Central Bank Digital Currency: A Growth Or Financial Repression Tool?

Central Bank Digital Currency: A Growth Or Financial Repression Tool?

Daniel Lacalle 23/10/2020 7
Central Bank Digital Currency: A Growth Or Financial Repression Tool?

The main central banks have been discussing the idea of implementing a digital currency.

The rationale behind it escapes many citizens. Most transactions in the main global currencies are conducted digitally and one could say that the largest and most traded currencies, the US Dollar, Euro, Yen, British Pound, Swiss Franc, and the Yuan are already functioning as mostly digital money.

So, what are central banks saying when they talk about a new and different digital currency? It is basically another step in the effort to gradually get rid of physical currencies, with an idea of strengthening control of the payments and make it simpler to trace the use of a particular means of payment. It is also aimed at competing with global cryptocurrencies. Most will state that the reasons behind the idea of a central bank digital currency are efficiency and improving the transmission mechanism of monetary policy.

Let us go point by point. When central banks say they want to improve the transmission mechanism of monetary policy, many of their messages are based on a wrong diagnosis: That there is an excess of savings that needs to be restrained. Central banks implement negative rates to try to push savers to take more risk, spend and invest more as if the reason why they do not spend or invest as much as central banks would want is the interest rate and not the challenged that households and businesses face in an uncertain economic environment. Citizens do not save because they are stupid or ignorant, but the opposite, because they understand that the economic environment is difficult and the attractive opportunities to invest are few. This does not mean that businesses and citizens are not spending and investing, they are, a lot. But central banks and governments place completely misguided and wrong blame on savings.

A solid economy is based on saving and prudent investment, not on debt and malinvestment. Therefore, it is wrong to continuously lower rates and attack savings. The economy does not improve by making it more fragile and indebted, rather the opposite.

The other point is the so-called efficiency. Central banks basically seem to want spending and control of monetary transactions at any cost. Issuing a central bank digital currency is not more efficient. It is another means of financial repression. If negative rates don’t work as a way of forcing economic agents to spend even more, they seem to think, then negative rates and dissolving the currency via an even higher increase in the supply of money with a digital currency should do.

The problem is that it does not work either. A central bank digital currency will increase the perception of risk and will not make economic agents spend or invest more because the problems of debt, overcapacity, and malinvestment will not be limited with a  digital currency, they will be exacerbated.

Central banks cannot force economic agents to spend and invest, and even less so if their policies are consistently aimed at incentivizing debt and perpetuate imbalances.

The support of a currency is not strengthened via a constant artificial increase in money supply and legal or financial repression. Central banks will not make their digital currencies a success if citizens fear -as they do- that the policymakers will constantly strive to dilute the purchasing power of the currency, which means less purchasing power of economic agents’ salaries and savings.

The process of any asset becoming a widely used currency is the most democratic there is. It cannot be decided by governments and cannot be imposed. If governments and central banks push financial repression and devaluation of their currency, citizens will move to other means of payment that become real money. Cryptocurrencies have not developed because of people´s idiocy or ill-means, but because of the lack of trust in fiat currencies and the constant desire of central banks and governments of destroying the currency to disguise structural problems.

That is why a central bank digital currency is an oxymoron, a contradiction in terms. The reason why citizens demanded cryptocurrencies is precisely because they were not controlled by central banks that constantly aim to increase the money supply and generate depreciation of money, inflation.

Central banks should defend the purchasing power of savings and salaries, not aim to erode them. If they decide to use new tools to dilute wealth, confidence in the domestic currency will evaporate. The fact that it has not happened yet does not mean that it is not going to occur sooner rather than later. When central banks finally realize that they have gone too far with their policy it will be too late.

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  • Grant Baines

    It could somehow work. However their track record suggests the opposite.

  • Andy T

    When you are desperate, digital currency is the ultimate solution !! Shame on them

  • Martin Humphreys

    They better focus on domestic currencies !!!

  • Anthony Pearce

    More of a financial repression tool and controlling us....

  • Kasey Crossland

    Nothing is certain forever in banking

  • Alex Duff

    Interesting analysis

  • Louise Wilson

    They have already gone too far !!

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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