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Central Bank Digital Currency (I)
The Bank of International Settlements (BIS) released their Annual Economic Report. The BIS was founded in 1930 to handle payments of German World War I reparations. It was the third attempt at squeezing the Germans in retribution for the war, one of the high points of Western civilization. Over the years, the bank evolved to be what today many refer to as the central bank to the world's central banks, but 2008 shone a clarifying light on that. For all who cared to look, the real central bank of central banks was the Fed. BIS still provides various services to member central banks and offers as good economic/financial analysis as anywhere else, which is definitely damning with faint praise.
If you're a little unsure of how the world economy works these days, the BIS Annual Economic Report will confirm you're not alone. The world's economic pooh-bahs are just as confused. Accepted established economic wisdom is, to say the least, lacking when it comes to explaining the global economy. This great conundrum is summed up in the report's first paragraph,
“The global economy has reached a critical and perilous juncture. Policymakers are facing a unique constellation of challenges. Each of them, taken in isolation, is not new; but their combination on a global scale is. On the one hand, central banks have been tightening to bring inflation back under control: prices are rising far too fast. On the other hand, financial vulnerabilities are widespread: debt levels – private and public – are historically high; asset prices, especially those of real estate, are elevated; and risk-taking in financial markets was rife during the phase in which interest rates stayed historically low for unusually long. Indeed, financial stress has already emerged. Each of the two challenges, by itself, would be difficult to tackle; their combination is daunting.”
To their credit, the BIS does a fair job succinctly laying out, with little bs, the forces that shaped the global economy over the past half-century. The BIS writes,
“The globalisation of the real economy helped central banks hardwire low inflation, by eroding the pricing power of labour and firms.” The BIS correctly adds, “Broad-ranging financial liberalisation, both domestically and internationally, provided scope for much larger financial expansions and contractions, no longer suppressed by the tight web of regulations that had greatly constrained the financial system.”
Boy, that sure makes you remember how back in the 1990s suggesting such things and the eventual harmful results they would lead to were an immediate path to political marginalization.
The rest of the report offers no further light on the situation or ways we might move away from this global quandary. BIS can't be faulted for this. Economic PhDs aren't particularly useful when underlying theories and rationalizations are falling to bits, literally. Established doctrinaire schools of economic thought were always much more about rationalizing and legitimizing industrial economic power structures than providing understanding to how the economy actually worked. Historically, every power structure established across the planet has relied on such myth making, associated priesthoods, and institutions, but it all becomes problematic when reality no longer conforms or in the economic vulgar, it all goes tits-up. The BIS more genteelly concludes, “Historical relationships no longer constitute reliable signposts.”
Best, the report is subtitled, “A tale of three journeys.” While the first two yarns are spun from accepted economics, it is the third, stretching beyond these tired and failing narratives that proves most entertaining. This tale BIS entitles, “Blueprint for the future monetary system: improving the old, enabling the new.” Phew! One of the conservative bastions of the global money system calling for improving the old and enabling the new – that just ain't right.
From times long past, the whole money racket has always been, fictionally, based on money as eternal, unchanging, unquestionable. In his seminal Secrets of the Temple, Bill Greider showed across history, faith, and faith is the operative word, in money's concreteness was essential for its value. Having one of modern money's hallowed institutions call for “improving the old” and “enabling the new” should be looked at as a bright yellow, violently flashing warning sign of greater monetary and economic volatility ahead.
Delving into modern money's existential turmoil, the report acknowledges the established anti-democratic “privileged powers of fiscal and monetary policy... .” This privileged power and most especially its abuse, represented by the actions of central banks and political regulators over the last decades, led to a quasi-revolt against the system in the last few years. A revolt not sprouting from the American plains and multitudes of yeoman farms as the great agrarian revolt against the formation of industrial modern bank-debt money in the 19th century, but from a handful of basements lit by computer screens coding innumerable digital crypto-fantasies, where money loses all physical definition, becoming nothing more than information bits tripping transistors across computer servers.
Unlike their Populist forebears' failure to configure money based on crops, the Information Era's crypto-coders succeeded in spooking the world's central banks into advocating digital currencies, chalk it up to progress, or innovation, or something. Instead of innumerable private crypto-currencies launched over the last decade, the BIS calls on central banks to keep their role as currency intermediaries, issuing their own crypto-currencies, rebranded as, Central Bank Digital Currency (CBDC). Nonetheless, the BIS basically shills the same assumed advantages the crypto-crowd hawks.
Most amusingly, and knee-slapping so, the BIS tries to separate their tokens from the circulating, highly speculative digital currencies. The BIS claims, “Not only is crypto self-referential, with little contact with the real world,” wait for it, “it also lacks the anchor of the trust in money provided by the central bank” – ho ho. Seems the BIS missed the great monetary existential crisis of faith brought on by the '08 financial crash that helped launch the crypto-rebellion.
The great divide between last decade's crypto-sellers and the BIS tokenisers is the question of trust. Bitcoin was launched with the whole idea trust was an unneeded element of money, and in the expansive nihilism underlying too much tech development, of society itself. It does make you wonder if BIS understands the fundamental political nature of money or if they're just using trust as a distinction from the crypto-peddlers. However, it is a distinction that makes some of the BIS thoughts on their tokenised money scheme more valuable than anything that's come to date from the crypto-mob.
The BIS doesn't write or offer advise for the hoi polloi. They advise the “privileged powers of fiscal and monetary policy” and our privileged moneyed class is increasingly nervous or should be of money's growing instability, aside from being more than a bit enviously rapacious to the seeming limitless profits gained by crypto-shilling. The BIS staff does not support money innovation for the removal of central banks from their privileged money system position, but just the opposite. The BIS writes,
“While tokenisation does not eliminate the role of intermediaries, it changes the nature of that role. The role of the operator in a tokenised environment is as a trusted intermediary serving in a governance role as the rule book’s curator, rather than as a bookkeeper who records individual transactions on behalf of account holders.”
Phew! – governance, that ain't a word heard much, except derisively, from the crypto-lot. BIS writes of this great difference,
“The full potential of tokenisation needs a monetary unit of account that denominates transactions, as well as the accompanying means of payment. In crypto, stablecoins that reside on the same platform as other crypto assets perform the role of the means of payment. However, for reasons highlighted already, central bank money and the settlement finality that it brings is a much firmer foundation for tokenisation.”
Next, the BIS ironically turns to the now completely discredited trope borrowed from the internet's initial popularizers, and then borrowed by crypto, that digitalization abolishes intermediaries. Certainly, the internet's growth saw the fall of many previously established intermediaries, more continue to disappear daily, but most have been replaced by larger, ever more powerful intermediaries. The BIS writes,
“In traditional ledger systems, account managers are entrusted with maintaining and updating an accurate record of ownership. In contrast, in a tokenised setting, money or assets become “executable objects” that are maintained on programmable platforms. They could be transferred through the execution of programming instructions issued by system participants without the intervention of an account manager.”
This sounds an awful lot like disrupting banks to me. After all, most of banking is simply record keeping, transaction accounting. If you're going to automate accounting using “executable objects,” sure seems like BIS is advocating separating the central banks from the banks themselves. And without a doubt, the next question the crypto-crowd would ask is, “If you don't need banks, why do you need central banks?” An old historical lesson for BIS staff, it's always treacherous for the palace to adopt the slogans of the street.
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