Central Bank Digital Currencies Are a Bad Idea
forgac.me
forgac.me
1. Austrian economics is right, Keynsian is wrong.
2. Central banks are introducing ledger based currencies to increase surveillance of consumers, using the strawman argument about China.
On 1), the pandemic has shown that government spending works to keep an economy from failing. The old inflation argument has been proven completely false. If anything, what has been proven is that a greater distribution of wealth is needed as Amazon and online wholesale and retail take over.
The boom in online sales is a superprofit, driven by a windfall that government public health measures closed other sales channels. Those profits should be subject to a windfall tax to reduce that concentration.
On 2) Central Banks are looking at ledger based currency as a way to allow more distribution channels beyond the existing retail banking network. It allows greater freedom for financial offerings by removing a layer of distribution.
In a way, ledger based currencies are the "Amazon" of money distribution by central banks. It allows them to push money out when needed to multiple outlets, while still maintaining regulatory control.
If anything, it's a "free but regulated market" at work.
From the document: "An added benefit of the increase in electronic payments is the reduction of shadow economy. Each year trillions of Euro flow in the shadow market unregulated and untaxed, leading to long term deficits. Traceability of electronic payments is much better than with cash, leading to more information on the flow of money. This information can be used to reduce tax evasion and make regulation easier, in turn reducing the shadow economy"
> It should also be said that this report is not made by the european union, but for the european union by a 3rd party that got paid to make research for them.
Signature right on the front page: "Policy Department for Economic, Scientific and Quality of Life Policies Directorate-General for Internal Policies."
This "third-party document" shit is a really embarrassing excuse. Can't the EU apologists think of something better?
Maybe someone external cooperated on that document - but it's still a document by the EU and for the EU just like any other, authored and published by a department of the Directorate-General for Internal Policies of the EU. I am sure they wouldn't have signed and published it if they disagreed with the content (or at least would have said so). You wouldn't try to claim that a law/regulation written by an external lawyer and published by the EU is actually not an EU document, right? Because there is a lot of that, e.g. the GDPR.
From the document: "The study lays out predictions for digital services in the next one to ten years and provides recommendations for action for the European Parliament in preparation for the Digital Services Act. This document was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on the Internal Market and Consumer Protection."
Anyways, this document is one of many, it's just the first I had a link to. The same points (and other, even more concerning ones) are made in many more.
> "such as democratic values, data protection, data accessibility, transparency and user friendliness."
Sure, just like the encryption backdoors are for the children, for the democracy and especially for transparency. Take these democratic values with you, I am not interested. The EU is really efficient in showing us why is democracy wrong.
That is an observation, not a policy thought up by politicians working at the Parliment.
>This "third-party document" shit is a really embarrassing excuse. Can't the EU apologists think of something better?
It is a study for politicians to take better decicions not policies to be implemented, for that you want to read the things like the meeting minutes not supporting analysis.
>Anyways, this document is one of many, it's just the first I had a link to. The same points (and other, even more concerning ones) are made in many more.
I would welcome linking to more, as long as they are not just studies, although interesting reading they do not dictate the policy.
>Sure, just like the encryption backdoors are for the children, for the democracy and especially for transparency. Take these democratic values with you, I am not interested. The EU is really efficient in showing us why is democracy wrong.
Well I am also welcoming more information about this as it sounds like something I want to read up on. The EU may be inefficient, and it could be a lot better, which is why I would welcome a discussion about it instead of making accusations without providing any sources to base your claims on.
Once more, the document says: "The study lays out predictions for digital services in the next one to ten years and provides recommendations for action for the European Parliament in preparation for the Digital Services Act."
> It is a study for politicians to take better decicions not policies to be implemented, for that you want to read the things like the meeting minutes not supporting analysis.
Exactly! And they really took all of this very concerning advice to their hearts with the Digital Services Act.
> I would welcome linking to more, as long as they are not just studies, although interesting reading they do not dictate the policy.
Start here: https://ec.europa.eu/digital-single-market/en/digital-servic...
> Well I am also welcoming more information about this as it sounds like something I want to read up on. The EU may be inefficient, and it could be a lot better, which is why I would welcome a discussion about it instead of making accusations without providing any sources to base your claims on.
Are you not watching the news? Even if not you could have easily used Google yourself, the document I linked gives more than enough keywords.
We're very lucky the EU is inefficient, otherwise there would be a totalitarian police state way worse than China or Russia sooner than tomorrow. Fortunately we got enough time to leave before the EU makes its latest moves.
No discussion is going to save this shit show, we're way past that. The DSA is going to be implemented soon and it's not going to be even a tiny bit better regardless of how much you talk about democratic values.
Sadly it can't be better. This union is not striving for freedom but the opposite.
The most fundamental hurtle to distribution is that people don't wanna! When you have a bunch of likes, giving them away sounds like a good idea, but in reality it means a) reducing your own value (unfairly), and b) increasing someone else's value (unfairly).
I personally have another solution, that I've never heard articulated, which I call "The Enough Number". It's a number you individually decide is enough for you, after which you will choose not to work any further (at least, not for money). This achieves a kind of de facto redistribution since, theoretically, someone else will step in to make the money the retiree is no longer making. Another way to put it is that it creates an artificial scarcity of competence, or it means that competence-for-hire decays over time in a way that is beneficial to society.
The only way for this to work, IMHO, is if you get some social status at Davos (free VIP entry for life? A medal?) for having a achieved Enough. Or maybe a publisher can arise, called "Enough Press" where such people can get a book deal.
FWIW my own Enough Number is $10M. This is still quite high but it reflects my upper-middle class sensibilities. This would be enough for a beautiful 1500 ft^2 house in Laguna Beach, a 30' wooden sailboat I partner on with a couple of neighbors, and I'd probably spend my time teaching neighborhood kids how to program and make things in a beautiful, sunny space filled with all kinds of very cool and dangerous components.
Politically, this helps focus me on the desired outcome, where the Earth is populated by people who routinely achieve Enough at 30, and spend most of their lives raising their kids, traveling, telling stories, eating good food, reading and writing. The really duty driven folk would find longer-term work at the EPA or the Justice Department or on space projects, etc. I would expect intellectuals to have the easiest time of it, because they could become adjunct professors. Celebrities and business people would struggle, I think, because the attention is the juice, and you can't every really have Enough!
From what little I've seen it can just as often amplify their own destruction or bad habits.
The number of disasters that are a) small enough not to wipe us all out, b) large enough that it would wipe out a large fraction of us, and c) a large amount of money would have any influence being in one group or another, is very small, and they would be mostly political (possibly biological) disasters.
I mean, I could think of stranger stories than a humanity that was saved from total destruction by the actions of a few "crazy" billionaires that got together to make a livable moon base "just in case" in 2021, just before The Real Plague, a virulent strain of Covid-19, created a zombie apocolypse that almost wiped us out - except for the intrepid crew of Atlas-1 Moonbase, populated by the best of humanity: Bezos, Gates, Musk, Myrhvold, Trump, and a good chunk of the Saudi royal family. Or that was the plan, anyway, before the Chinese finally activated their APT and, at the last minute, replaced the passengers with CCP leaders and their families. (Satire aside, if humanity could "come back" from this unlikely scenario, then I'd say the excesses of the 20th and 21st century might even have been worth it. But really, the odds of any of this happening seem vanishingly small.
You are trying to solve the problem of scarcity. This scarcity manifests in people having not enough. And I’m not taking about your Enough, I’m talking about people having to think about how much mortgage they can afford, whether to buy groceries at Whole Foods, Safeway or Walmart, or whether they can make payment on their car. All of this happens because we don’t have unlimited abundance of everything, and we need to determine how products and services that are produced get distributed.
For this purpose, we use money , and the way it works is people can make money by various activities that almost always provide products and services that other people value, and they give you money in exchange. This can be entrepreneurship, but for most people it’s a job one does for wages.
Some jobs pay little, some pay a lot, and it seems that your idea is that there are not enough high paying jobs around, and so you want to increase availability of these jobs by having people working these jobs give them up early.
This is a well meaning, but terrible idea. The problem here is that its result is less things get produced, so in aggregate, we’re even less wealthy than before your plan. Your plan is strictly negative for the society. It might benefit some people who get to have a better job than they otherwise would, but the society is paying immense cost for this job.
A better alternative than destroys less (though still significant amount) value is to just tax the high earners and use the proceeds to subsidize low earners. This way, you can have low earners earn as much as they would have after switching to higher paying job in your “retire early when you have Enough”, but you’d have both high and low earner continue working, so more total value would be produced.
In this better alternative why would high earners continue to earn high when they can just switch to become a low earner and eat the tax from the remaining high earners.
Or, another way to look at it. All the good advice about growing rich talk about "passive income". That is, by definition, income you make despite not doing anything. The economy suffers not at all if such a person decides to do...anything with that money (other than consume it).
I don’t know what background you are coming from, but rest assured that most high earners do produce significant value. Lawyers, doctors, software engineers, architects, the list could go on an on. To be sure, some people might make money in zero sum activities, and some might exploit information asymmetries to charge significantly more than their services would be worth in perfect information scenarios. But, by and large, high earners (defined as, say, top 5% of wage workers) most definitely do provide value, in excess of what they are actually paid. It is simply hard for millions of people to convince others to give them more money than they services are worth.
> Or, another way to look at it. (...)
I don’t actually understand your argument in this sections. Most good advice on getting rich is not focusing on “passive income”. Instead, it focuses on investment and on providing value by entrepreneurship. People talking about “passive income” usually mean by it a kind of investment that produces returns with little to no labor input required. Given the low cost of capital today, such investments don’t usually provide high returns, and so are highly unlikely to make one rich. They can provide nice income, to be sure, but that requires becoming rich in the first place.
I have to conclude you aren't arguing in good faith.
There are many jobs that have well agreed upon social value but we have no way to wire up the economy to pay them commensurately. Think of caregivers being paid $9 per hour to clean up Grandpa's sick, or teachers who can't spend their summers on improving their craft because they have to take a menial off-season position to stay afloat.
It also works on the other side-- I think you'd be hard pressed to find someone saying that top athletes and actors are worth eight figures a year on their contribution to society alone, but the market has bid them there.
A much more hands-on system of wage and price controls could at least come from a conscious decision-making process.
No, prices are information. Money is a unit of measure. Fucking around with money results in misinformation.
My point actually wasn't that this is a good idea, but that it's a superior idea to doing the same thing with a blockchain based ledger. All the problems you outline are true for the blockchain solution as well.
Also, inflation in consumer goods can show delayed as well. And assets are already inflated. It’s a bit too early to say with confidence, that the stimulus prevented the economy from failing.
At this point in history, how can anyone claim that Keynesianism is "wrong"?
> I would summarize the Keynesian view in terms of four points:
> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
* https://krugman.blogs.nytimes.com/2015/09/15/keynesianism-ex...
I'm sure that there are nuances in the model that can be more or less accurate, but the idea that (aggregate) demand drives economic activity, and that (central bank) interest rates and government (stimulus) spending effects economic activity seems fairly certain. Especially with everything we've seen over the last ~20 years: Fed-driven US real estate bubble, post-2008 economic recovery, lack of inflation due to low/zero rates even with lots of "printing money", austerity caused economic slowdowns (in the EU).
It's been one giant economics petri dish of experiments. How has Keynesianism failed? Non-K folks were predicting all sorts of problem, and yet the Ks were saying 'it'll be fine':
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://economics21.org/html/open-letter-ben-bernanke-287.ht...
Full-employment is very easy to achieve for the government, if that is the government's only goal. Create artificial demand for ditches to be dug, and then hire people to dig those ditches. The fundamental question is not how to generate artificial demand, but how to generate artificial demand that succeeds at generating useful value.
Now, that spectrum has a range of answers. Sometimes you don't really care about value, or you take value on faith, e.g. when constructing public infrastructure works. They put people to work, get people spending, and everyone agrees that the country is in dire need of infrastructure improvements right now. There are, however, two non-infrastructure extremes: a) spending money on strong companies that will become stronger (instead of failing due to temporary unavoidable circumstances), but if anyone knew for sure which companies these were, the government wouldn't need to spend any money at all, investors would step in and pocket the profits. Then there's b) spending money on weak companies that would've failed in a year or two anyway, and emergency bailouts only forestalls the inevitable, wasting money and time and creative potential for nothing.
Now most companies are on a spectrum, which means that the strategy of such wide-spectrum spending is to offset the losses of boosting weak companies with the gains made by strong companies, overall.
Will it work at generating (net) useful value? Maybe. If so, then the currency is tied up in the extra value generated, and we'll avoid inflation. If not, then we have far more currency in circulation for the same amount of value, and prices will go up in tandem. Jury's still out.
This is a bit black-and-white: full employment may not be the end-goal of stimulus spending and the government generally, but rather simply just getting the ball rolling. Pre-pandemic there wasn't much need of stimulus, and certainly no need of the December 2017 tax cut (TCJA) that was supposed to "pay for itself" per its proponents, given the state of the economy and unemployment rate:
* https://fred.stlouisfed.org/series/UNRATE
Now that isn't the only measure of 'success', but if the unemployment rate is (say) >8%, then spending money on 'non-useful value' work, so that people can pay rent and buy food, isn't such a bad thing in the short-term (IMHO).
Some certainly argue for full-employment all the time, but that's a separate discussion than the general idea of raising aggregate demand to 'induce' economic activity.
> Now, that spectrum has a range of answers. Sometimes you don't really care about value, or you take value on faith, e.g. when constructing public infrastructure works. They put people to work, get people spending, and everyone agrees that the country is in dire need of infrastructure improvements right now.
Yeah:
* https://www.npr.org/2018/05/15/611389675/why-its-infrastruct...
* https://www.theverge.com/2020/3/10/21173209/infrastructure-w...
https://www.bls.gov/opub/hom/cpi/
I can’t speak as to how accurate it is compared to real life.
What I know is CPI figures don’t and can’t incorporate volatility. For example, I assume healthcare expenses will skyrocket, and government assistance such as Social Security will be reduced. Therefore, I act as if life will be more and more expensive.
[1] https://www.bls.gov/regions/midwest/news-release/2020/pdf/co...
For example, when I shop, I'm not that particular to specific brands, so if I'm buying soup or cereal, I will always choose the one that is on sale that week, usually around half price (e.g B1G1). I end up paying about 60% of what a normal customer pays who is loyal to specific brands no matter if they're on sale or not.
What I've noticed is that the normal prices haven't really gone up all that much, but the discounts are very small and there are far fewer of the really good ones (e.g. $3 per lb. of chicken, the $0.99 carton of eggs, half price cheese, B1G1 soups, etc).
Thus, I'd say my grocery bill has gone up about 50% or more in just the last year, whereas it had really held stead for the last decade.
This is, of course, on top of home prices in my area nearly doubling in 10 years when considering increased taxes, HOAs, repair costs, etc.
[1]: https://en.wikipedia.org/wiki/Great_Depression#cite_ref-Rand...
Are you saying there is nothing to be paid by current and future generations for this.? The system will take care of itself somehow?
Just wondering how is it possible for them to do this without raising inflation. Simply allocating all the debt on their balance sheet means they have erased the debts of the corps/public by increasing the money circulation isn't it? Then inflation will happen?
That’s why there would need to be a wealth/income tax to redistribute in order to provide the UBI in the first place.
1. https://www.clevelandfed.org/en/newsroom-and-events/speeches...
I find your arguments very naive. You entirely ignore the misuse of governmental power - history has shown us. Also please consider that increasing the money supply steals money (the value of money) from everyone's checking account over the long term. At the same time consider that QE money is not retrieved by the people who need it most (see cantillon effect).
Inflation measures the general price level in the economy (in the form of a basket of goods), not the prices of individual commodities. The inflation in Austria has been at a steady 1-3%[1] over the last decade, roughly in line with inflation targets. Housing prices have risen, like in many other regions, due to a lack of supply of housing in the market, not changes in the money supply.
These vague rants about governmental power are exactly what makes it to read any of these Mises articles with a straight face, it is nothing else but libertarian ideology.
[1]https://www.statista.com/statistics/375291/inflation-rate-in...
Don't you think demand/supply is strongly impacted by the actions taken by the FED or ECB (eg interests - since 2008 it's difficult to find better investment objects than real estate or Gold in order to retain the asset's value - loans are pretty cheap).
>These vague rants about governmental power are exactly what makes it to read any of these Mises articles with a straight face, it is nothing else but libertarian ideology.
Does that mean you are sure the government won't use interest rates as a mean for controlling the economy? Wouldn't you feel very bad when being forced to spend your money in order to not be punished with negative interest rates? Without cash you won't even be able to escape. Negative interest rates are just one example. I'm sure that this is happening if we don't act.
I can't see why you consider such things vague rants.
>Does that mean you are sure the government won't use interest rates as a mean for controlling the economy?
The central bank, which acts independently, and not the government, uses interest rates to control the economy, but that's the point. It's a good thing, not a bad thing. If we had the digital currency in question and the central bank can send everyone two thousand bucks during a pandemic induced depression to stabilize demand rather than completely sound policy being held hostage by politics we would all be better off. We are right now literally living through a situation that shows what the benefit of such tools would be.
But that's the problem: housing isn't like most goods (eg. TVs) that can be produced in a factory in quantities so massive that everyone can have one. The same can't be said of housing, or more specifically land eg. there's only so many space for a semi-detached house within 30 minutes driving distance of the bay area.
> Which again, is not happening as born out by data.
Source?
It's worse than that.
If inflation was uniform and instantaneous, expanding the money supply would just result in a corresponding change in all prices and account balances. It'd be like trying to redefine the litre in order to get more gas from the pump. As such, the state wouldn't bother trying to change it.
Inflation "works" insofar as it allows those who receive the new money earlier to buy goods before the suppliers realize their prices are too low for the new money supply, and in so doing drive up the prices faced by those who receive the new money later. The aggregate effect is to transfer money from those who receive the money last to those that receive it first (banks, financial institutions, forex, etc.)
This seems to be an attempt at corralling a market by offering something entirely unfit for purpose, but marketed as being backed by the ultimately trustworthy (for surface-level-only reasons of "well, we've gotten you this far") Central Banks, and therefore immune to failure.
What can it offer that doesn't already exist and also provide any consumer benefit?
The article seems to answer that: nothing, in fact, less than nothing.
Cryptocurrencies are anathema to Central Banks, so any embrace by the Central Banks must be looked at as a defensive reaction to a changing landscape.
It does.
What purpose? If you're only interested in a transaction processing system I don't anyone thought that cryptocurrencies were going to be an efficient alternative to a centralized ledger.
>Economists of the Austrian school understand, that the boom is the real problem and the economic crisis is the necessary and positive cleansing mechanism.
The demand for austerity is a fetish of power abuse and discharge of guilt by claiming only the best motives.
Disgusting.
Austerity is part of the recipe for turning a country into a failed state-see Greece.
How on Earth does inflation rise all boats when it's literally a wealth transfer from all currency holders to the money issuers and first spenders (banks and financial institutions)?
Because we absolutely do need to print money to avoid millions of people living in the streets at this point.
But we also ARE going to be bankrupt by it.
And I think the way out is to recognize that the monetary system is dated and inadequate and create a new one. Unlikely they will do that, but I feel better mentioning it even though it will be ignored.
The new system would be digital and incorporate more real-world information and finer-grained control.
The people cheering on continuously increasing government debt are cheering on impoverishing their children and their children's children to temporarily bolster their own living standards. To me that seems disgusting, robbing the future to pay for excess in the present.
Money is just a way of keeping track of how much of future output of civilization given entity deserves. If we decide that people who borrowed the money now don't deserve it then, puff, there's no debt, nothing to pay back, no burden on future taxpayers.
On the other hand the resources that we dig up now, burn, pollute... those are real theft robbing the future.
Do you mean "people who loaned that money"? That is a lot of foreign governments who will refuse to keep loaning us more money which would mean we'd need to balance our budget pretty quickly, or face inflation.
Also, please realize that it is also lots of pensioners and also anyone expecting social security in the future [1].
What you're talking about isn't even Keynesian economics, it sounds like a form of monetary nihilism. We've been down that road before, and hyper-inflation is a real thing proven by history before [2].
[1] https://www.cbpp.org/research/social-security/policy-basics-....
Yes. Thank you for the correction.
Countries have whole net of iou-s between them and debts are not always expected to be paid back in full.
Some money borrowed comes from private market that you can disregard completely if you decide it was a bad idea and don't intend to repeat it in the future.
Yes. Hyperinflation is a thing but I wonder how high (stable) inflation you could have by just printing new money and using it to finance budget directly while preventing banks from inflating money supply with credit.
I'm not sure what the solution is, but I think assuming that because there's some monetary debt now it will all have to be paid back in the future is wrong because that's not what eventually is going to happen.
In fact, it’s worse: you’re not only losing trust on the bondholders whom you reneged to repay, but also most everyone else who observed it happening. You’ll be only left with people who will require handsome compensation for observably very real risk of not getting paid back.
So yes, our children will either have to repay all the debts we took, or default and lose immense amount of food will and trust that we are exploiting by borrowing at low rates. Either way, we are enriching ourselves at the expense of our children.
It does a pretty good job at explaining why the US can basically print money at will without facing inflation. Spoiler alert: people need to buy oil in dollars, but it cost us much of our domestic manufacturing base. I bring this up because the belief seems common at present that money is imaginary and that we've made so much of it without causing inflation is proof of this fact, but (as per the article) it's like a balloon as when you squeeze it, the air has got to go somewhere.
This can be said about any technological innovation since the cave age. It's evil because it could be used for evil. I, for one, don't appreciate this kind of arguments.
For me personally CBDC has two big advantages
- reduced risk (central banks can't go bankrupt)
- commercial banks invest my money on my behalf without me having any control over the process. CBDC is presumably just a store.
That sounds like a failure of politics and regulation; something that technology is a good workaround for, but a poor solution.
Technology can be a catalyst for increasing competition between banks. There might be another (regulatory) way to do it. Whichever gets us there faster.
Central banks have been against direct accounts for retail for this reason, because they didn't want to be in the business of retail lending as well.
What would be the alternative there? It seems unlikely that central banks would go into the business of vetting and giving out small business loans. Could a commercial bank function with only giving out loans and no deposit (I guess it would get loans directly from the central bank instead of balancing its balance sheet with deposits?)
As I mentioned in another comment, banks will have to do a better job at convincing me to open a deposit. Hopefully this will increase competition between banks and make them more transparent.
Not sure it makes sense, can they really compete against a "narrow banking" style bank? Why wouldn't narrow bank compete a better UI/services (and not offer any loans)?
https://www.econlib.org/why-does-the-fed-oppose-narrow-banki... explores a bit that part and the arguments against it.
Sure they can. They should be able to offer a better interest rate on their deposits.
"... new customers is one way, if not the cheapest way, to secure those reserves. Indeed, the current targeted fed funds rate—the rate at which banks borrow from each other—is between 0.25% and 0.75%, well above the 0.01% to 0.02% interest rate the Bank of America pays on a standard checking deposit.5 6 The banks don’t need your money; it’s just cheaper for them to borrow from you than it is to borrow from other banks." [0]
Why is that? why is it cheaper for banks to borrow from me than from other banks? I say it's due to the lack of competition.
[0]https://www.investopedia.com/articles/investing/022416/why-b...
The are many, many banks who will pay you something resembling the fed funds rate on a savings account (0.5% seems to be the number at the moment). Bank of America and other banks get away with paying 0.01% due to inertia and lack of consumer education.
commercial loan rates are nowhere near zero. I don't see what it has to do with CBDC.
But in any case, this still has the issue that it would be a massive institution, if it had to review all small business loans.
Indeed, there have been certain periods of time where privately issued money / bank deposits were “safer” than central bank or government issued currency. Also keep in mind that bank deposits are not a promise to pay base money as people mistakenly believe. It’s just that commercial banks are a market maker between their money and the government/base money and it just so happens that the exchange rate is 1:1 unless the solvency of the bank, central bank or government is brought into question. Commercial banks also don’t “invest money”. Instead, they are in the business of swapping IOUs. When you get a loan, you swap your IOU (a debt from you to the bank - the bank’s asset) for the bank’s IOU (debt from the bank to you - bank’s liability). You do this because the bank IOU is readily accepted by everyone and yours isn’t. If you just have a deposit, you get it by swapping the IOU from another bank or an IOU from the government (notes and coins) for an IOU with the bank you hold a deposit with. Note that the deposit is not your money either.
Sure. But you don't simply get a loan. A bank (account manager) will make a decision whether they want to give you a loan (with a certain interest) or not. And I don't have any influence on that "decision". This is what I mean when I say "commercial banks invest my money on my behalf without me having any control over the process".
Reason being is that I somewhat take issue with economists of the Austrian school or “full reserve bankers” (eg author of OPs article) who fundamentally don’t understand what banks are and how they work. It’s incredible really, because if they took the time to write out the accounting journals for loan creation and destruction then they would, in a single moment, realise that much of what they advocate is in fact complete nonsense. Because, ultimately, banks don’t lend out base money... so they can’t possibly counterfeit it (as Mises claims). Banks also don’t have a special privilege to create “money”/IOUs - we can all do it and we do it all the time, It’s just that the bank’s money is widely accepted and ours is not.
This is completely wrong. Your money on your bank account doesn't exist. What you see is the number of dollars the bank owes you. Its a debt. They dont invest your money anywhere. It doesn't exist. When someone transfers "money" to you the bank subtractions debt from their account and adds it to yours. Its still the same debt they just owe it to someone else now. If they give you credit for example because you want to build a house. They create the credit out of thin air by putting the house on the balance sheet so they can give out credit worth as much as the house. You pay it back and the house is yours you dont pay and the house goes to the bank. Your own money is used first so the house is allays worth more than what the bank credited at any point in time. Nowhere does the bank need someone else's money to give you that credit.
They cant credit infinite amount because there is no infinite no-risk demand for credit. Banks dont give credit where there is a risk to lose. That's why startups need VC and not a bank credit. Banks attract certain deposit holders because they are future house builder or otherwise customers of something the bank actually makes profit with. They dont care about the money deposited but if its more its more likely to be a customer they can make profit with. So yes they are interested in you as a customer if you have money but not because you store it there and they want to use it for something. Its one of the most taught lies about how money and banks work.
Deposits in commercial banks can then be treated as bank risk capital - where the depositor always risks a loss.
I don’t actually know for sure, but surely the percentage of fiat money that exists as physical cash is pretty small? Similar for the percentage of transactions that happens physically.
yes, but currently only licensed financial institutions (e.g. banks) can hold accounts directly at a central bank. You, as a private person, can't. CBDC will give you that capability too.
Personally I think something like solutions built on Ethereum 2.0 have the potential to really integrate more real-world information and finer-grained control for society.
Money is fundamentally a technology and it should be a high technology.
But like with everything else, there are extreme differences between the outcome of divergent designs.
Moral hazards of TBTF/TBTJ and propping up zombies can only get you so far…
“Hard” assets like gold and BTC by definition can’t be used for fractional reserve banking and instead must be warehoused (or you bury your good in the back yard and hope nobody steals it). Hence yiu are typically paying someone to warehouse your gold (there’s a fair amount of literature on this) or paying for a public wallet, rather than having the bank pay you. How is that any different from paying he central bank to sell you a bond?
(TLDR: most of the useful concepts from Austrian theory were incorporated into mainstream economics; what was left were some bold claims and a hostility towards maths and empiricism.) https://econfaculty.gmu.edu/bcaplan/whyaust.htm
Austrian economics isn't hostile to maths; it follows a different value system based on ordinal, not cardial utility, which doesn't allow for interpersonal value comparisons. Mathematically speaking this system is actually more elegant, as it has one less assumption (no philosophical assumption that interpersonal value comparison is possible), but obviously in such a system fewer statements can be made.
The Bank of England is consulting on a CBDC and people from small, nimble providers who can change their tech more cheaply than big incumbents are representing the view that a CBDC can open up the payments infrastructure for them. It is hard to imagine a better development for them, and consumers.
Less positively, the whole critique of Keynesianism was answered decades ago and it amazes me that this is still a debate. Facts are facts, people have lives and need to consume, optimising without regard to this is abstracting human consequences out of the equation and therefore morally abhorrent. The Austrian school is for people who don't need to live with the agony of unemployment or deprivation.
Also, the only two among that list that I know to be actual banks - rather than prepaid card providers - are Monzo and Starling.
Adoption seems to be small though.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."
If you mean deposits, then you're describing fractional reserve banking, and the central bank sets the reserve ratio for those commercial banks, thus the central bank is still in control.
Without taking a side on the actual point: that's not a hint, that's just you stating what you happen to believe with no argument to back it up. It doesn't convince anyone who doesn't already agree with you.
That said, I would love to see the arguments and evidence in favor of either standpoint if anyone has some useful resources to that effect.
Therefore when demand is low across the whole economy, there is a rationale for govts/central banks either to directly boost demand by spending or indirectly lower the costs of capital investment by lowering interest rates. The evidence for and against the efficacy of certain interventions is basically the entire field of macroeconomics, but Keynes' General Theory is the starting point and something like Woodford's Interest and Prices: Foundations of a Theory of Monetary Policy or most undergrad macroeconomics textbooks more reflective of current practice.
Some salesmen try to sell their own tool box set as the best that will solve all your problems when the truth is you must use the right tool for the right problem.
For example Austrian economics can be the right tool if you have an economy that is suffering from high inflation. Let's take a look at Greece [0]. Inflation peaked at 6% in 2008. You can call that high but most economies that suffer from the negative effects of inflation have double digit inflation. Inflation fell straight to -2% in 2014. It certainly doesn't look like the type of economy where Austrian economics would be the right tool.
However, if you were to use Austrian economics in say Argentina [1] you could certainly speed up the economic recovery. It certainly has a place on earth but not in most first world economies.
[0] https://tradingeconomics.com/greece/inflation-cpi [1] https://tradingeconomics.com/argentina/inflation-cpi
If we find that unemployment does not improve quickly enough coming out of this we could be in for some pretty hairy downward spirals.
The cheques that were/are issued by the US Congress should not be thought of as stimulus packages (which they are not): they are disaster relief.
The economy (or economies, plural, of states considered individually) were put into a coma purposefully for health and safety reasons. It would be paradoxical to 'jump start' the economies when they have been shutdown at the same time.
The purpose of the cheques is that help those who cannot work, and draw an income, to pay the rent and purchase food. At least that is the opinion of folks like Ben Bernanke and Paul Krugman.
Some people are of course labelling them as "stimulus cheques", but that is incorrect: it is probably undesirable for people to go outside of their homes and try to do 'normal' stuff. At least not until vaccines are rolled out in volume.
In Australia the government handed out $600 to individuals who were on income support, and I can guarantee some of those recipients went straight out and bought a 60" television. This would naturally stimulate some sales but do absolutely nothing beneficial in the long run because the rest of us will have to pay for it eventually.
* https://en.wikipedia.org/wiki/Federal_aid_during_the_COVID-1...
> This would naturally stimulate some sales but do absolutely nothing beneficial in the long run because the rest of us will have to pay for it eventually.
Define "rest of us". The UK is still rolling forward debt from the 1700s and 1800s:
* https://www.theguardian.com/business/2014/oct/31/uk-first-wo...
* https://www.theguardian.com/business/blog/2014/oct/31/paying...
Unless your government has run budget surpluses sometime in its history, then the debt you have accumulated has probably never been paid off, but simply rolled forward. This generally isn't a probably as long as economic growth is higher than interest rates, which for AU look to be quite low:
* https://ca.investing.com/rates-bonds/australia-government-bo...
And interest rates have been (generally) falling for Western European countries for 700 years (with some gyrations):
* https://www.visualcapitalist.com/700-year-decline-of-interes...
So it's probably cheaper to pay off old debt with new debt. In Canada for example, even though we had an unprecedented CA$ 340B deficit, our total debt servicing costs will be lower over the next few years.
I'm with Piketty here and have no problem with more redistribution:
* https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...
We're living in another Gilded Age.
To have transactions for goods and services. Anything that creates more transactions "drives" it. Generally the Keynesian view is that it is demand (for goods/services) that creates/drives activity.
If people are scared of losing their jobs (or have lost their jobs) they won't spend money because they may not have any more. If people are confident of their future prospects they'll be more likely to spend now because they have faith that they'll get more money later.
The best ELI5 of Keynesianism that I've come across:
> I would summarize the Keynesian view in terms of four points:
> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
* https://krugman.blogs.nytimes.com/2015/09/15/keynesianism-ex...
Really it’s mostly a question of short vs mid term results, in a world of feedback loops either can dominate.
Appropriate capital investment table stakes, now. Innovation isn't a machine you put capital investment tokens into until you get a breakthrough.
Does this author have vested, financial interest-motive in Bitcoin or other crypto-"currencies" - which centralized digital currencies (legitimately fiat, a better transparent version of)?
Edit to add: looks like they likely do, re: a project they list in this site's menu - oh, and in their about me: "Early Bitcoin adopter, now Bitcoin Cash supporter." Would it not have been best practice for the author to list their vested interests as they're writing about a competing product/offering?
Imagine if everyone countering the positive narrative (propaganda in part) perpetuated by the "army of HODLers" was financially incentivized to counter that narrative whenever they had a chance, and not only that but proselytized their position, Bitcoin et al would have never reached its position today and many people who bought into the hype - or even killed themselves because of their losses - would have not unnecessarily, unreasonably transferred their wealth to someone else; a true centralized digital currency could take the cash you transfer into the digital currency "out of circulation" instead of giving it to someone, Bitcoin et al similarly structured - the "army of HODLers" are akin to a religion that's financially incentivized - even Fred Wilson - https://avc.com/2019/04/orthodoxy/ - stated he dislikes the cult-like behaviour of some in their community, without realizing he's in the community but just taking a priest-like role where he's in a more refined position and better controls his behaviour/image.
I am glad higher profile individuals are starting to voice their opposition, dislike of Bitcoin et al - Elon Musk recently tweeting out "Bitcoin is almost as bs as fiat money;" https://twitter.com/elonmusk/status/1340588909974200321 - fiat currency can shift into a better system supported by immutable, transparent blockchain - but with centralized control so no shenanigans can occur hidden from other allied nations you're trying to fairly balance economies with, arguably who will all be democratically elected governments, democracies.
Edit to add: With the growing "army of HODLers" with more vested asset holders waiting for the value of Bitcoin et al to recover and then some - while chanting the mantra "HODL!" - we need to pay attention to counter regulatory capture that this newer industrial complex will work towards.
As far as I know no central bank gives you money to buy consumer goods, they give money to commercial banks who let you borrow money to buy real estate (an investment if you rent it out) or to your startup or existing business so that you can expand faster (also an investment). That's the end of the short list of things that the central bank does that had even a tiny chance of directly involving consumers and the vast majority of money does go into capital investments.
Finally there is QE where the central banks introduce money into capital markets directly. Again unless you are a retail investor you are not going to transfer that new money into consumer spending. The vast majority of retail investors have a small net worth which means most of the money is going to a minority of wealthy people. Those wealthy people own businesses and would rather earn even more money (capital investment again).
So, every time the author complained about the central bank following keynesian politics too much, they didn't...
If anything, there is too little keynesianism. Inflation is low because money isn't reaching consumers at all. Now that we have arrived at inflation we can put another piece of the article in perspective.
>Economists of the Austrian school understand, that the boom is the real problem and the economic crisis is the necessary and positive cleansing mechanism.
Consumer inflation is a positive cleansing mechanism, it tells you "you have to be at least this productive to break even". Companies whose returns are below inflation have to close up shop eventually. Why is that? Because there is a shortage of goods or workers and those few precious goods or workers should be used in the most efficient way. Except this isn't what is currently happening, there is an overabundance of goods and labor and therefore there is no need for any sort of economic cleansing in the name of efficiency. It's the biggest reason why austerity policy in Greece did not work as "advertised". Their unemployment rate was so high that no job or company could be considered too inefficient. Simply getting people to work is already success.
I'll take advantage of this to also talk about something unrelated to the article. Some capital owners argue that their wealth should not be taxed on inflation. Well, that would completely go against the idea of the cleansing mechanism and inflation would just be central bank money straight into the pockets of the rich (it already is to a large degree).
1. This is illustrated by a 50 year old who paid off their $500k house. They sell, keep the cash for 23 months until they move across the country to buy a new house.
2. They could store their $500k in USD w/money printing and be a Keynesian. Money printing dilutes and they can buy less.
3. Another similar couple stores their $500k in BTC or cryptGOLD, as a non-money printing Austrian.
Imagine if each person in society is picking individually if they want to be an Austrian or Keynesian based on the currency they select. Costs of USD money printing will be paid by a smaller and smaller group of people as more and more move off of USD.
For example, if the 50 year old bought all their Bitcoin in January 2018, and sold them to buy their new house in January 2020, they would have been very, very disappointed.