If you thought fiat money was bad, you’re in for a shock. Governments around the world are developing central bank digital currencies (CBDCs). And these will prove far worse. They may well be the biggest threat to freedom I have encountered in my lifetime.
But let’s begin with some context. The problem with fiat money — meaning money by decree of the government — is that the government controls it. The amount, whether it is backed by anything, and how it enters the economy.
Over the years, and after a series of inflationary disasters, the government was forced to abdicate parts of this control to central bankers…which are appointed by the government…
Go to university and you’ll learn that central bank independence is a central pillar of monetary stability, because politicians cannot be trusted with power over fiat money. Once you graduate and begin reading the news, you discover this is a sham.
Governments are in so much debt that they need central bankers to print money for them just to finance the deficits. Central bankers have no choice, unless they want their government to go bust. The bluff of central bank independence was called long ago.
But it wasn’t always this way.
Free banking
Money was once in the hands of the private sector, because people didn’t trust governments to run things. Each bank would issue its own money. In fact, in the UK, there are still about 10 different not issuing banks as a historical remnant of this.
If you ever want to wreak havoc on an Australian customs official, show them a Clydesdale Bank banknote, Bank of Scotland banknote, Royal Bank of Scotland banknote, and a Bank of England banknote at the same time.
Just don’t expect to be allowed to leave with your money for an hour while they frantically try to find the exchange rates to see if you’ve breached any rules.
Anyway, governments covet control over money. And so what’s known as the free banking era never lasts. Free as in ‘freedom’, by the way.
Which brings us back to today’s topic of central bank digital currencies (CBDCs), which are a technocratic upgrade on fiat money. Technocratic as in ‘technological’ and ‘government control’.
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The ‘innovation’ of central bank digital currencies
What makes CBDCs so bad? They offer governments a level of control which was unimaginable not so long ago. And I expect this to lead to extraordinarily bad economic policy over time. Ironically, the story begins with precisely the opposite innovation. A libertarian anti-government utopia.
Cryptocurrencies work by creating ledgers which detail who owns what by way of detailing every historical transaction. Instead of owning a dollar because your bank statement says so, you own it because the ledger shows how you got it.
This innovation was supposed to circumvent the need for a financial system’s worth of institutions — all replaced by a simple ledger. And by making the ledger anonymous and stored in a decentralised way, cryptocurrencies made it possible to evade governments too. You’d have to shut down the internet to interfere with bitcoin.
But the ledger technology developed also opened the door to an upgrade of the fiat money we use now. What if our government money was run on the same sort of ledger? Without anonymity and with government control over a centralised ledger.
Then the government can see what you own and when you owned it by way of having a historical record of every single transaction. This already exists in our banking system today, of course. But there’s an entire banking system doing the record keeping instead of a single ledger. And that banking system either does a good job of protecting your privacy, or a bad job of helping the government invade your privacy.
In a way, the impressive inefficiency of the banking system protects us all by making extreme government measures unviable. The bizarre tax system adds to the obfuscation. Either way, governments need our cooperation on tax matters. Paycheques are one of the few arenas they’ve managed to invade successfully, with their cut coming out before we even get a choice. For most other taxes, governments ask us to navigate the byzantine banking system’s information for them. And woe betide anyone who gets it wrong.
But under CBDCs, the government has complete information of everything in their hands. Because it holds the ledger, which determines who owns what, in its hands. It doesn’t have to ask to tax you, nor figure out how much. It just does it, finished. You cannot escape, fudge, hide, deny, reject, ignore or take any other measure against the policy. It is all on the ledger, which the government controls and where it can see everything on.
Governments have been incapable, not unwilling, of making bad policy
Many of you think this sounds like quite a good idea. Finally, tax evasion would disappear, for example.
But do you trust governments with this level of power? Where their wildest dreams in terms of policy suddenly become viable because they have complete knowledge of your financial affairs and complete power to alter them.
Not so long ago, wealth taxes and high-income taxes were deemed a bad idea because they wouldn’t work well. People would hide wealth and income in various ways. Under a CBDC system, this becomes effectively impossible. Governments will succeed in making bad policy function. And this will bring back into discussion policy which is dangerously invasive.
Another risk is what brings down fiat currency systems in the end. The desire to use money to manipulate the economy is incredibly strong. Fiat makes this possible by way of enabling manipulating interest rates, QE and all sorts of other policies. But CBDCs create a whole new level of options.
In China, they’re considering having their CBDC money expire over time in order to pressure people into spending it to try and goose the economy. When my colleagues warned about this a few years ago, they were laughed at…
Investors should also consider the implications for the financial system. CBDCs could do away with the banking system by making money and transactions happen without the vast infrastructure which banks currently provide. At the very least, the role of banks would change dramatically. Their shares could crash as the government creates a whole new parallel financial system which doesn’t need bank accounts, payment systems or much else to function.
CBDCs will prove enticing in coming years. Nobody likes bankers, after all. But we’ll be handing central bankers and politicians complete control over our financial affairs in a way they could only dream of before now. And it’ll quickly become our nightmare.
Unless you understand what all this means and begin to prepare for how it changes the world.
My mentor Greg Canavan and one of Australia’s foremost crypto experts Ryan Dinse are on the case here. In fact, they’ve been working on a secret ‘world goes digital’ project for much of this year. The implications for Australian investors are actually quite profound. You’ll be very surprised at what they’ve found. They go public with their research late next week. Stay tuned…
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.
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