@TomB said "money that expires (or automatically degrades) seems to be one of the goals of centralized, digital currency."
I agree, and it is a bit scary. One of the fundamental definitions of money is a "store of value". Inflation of course erodes the value of money--and central bankers quite explicitly use low interest rates (and negative real rates, or sometimes, amazingly, negative nominal rates!) in an effort to promote spending linked to the psychology of eroding value. Although I am not as anti-banker as many participants on this board, I nonetheless do not like the idea of giving our central bankers one additional lever to "fine tune" consumption. There will be all sorts of unintended consequences, including the further emergence of private currencies, use of precious metals, regulatory measures to combat these, and lengthy and distracting legal battles among the parties involved. (not to mention the fact that central banker "fine-tuning" is illusory, but that is a somewhat separate topic) Americans are flexible, resourceful, and resilient. I suspect a degrading dollar in the end will not be politically viable, and will not happen, at least within the next decade or so. Nonetheless, the concept will be discussed, and the discussions will be interesting!
(PS - TomB -- I like your choice of the word "degrade")
Digital currencies issued by a central bank can be manipulated by the central bank to increase money velocity simply by implementing a negative interest rate. With no option to withdraw the cash to protect it from degradation, savers will have no choice but to spend it before a negative rate is subtracted from it. This can be used by the central bank to stimulate (force) spending when holders of money would otherwise choose to save.
And, each time money is spent is creates state sales tax revenues and income tax liabilities for those who receive it. Look for a federal Value Added Tax in the future; why should the federal government miss out on a whopper of an income stream, that states now enjoy.
I guess commercial banks will have to settle on becoming payday loan robber barons.
Keep an open mind, or get financially repressed -Zoltan Pozsar
@derryb said:
Digital currencies issued by a central bank can be manipulated by the central bank to increase money velocity simply by implementing a negative interest rate. With no option to withdraw the cash to protect it from degradation, savers will have no choice but to spend it before a negative rate is subtracted from it. This can be used by the central bank to stimulate (force) spending when holders of money would otherwise choose to save.
Does this increase the velocity of money and potentially create snowballing inflation?
The issuer of CBDCs is in the drivers seat to heat or cool inflation by promoting savings or spending with it's application of both positive and negative interest rates. As you know spending creates demand, increase in demand leads to higher prices. It also can save fuel in the helicopter by directly deposing "free" money into digital accounts to promote spending.
One CBDC concern is that the central bank holds the on/off switch for every account just as papal does for businesses it does not agree with. Could a non-complying citizen be denied access to money in his digital account?
Keep an open mind, or get financially repressed -Zoltan Pozsar
@derryb asked “ Could a non-complying citizen be denied access to money in his digital account?”
If it is really a digital currency rather an account like Treasury Direct, then it should be completely transferable (like cash) and not linked to a particular individual. Instances of the currency could degrade, but they should be relatively hard to confiscate.
CBDC's will be held in individual accounts provided by the central bank. Would seem logical for the central bank to have full control of the account holder's access to it. Keep in mind these are being set up to phase out commercial bank accounts that hold actual cash. The goal is to have all transaction conducted through these digital accounts.
Keep an open mind, or get financially repressed -Zoltan Pozsar
@derryb said: "Maybe you should read the link in the OP."
OK, I've read the thing now
It is definitely a bit on the paranoid side, though this is an area where a touch of paranoia may be warranted. As they point out, China is moving quickly in that direction. And, as they point out, there may be some pressure for third world countries to sign up.
Two points, however:
(1) The trend in Europe, and to some extent in the US, is towards privacy protections and greater privacy. We're not going to just give that up because some of our elected officials or bureaucrats think it's a good idea.
(2) If the Fed develops some sort of digital dollar, as they point out, the associated payment processing system would be a key element. But, this would not devastate the banking industry. Banks would evolve, but would still provide essential services such as making loans, packaging loans, underwriting financial risks, trading, deal-making, etc.
I do tend to agree that as the US dollar becomes less and less tangible, and if digital dollars incorporate new elements of "decay", gold could move back into the mainstream.
(1) The trend in Europe, and to some extent in the US, is towards privacy protections and greater privacy. We're not going to just give that up because some of our elected officials or bureaucrats think it's a good idea.
You are joking - right? Your vehicle hoovers up data on you every time you turn the key and plug in your phone to charge. If it has WiFi or OnStar it is sending that data to various companies daily. Your store loyalty cards, phone, credit cards, television, computer - all gather data on you that develop a profile of you that is detailed and specific
@cohodk: thanks, it is an extraordinarily useful resource.
At this point, I can only make one big-picture comment: the amount of intellectual talent being directed towards the cryptocurrency world is staggering.
@Higashiyama - sorry, the chip is a ubiquitous part of our daily lives. Look at the disruption being caused in every supply chain by the current chip shortage. Every chip has software and can gather data and send it back. That software can also be program to degrade if it doesn't contact the mother ship every X number of days. Sorry - but the horse is out of the barn and took the doors with it...
@taxmad -- probably I agree with you, if you are saying that there is a vast amount of information available about the background and behaviors of almost everyone who participates in the modern economy. Certainly you would know a lot about me if you had access to just two things: my credit card purchases, and my Amazon account.
But, I do think there is an emerging backlash, and it may be possible to put the horse's grandkids back into the barn.
Also, it is still possible -- with great effort -- to substantially protect one's privacy. I do know a few people who have materially prosperous lifestyles and are "off the grid", in both a literal and more expansive way.
My concern with the "chip shortage" is what will happen to existing quality control to ramp up chip availability, especially when a $30K+ new vehicle is going to totally depend upon these chips. There is a cost/sacrifice to taking inferior material and production shortcuts.
As we have witnessed, sudden increase (emergency?) demand has people around the world accepting medical protection that has not gone through normal quality control (trial period/proof of safety/effectiveness) processes. I mention this not to start a debate on medical options but to point out how willing the market is to accept what could be an inferior product when a proven product is not available. Until I am convinced "chip" quality has not been compromised I will not be buying any new electronic products unless my current product has died and my quality of life depends on it.
Keep an open mind, or get financially repressed -Zoltan Pozsar
Seems quite ironic that the creation of cryptos to decentralize finance could actually make it more centralized.
Not really - social media companies were supposed to expand speech and the free sharing of ideas. The best laid plans of mice and men often go awry...
Speech certainly has been expanded and there are now a plethora of ideas with which one can pollute their psyche. Yes, this social media experiment has definitely gone awry.
The vast majority of USA hundred dollar bills are circulating outside the USA, specifically the southern hemisphere. Those people and the lower economic portion of the USA are not going to be able to adapt to a digital currency.
@streeter said:
The vast majority of USA hundred dollar bills are circulating outside the USA, specifically the southern hemisphere. Those people and the lower economic portion of the USA are not going to be able to adapt to a digital currency.
All it takes is a cell phone. Like it or not you are providing them.
Keep an open mind, or get financially repressed -Zoltan Pozsar
derryb
Posts: 36,203 ✭✭✭✭✭
Comments
I have coupons that expire ... always seems to happen just before I want to use them. Infuriating.
I didn't read your link, but money that expires (or automatically degrades) seems to be one of the goals of centralized, digital currency.
In honor of the memory of Cpl. Michael E. Thompson
Well, they're not gonna outsmart me. I'll just buy gift cards and forever stamps.
Keep an open mind, or get financially repressed -Zoltan Pozsar
@TomB said "money that expires (or automatically degrades) seems to be one of the goals of centralized, digital currency."
I agree, and it is a bit scary. One of the fundamental definitions of money is a "store of value". Inflation of course erodes the value of money--and central bankers quite explicitly use low interest rates (and negative real rates, or sometimes, amazingly, negative nominal rates!) in an effort to promote spending linked to the psychology of eroding value. Although I am not as anti-banker as many participants on this board, I nonetheless do not like the idea of giving our central bankers one additional lever to "fine tune" consumption. There will be all sorts of unintended consequences, including the further emergence of private currencies, use of precious metals, regulatory measures to combat these, and lengthy and distracting legal battles among the parties involved. (not to mention the fact that central banker "fine-tuning" is illusory, but that is a somewhat separate topic) Americans are flexible, resourceful, and resilient. I suspect a degrading dollar in the end will not be politically viable, and will not happen, at least within the next decade or so. Nonetheless, the concept will be discussed, and the discussions will be interesting!
(PS - TomB -- I like your choice of the word "degrade")
Digital currencies issued by a central bank can be manipulated by the central bank to increase money velocity simply by implementing a negative interest rate. With no option to withdraw the cash to protect it from degradation, savers will have no choice but to spend it before a negative rate is subtracted from it. This can be used by the central bank to stimulate (force) spending when holders of money would otherwise choose to save.
And, each time money is spent is creates state sales tax revenues and income tax liabilities for those who receive it. Look for a federal Value Added Tax in the future; why should the federal government miss out on a whopper of an income stream, that states now enjoy.
I guess commercial banks will have to settle on becoming payday loan robber barons.
Keep an open mind, or get financially repressed -Zoltan Pozsar
Does this increase the velocity of money and potentially create snowballing inflation?
Knowledge is the enemy of fear
The issuer of CBDCs is in the drivers seat to heat or cool inflation by promoting savings or spending with it's application of both positive and negative interest rates. As you know spending creates demand, increase in demand leads to higher prices. It also can save fuel in the helicopter by directly deposing "free" money into digital accounts to promote spending.
One CBDC concern is that the central bank holds the on/off switch for every account just as papal does for businesses it does not agree with. Could a non-complying citizen be denied access to money in his digital account?
Keep an open mind, or get financially repressed -Zoltan Pozsar
Only if the Govt wants civil unrest.
And im not so sure that's off their wish list.
Knowledge is the enemy of fear
@derryb asked “ Could a non-complying citizen be denied access to money in his digital account?”
If it is really a digital currency rather an account like Treasury Direct, then it should be completely transferable (like cash) and not linked to a particular individual. Instances of the currency could degrade, but they should be relatively hard to confiscate.
CBDC's will be held in individual accounts provided by the central bank. Would seem logical for the central bank to have full control of the account holder's access to it. Keep in mind these are being set up to phase out commercial bank accounts that hold actual cash. The goal is to have all transaction conducted through these digital accounts.
Keep an open mind, or get financially repressed -Zoltan Pozsar
Some people may be suggesting that, but what you are describing is more like nationalized banking than digital currency.
Maybe you should read the link in the OP.
Keep an open mind, or get financially repressed -Zoltan Pozsar
@derryb said: "Maybe you should read the link in the OP."
OK, I've read the thing now
It is definitely a bit on the paranoid side, though this is an area where a touch of paranoia may be warranted. As they point out, China is moving quickly in that direction. And, as they point out, there may be some pressure for third world countries to sign up.
Two points, however:
(1) The trend in Europe, and to some extent in the US, is towards privacy protections and greater privacy. We're not going to just give that up because some of our elected officials or bureaucrats think it's a good idea.
(2) If the Fed develops some sort of digital dollar, as they point out, the associated payment processing system would be a key element. But, this would not devastate the banking industry. Banks would evolve, but would still provide essential services such as making loans, packaging loans, underwriting financial risks, trading, deal-making, etc.
I do tend to agree that as the US dollar becomes less and less tangible, and if digital dollars incorporate new elements of "decay", gold could move back into the mainstream.
Higashyama, browse around this website and read about some of these "tokens".
https://coinmarketcap.com/view/defi/
Knowledge is the enemy of fear
You are joking - right? Your vehicle hoovers up data on you every time you turn the key and plug in your phone to charge. If it has WiFi or OnStar it is sending that data to various companies daily. Your store loyalty cards, phone, credit cards, television, computer - all gather data on you that develop a profile of you that is detailed and specific
@taxmad -- although most people don't, you can turn them off; privacy is about individuals, not mass behavior.
@cohodk: thanks, it is an extraordinarily useful resource.
At this point, I can only make one big-picture comment: the amount of intellectual talent being directed towards the cryptocurrency world is staggering.
@Higashiyama - sorry, the chip is a ubiquitous part of our daily lives. Look at the disruption being caused in every supply chain by the current chip shortage. Every chip has software and can gather data and send it back. That software can also be program to degrade if it doesn't contact the mother ship every X number of days. Sorry - but the horse is out of the barn and took the doors with it...
@taxmad -- probably I agree with you, if you are saying that there is a vast amount of information available about the background and behaviors of almost everyone who participates in the modern economy. Certainly you would know a lot about me if you had access to just two things: my credit card purchases, and my Amazon account.
But, I do think there is an emerging backlash, and it may be possible to put the horse's grandkids back into the barn.
Also, it is still possible -- with great effort -- to substantially protect one's privacy. I do know a few people who have materially prosperous lifestyles and are "off the grid", in both a literal and more expansive way.
My concern with the "chip shortage" is what will happen to existing quality control to ramp up chip availability, especially when a $30K+ new vehicle is going to totally depend upon these chips. There is a cost/sacrifice to taking inferior material and production shortcuts.
As we have witnessed, sudden increase (emergency?) demand has people around the world accepting medical protection that has not gone through normal quality control (trial period/proof of safety/effectiveness) processes. I mention this not to start a debate on medical options but to point out how willing the market is to accept what could be an inferior product when a proven product is not available. Until I am convinced "chip" quality has not been compromised I will not be buying any new electronic products unless my current product has died and my quality of life depends on it.
Keep an open mind, or get financially repressed -Zoltan Pozsar
Just received the latest Economist.
Cover story; government sponsored cryptocurrencies!
I’m only part way into it, but the magazine seems to have a few concerns:
(1) Transfer of power to governments;
(2) Government taking over large segments of finance;
(3) Loss of individual liberties
(Done right, however, they think it’s a great step forward; they seem to have a fair amount of faith in central bank discipline)
Keep an open mind, or get financially repressed -Zoltan Pozsar
Seems quite ironic that the creation of cryptos to decentralize finance could actually make it more centralized.
Knowledge is the enemy of fear
Not really - social media companies were supposed to expand speech and the free sharing of ideas. The best laid plans of mice and men often go awry...
Speech certainly has been expanded and there are now a plethora of ideas with which one can pollute their psyche. Yes, this social media experiment has definitely gone awry.
Knowledge is the enemy of fear
That's their goal. Increase the velocity of currency (they call it money), rather than people saving it.
The vast majority of USA hundred dollar bills are circulating outside the USA, specifically the southern hemisphere. Those people and the lower economic portion of the USA are not going to be able to adapt to a digital currency.
All it takes is a cell phone. Like it or not you are providing them.
Keep an open mind, or get financially repressed -Zoltan Pozsar