Central Bank Digital Currencies (CBDCs) are coming. They are inevitable now. And crypto investors are going to hate them. (Bond investors might wind up hating them, too — but that’s a different story.)
China has been developing a central bank digital currency (CBDC) for years. Because of that head start, China will likely be the first country to get a CBDC to market. But other countries will follow quickly.
There is already a routine string of news announcements along the lines of, “XYZ central bank is launching a study of digital currency possibilities.” These are trial balloons. When the first CBDCs start rolling out, many more will follow. It will be “everybody in the pool.”
CBDCs will represent the worst aspects of cryptocurrency rather than the best. They will be “true” cryptos in at least two positive senses: First, they will represent transformative groundbreaking technology; and second, they will revolutionize digital payments in a specific way.
But in other ways, CBDCs will be awful. They will represent the worst of fiat money. And they will give central bankers, and governments in general, unprecedented levels of granular precision and control.
To get an idea of how powerful CBDCs will be, think about Facebook’s targeted advertising platform.
With Facebook, it is possible to “micro-target” audiences to an insane degree.
For a hypothetical example, you could advertise to midwestern grandmothers who have a taste for aged bourbon and purchased a cruise line ticket in the past year. Or something equally granular.
Now imagine that kind of micro-targeting power in the hands of central bankers and politicians.
Benjamin S. Bernanke, the Federal Reserve Chairman who presided over the 2008 financial crisis, was nicknamed “helicopter Ben” because of a speech he gave in 2002. (The speech is still online: You can read it here.)
In the 2002 speech, Bernanke explained how central banks could use “helicopter money” to fight deflation. Bernanke didn’t use the phrase himself, he just described the process.
“Under a paper-money system, a determined government can always generate higher spending and hence positive inflation,” he wrote.
The actual phrase originated with Nobel Prize-winning economist Milton Friedman in 1969, as written in a paper titled “The Optimum Quantity of Money:”
“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community…”
The key concept of helicopter money is giving money to citizens directly.
Instead of providing liquidity to the banks, or hoping to increase risk appetite by lowering interest rates, with helicopter money you just drop cash from the sky.
Central bank digital currencies will potentially combine helicopter money with Facebook-style socioeconomic micro-targeting as wielded by central banks and governments.
Think about that for a minute. It’s pretty trippy.
Just as a Facebook advertiser can target bourbon-drinking midwestern grandmothers, CBDCs could allow a central banker or U.S. treasury official to send cash to a specific micro-targeted receiver, with finely tuned parameters right down to ZIP code-adjusted cost-of-living payments or inputs on a tax return.
Cryptocurrency was supposed to be a bridge to a libertarian paradise. But so was the internet — at least at first. Twenty-five years ago, there was little concept of a dark side to the internet, and no thought of governments mastering the internet to their own ends.
Now, though, we are seeing how dark and authoritarian the internet can be. Technology can increase liberty or enable authoritarianism, depending on just who wields it and why.
The same will apply to government-controlled CBDCs, even as the world enters a new era of monetary policy (with the old policy ideas tapped out) and a new era of top-down government intervention.
CBDCs will play a key role in this to the extent they transmit the economic will of the state. They will also result in wild new political experiments gone wrong.
Central bankers will embrace CBDCs as a shiny new set of tools for pushing and prodding the economy. They will surely do this with a sigh of relief, given how rusted and broken their old tools had become.
But at the end of the day, CBDCs are going to be hyperactive transmission mechanisms for fiat money — printable with a keyboard stroke — and a likely source of fresh new policy disasters.
(CBDC + MMT = OMG?)
On the bright side, this brave new world will probably be great for gold and Bitcoin.
To the extent the forces of inflation are unleashed through new digital channels, scarce sovereign assets (gold and Bitcoin) will win and bonds will lose.
TradeSmith Research Team