Central Bank Digital Currencies: What's The Point?

Speaker 0 00:00:00 If you are joining us via morals and markets podcast on your favorite podcast app, please like, and subscribe and share the podcast, um, so that other people can see Dr. Salzmann's great content. And with that, uh, we are going to be talking central bank digital currencies. What's the point? I think this is a super, super important topic that not a lot of people are talking about. So I'm really excited to hear Dr. Salzmann's comments. And with that, I'm handing it over to you, Richard Speaker 1 00:00:24 Abbey. Thank you. And I didn't realize I have another birthday to celebrate my birthday with that list society. One of my favorite of all my birthdays. So I, now I have two, two birthdays. Um, thank you. Thank you. Thank you, Atlas society. And thank you for joining me tonight. Uh, morals and markets for those who don't know is a monthly webinar, 90 minutes, where I try to integrate and synthesize the moral aspects of markets and markets. So some of it sometimes is just technical economics, which will satisfy the economist in you. But those of you who are more philosophical and don't really know much about economics, you'll get that angle of it as well. But I think the integration of the two can be fascinating. So I try to pick topics that have both in it. They'll either have ethical Ash aspects or political economic, all three of those. Speaker 1 00:01:12 That's what I specialize at duke. This is mostly aimed to college students and it began with a small group at duke. And then it's been growing since Abby has been helping grow the list. So just so you know, the context, so many of you are new to this and wondering what the heck we are doing. That's what we're doing. So I think Atlas society for promoting it and describing it so well, this, uh, topic tonight I picked, and by the way, the format 90 minutes, I try to say something for maybe 25, 30 minutes, then I turn it over to you. Um, you can ask questions, you can make comments. Um, but the idea is not to have any monologue for 90 minutes. You wouldn't like that. Uh, so I'll present material, you know, stuff to chew on for 25, 30 minutes or so, and then, uh, I'll stop there. Speaker 1 00:01:58 I have my eye on the clock. So I'm usually good about this Abbey, right? I tend to stop around them. Um, so anyway, we'll get more jointers this is a nice turnout, Abby, isn't that for the, for, for this early on in the, in the podcast, in the broadcast, the reason I picked this topic last month, I had the great pleasure of having one of my duke students, Jack Kriesel with me. And we talked about cryptocurrency just broadly and, and Jack is absolutely brilliant on this. I myself have a long history of studying monetary economics and central banking and the gold standard, and always from a pro capitalist free market, uh, perspective. Jack Jack is very learned not only on crypto. I mean, he's only 17, 18 years old, very learned, not only on crypto and Bitcoin, but he is aware of the surrounding call it moral political context of money and therefore, uh, you know, aspects of monetary autonomy, privacy choice, and currencies, all the things of interest, mostly to libertarians Objectivists and others who think the government should not be a monopolist issuer of currency. Speaker 1 00:03:09 So the reason I pick tonight was well leveraging off of last month's topic. What about central banks issuing crypto? So in other words, the broader issue is crypto is becoming a kind of interesting competitor say to conventional Fiat paper monies or commercial bank deposits, but what, why should central banks at all have a role in this? They are increasingly trying to have a role in this and the literature I read and the reports I read from central bankers, uh, presented as we're just trying to help, or we're just trying to, uh, facilitate this wonderful new, innovative, vulnerable money. We're just trying to make the payment system more efficient. Uh, we're just trying to ensure the safety and soundness of the financial system. I am more skeptical, uh, of what they're trying to do. There, there's a certain truth to some of that, but from my perspective, and now here, I'm just going to back actually read the descriptor I gave, uh, for the listening audience who may not have seen the description or an abstract of tonight, because it really, I think summarizes, summarizes what I'm going to say. Speaker 1 00:04:19 And you'll see that it's a much more skeptical treatment of central banks. And then I'll dig into one, call it the positive aspects, why central banks would involve themselves in digital currencies or cryptos. And then the, what I call the more nefarious reasons. So here's the descriptor for those of you who didn't get to see it, quote central bankers as monopolist issuers of state-based Fiat money, basically mandatory money. They operate not to help economies, but to assist fiscally profligate governments in funding themselves, cheaply and surreptitiously. Wow. That's like in a hidden way. It sounds like I'm a conspiracy theorist. Continuing the quote lately in response to the spread and possible threat of cryptocurrency central banks have pursued plans to issue their fee out monies in digital form. According to the bank for international settlements, by the way, a bank of central banks, there, there are a bunch of central bankers, 86% of their members, their central banks are actively researching central bank, digital currencies. Speaker 1 00:05:33 What I'll call CBD seas. I hate that acronym 60% are experimenting with it is experimenting with it. And 14% actually have pilot projects further. The final part of the quote fans' claim that CBD C's will help central banks better manage the payment system inflation and the but nefarious motives are also likely having to do with modern monetary theory and more direct means of financing profit governments, unquote. Okay. I say nefarious. I mean that means kind of like dastardly bad motives. Let, so let me first start with the positive and then turn to the negative, which I'll emphasize more in my leg. The later part of my comments, digital money is a perfectly fine technologically capitalist profit oriented form of money. There's no doubt about that. If in the free market movement or in objectivism or libertarianism, you know, there were cases made for the gold standard. Speaker 1 00:06:41 I make a case for the gold standard I have for 40 years. I still think it's one of the most ingenious, best monetary systems ever the most objective system ever created. And yet what did gold transform into claims on gold currencies, convertible integral and things like credit cards, checking accounts, uh, debit cards, point of sale terminals. You know, I'm, I'm not like moving into the more recent decades. They are about means more convenient and lower cost means of moving your money around. So no advocate or free market money should get caught up in the idea of, I like these old clunky, you know, Dickensian tight monies that clunk around in your pocket like gold coins, not necessarily the, the key part of the gold standard was not just that gold is an object of money. You cannot print it. You cannot fabricate it alchemists for decades and centuries. Speaker 1 00:07:44 Tried could not turn lead into gold. So one of the great things about gold is people did converge on gold as money over the centuries. It's got a centuries long record, but it's also one deniable that for convenience, people would want to use that eventually as base money, as an anchor, so to speak for other forms of money. But these other forms could only retain their value. This is the key point, uh, currencies checking accounts, debit. They can only retain their value, derive their value as derivative monies. If they were linked to gold in some way, if they still remain convertible into gold in some way. And that we know if you know, the history was totally broken. 50 years ago, 50 years ago, the major countries of the world went off the gold standard. Meaning no more government monies are, are connected at any level to gold anymore, but notice gold still exists. Speaker 1 00:08:41 Gold is still mined. Gold is still exchanged, stored in short people still value. It it's worth way more than it was when the countries went off. The gold standard. I gave you all this background suggest that central banks are not really keen on operating on objective money, meaning they cannot survive in today's world with a limited supply of money with a, with a money supply that only goes up, um, in incremental, uh, reasonable percentages. And so that's one of the reasons they went off the gold standard. It was not because the world did not have enough gold it's because governments engaged in excess of spending would not tax their citizens to the full extent of that spending meaning they had to borrow the difference, meaning they had to go to a central bank to help them borrow. I know it's somewhat, it's this'll sound somewhat technical, but that really what was going on when they were going off the gold standard. Speaker 1 00:09:43 Now fast forward to today and the private banking system and private monetary system, I would have to say has done an enormously amazing job of modernizing the payment system. It wasn't something central banks did. They kind of dragged their heels about this, but the private banking system was the one that came up with checking accounts and credit cards and debit cards and crypto and Bitcoin. If you know, this is a private sector project, uh, looked at skeptically by governments. Why? Because they looked at it and they said, wait a minute, is there some kind of competing money out there that we don't control that we don't monopolize? The reason the governments of the world through central banks, monopolized money is they do not want the private sector determining money it's value, who gets it, who borrows it, who lends it at what interest rate, the government wants to control that in a context where the government is out of control. Speaker 1 00:10:46 They want to control money because they are fiscally out of control. They're spending ridiculous excessive amounts of money. They need to get their hands on money to be the sole issuers of money, controllers of money. But because they can't totally stop innovation, unless they totally take over the monetary system, they will see things like digital currencies. And so this brings us to our topic tonight, what are they doing by offering or thinking about or researching central bank digital currencies? I see it as something like a co-opting of the system, an early attempt for them to get their hands on or their regulatory tentacles into this system. On the one hand, they don't want to come out as the end or fall barbarian saying we're against digital. They don't want to do that. They want us to be seen as, um, you know, monetary experts, monetary futurists, but really, if you look at the history, you cannot really trust these central banks by way, especially in the last dozen years, you might have trusted them before 2008, but what have all of them done since 2008 massive increases in the money supply, uh, depression of interest rates down to near zero, sometimes negative and an increasing control over the payment system in banks. Speaker 1 00:12:14 Uh, there's been a real acceleration of this. Whereas the banking system was moving toward more freedom from 1980 to 2000. It's gone the other ways since nine 11, some of it under the pretext of we need to stop these terrorists for moving money around the banking system, or we need to stop a black market movements of money, you know, uh, associated say with drug dealing or human trafficking or something like that. This is the pretext governments have been using to say, Hey, we need to know what's going on inside your bank account, inside the payment system. So bank financial bank privacy, I would say in financial privacy generally are gone, are almost completely gone. If you knew what the system looked like in the seventies, eighties and nineties, I mean, people had private banks, Swiss account, Swiss bank accounts. They didn't have their name on them. Speaker 1 00:13:04 They had numbers on them. You really did have financial privacy, the government couldn't just access your bank records. They had to go get a subpoena and they had to go to a court and prove that you were, uh, uh, had, there was probable cause that you were a criminal. Now they can access anything they can look at. They can look into your bank records and force JP Morgan to tell you what they're doing. I think this is why they're interested in crypto. I think it's why they're interested in digital. It's not to make the financial system and payment system more efficient it's to keep its eyes on you. It's to make sure you're not a tax avoider it's to make sure you're not a, I don't know, uh, uh, a Canadian trucker objecting to maths in Canada. So, so just look at all the stuff Trudeau did to the banking system in Canada over the last three weeks, he basically totally took it over. Speaker 1 00:13:58 He basically stopped payments, uh, even in things like GoFund me accounts, he blocked or trying to block Bitcoin accounts, uh, of truckers they looked into who actually gave money to truckers. How do they get that? They called it the banks and said, show us all the payments all the way down to $50. For a couple of days, there was actually a run on the banks and in Canada people so fearful that the government was either going to seize their money, stop movements of their money, investigate their bank records, that they tried to get cash out of the banks. They didn't trust the banks. So these are the kinds of, and now if you look at, of course, what's happening in Ukraine and elsewhere, these are the kinds of things that we need to keep our eye on. When we hear about government saying, Hey, we're going to get in the digital currency business. Speaker 1 00:14:47 Now I mentioned in the introduction, um, modern monetary theory. I don't want this segment to be on that because I have a whole segment on that, but I just wanted to briefly say what it is and how it relates to digital currencies, central bank, digital currencies in brief modern monetary theory is first of all, it's not modern and is not really a theory. This has been around for decades. It's supposedly mostly comes from the Keynesians, but the idea of modern monetary theory is something like this. If we set up the structure of the system correctly, we, by the way, as central planners, the government can issue money without limit and consequence. And it can issue debt without limit, without consequence, not just think of this. It's like rejecting the law of causality on money. What does it mean to say we can issue as much money as we want without consequence. Speaker 1 00:15:48 What would be the consequences of issuing a lot of money, inflation, a decline in the value of money, the cost of living skyrockets in the extreme hyperinflation. I mean, there's a long history of this, so it's not like I'm making it up. Um, but they're saying no, no, no, no, no, no. We can issue a lot of money and not have inflation 0.1 0.2. We can also borrow a lot of money issue, a lot of government bonds. Now this is a little more technical, harder to follow without interest rates rising to get that. Imagine we can borrow, borrow, borrow, borrow, borrow, and interest rates. Won't go up. That does sound illogical. Doesn't it? Usually, if you borrow too much money, the banker says you have to pay a high interest rate. Why? Because you might default, it seems like too much money you're borrowing on your credit card. Speaker 1 00:16:42 The modern monetary theory is saying, no, no, no, no. We're living in a brave new world where the government can not only print money without causing a lot of inflation. It can borrow money without boosting interest, right? If anything, look, interest rates are declining, they'd say so it seems a paradox. People look at this and they say, well, we know for a fact, especially since oh eight, especially since the financial crisis that governments have issued a lot of money and that doesn't until recently it doesn't appear to be a lot of new inflation. And they have really issued a lot of debt. Government debt in the U S is up to 30 trillion. Now it was only 10 trillion in 2008. So it's tripled since 2008, but the government borrows at 10 years now at 2%, I mean, it's a very cheap rate. Why do I say all this central banks are facilitating? Speaker 1 00:17:31 This central banks are not printing money and keeping interest rates low because they're trying to help the economy. They're doing it because if interest rates were higher, the government budget would be busted. The interest expense on the debt would be so high. It would crowd out other spending like on welfare payments or national defense. Japan knows this. Japan has been doing this for two decades. Now a lot longer than the U S has. And it also has very low interest rates. And Japan also is very worried about if interest rates go up, the country will go bankrupt. Don't really, the government will go insolvent because again, understand this. If you have a lot of debt and a low interest rate, your interest expense could be low. But if the interest rate goes up and you still have that huge debt, your interest expense will be a big part of your budget. Speaker 1 00:18:28 That's what Japan has been worried about. That's what the U S and the fed is worried about. Notice they have no underlying solution for the deficit spending. They still do the deficit spending. They can't control what Congress is doing, but the fed is like a handmaid to this fiscal prophecy. It is told to finance the deficit. Now here's where digital currencies come in. It is a lot easier to issue money without limit. If you just do it with a stroke of a key, you don't need printing presses to create currency. See what I'm saying? You do not have to go through the banking system. You simply create the digital currency directly from the central bank. That's one form of central bank, digital currency. So there, there are two basic forms, but I don't want to get too much in the tech next because I'll, I'll lose the audience, but one form would be, have your account at the central bank. Speaker 1 00:19:24 And what do you think of that? So imagine you'll have a checking account right now at, uh, I dunno, Citibank. Imagine if your account was that the federal reserve, that sounded weird, but there are some advocates of central bank, digital currencies who say the system we should be moving toward is everyone has their banking accounts, ethics, central bank. I mean, that to me is total government takeover of the banking system in the beginning. They'll just say, as they have been, if you read these reports, they'll say we're just providing services to people who are un-banked. Un-banked means people who don't have banking accounts. Now, if I asked you, tell me the profile of people who don't have a bank account, what would you say? What are the two groups you can think of anyone? Speaker 1 00:20:17 The first group they would say is poor people. Poor people either don't have enough money to put in the bank, or, you know, minimum deposits are too high, or the fees are too high. Okay. Maybe that's true. The estimates are, that's like 3% of the population, but the other group would be what criminals, black market activity, tax evasion, right? All those kinds of things that they accused Bitcoiners are doing now, they certainly do not want tax evasion. Right? So part of the, part of the threat, I think of central bank, digital currencies meant mainly central banks getting more involved in these kind of off-roading currencies is they really do want to inspect and invade and monitor your financial transactions. And once they provide this service in the beginning, they'll just say, we're providing this service, you know, in addition to what banks do. But once they have that structure in place, it will be very easy for them to say, we're going to be the sole banker now, not Citibank or anyone else. Speaker 1 00:21:19 So think of what's happened. They've already taken over the issuance of currency from private banks. The private banks issued money convertible into gold until the federal reserve monopolized it. So now the federal reserve monopolized money, but it was still the money that's in the volts of S of Citibank and others. Right? If you were a total central planner, you would not want to have any private banks. You don't want them taking, not really. You don't want them taking deposits. You don't want them making the loans. You want government officials to be taking the deposits and making the loans. That's what's happened in all socialist countries. They have one bank. Everyone has accounts at the bank, the bank issues, money without limit. And here's the key. And here's the key to central bank, digital currencies. They can debit and credit your account whenever they want instantaneously. Speaker 1 00:22:10 Instantaneously. Now you may think this is weird. Like, why would anyone do this? Actually came up during the COVID lockdowns. Now think of the logic. COVID lockdowns. Everyone go home and don't work, but you need money to pay your rent and food, right? So we will send you a stimulus check, but the check takes forever to go through the mail and get to your mailbox. And then you walk to the bank and then the back, the check has to clear and blah, blah, blah. There were people at the time saying, I wonder if we can do this instantaneously? Wouldn't it be nice if the fed could just credit your account overnight, once a Congress passes the bailout bill and they instruct the central bank to just credit your account. Next day, you wake up, Hey, there's money in my account, but notice likewise, they could immediately tax your account. Speaker 1 00:23:09 Why should we pass these tax bills? You know, they take forever to debate in Congress. They only pass the tax bill. Then the house house of representatives have to sign it. Then the fed has to sign it. Then the IRS has to set up the blah, blah, blah, blah, blah. What if they could do it instantaneously? See the idea. This is what's very attractive. I think to central banks on digital currencies, they really want direct, direct access to your bank accounts and the lending mechanism. And for purposes of not only monitoring and fiscal policy, which again is not good for the economy. It's just good for the spenders and the borrowers in Congress, in the widest. But for privacy purposes, they do not want you to be able to do whatever you want with their money. They want to be able to track you. They want to be able to monitor you in a highly politicized setting. They want to be able to punish you. I mean, we saw this just last week in Canada, they can target certain groups and say, you just can't get your money. Cause we're calling you terrorists or insurrectionists or enemies of the state. Speaker 1 00:24:21 And likewise friends of the state can get instantaneous subsidies. I wonderful. Last thing. I'll leave you with. Cause I'm running out of time here a little bit. This is almost as a bit technical, but I I'm shocked to the extent I found it in the central bank, digital currency studies that have come out so far. And by the way, if this interests you, the fed finally just issued a study on digital currencies and it doesn't however commit to doing it is just studying the issue. But I think this is the beginning of it getting into the issue. I don't know if you realize this, but if you go to a bank and put your money in, they usually pay you interest. You know that concept, right? You gave them your money. You would like a return on your money. The bank pays you an interest rate. Speaker 1 00:25:13 Now it may be high or low or something, but you don't pay them. Right? They pay you. So that's called positive interest rates. Well, one phenomenon we've seen in the last decade is negative interest rates. Now this sounds, this will sound weird, but what is a negative interest rate? Negative interest rate is when you deposit your money and you pay the bank or government borrows, and the bond is at a negative interest rate. Instead of the government borrowing from you and paying you an interest, a you pay the government and interest rate. It is bizarre and yet such bonds do exist. People do buy them. And here's the important point as governments all over the world over borrow, borrow too much and worry about paying too high end interest rate. They have begun to promote the idea of negative interest rates. And there's no other way to describe this, except it's a massive default on bonds, because think of it in a normal setting. Speaker 1 00:26:22 If the government is paying you a positive interest rate on a bond, and then one day you wake up and it said, we aren't paying, we're not going to pay the interest or principle. That is technically a default, right? That is what a default means on a bond on any kind of loan. When the borrower says, I'm not paying it, I'm not paying the interest or the principle I'm just going to not do it. That's called the default. Well, I consider negative interest rates. The equivalent of a default is the equivalent of the borrower. Not only not paying you an interest rate, but making you pay them an interest rate. And that is what digital currencies permit governments to do. And that is what I think they're moving toward doing. They're trying to set up this system so that when you put money in the bank and the richer you are, the more this will affect you, you will not see at the end of the month and accretion of your account with a positive interest rate, you'll see a deduction from your account minus 2%, minus 3%, minus 4%. Speaker 1 00:27:24 And there'll be a negative interest rate. And that is one way of government confiscating your wealth. It's much easier to do with a digital currency because all they have to do is go on into the system and put in negative interest rate. If you're sitting there with cash, the government can't run around, unless it's going to steal your cat. It can't run around and deduct the value of your cash except through inflation. So I'll leave you with that. That is what I mean by that. Going more nefarious possibilities that government might, uh, use digital currencies for. But I wanted to make you aware of this because this, this requires a knowledge of two things, which is difficult to have. It requires a knowledge of digital currencies. A lot of people can't get their heads around, even that what the heck is a Bitcoin? What the heck is a cryptocurrency and knowledge of something even more obscure, which is central banking. Speaker 1 00:28:20 So I'm conceding. This is not an easy topic, but I'm also saying this isn't a morally, politically, economically crucial topic. And I think there's probably only 10 people in the world who even know what the heck this means or what it might mean because the two aspects of CB DCS are hard, CB part central banking, hard to understand, hard to understand the motives, the DC part, digital currency. Also hard to understand here. We're looking at the intersection of two very complex topics. Central banks issuing digital currencies. So I that's eight 30 now. I hope that helps. Some of it may sound obscure. And so I'm open to comments and questions. Now we'd love to hear from you.