The Future of Money and Banking
Central Bank Digital Currency and Beyond
If I understand him correctly, Jon proposes that a private company take on the technical challenges of producing a central bank digital currency (CBDC). The private company would then sell the CBDC for conventional money. The conventional money (retail bank credit) would be held in trust in a reliable investment, “safeguarded from lending” and thus risk of loss. Presumably the private company collects its needed revenues from the investment.
Let us examine this idea from the perspective of endogenous money, that is to say, what we now know to be true: essentially all conventional money is already owed to a bank by the borrower that created it. Therefore, to complete the circle from bank credit creation to bank credit extinguishment, the bank credit the borrower created needs to be available to be earned by the borrower.
Of course, anyone’s money can be used to pay the bank, but because almost all money is owed as principal debt to a bank, there is no “other” money – it is all committed to the debt that created it. Therefore, it is valid to picture bank credit as being like a yo-yo, spun out into circulation when initially spent, circulating while interest is most of the payment, and then drawn back to the bank as accelerating principal payments. What makes our money system dysfunctional is someone else grabbing your yo-yo so you can’t earn it back.
Jon then mentions that the private company would invest the bank credit in a “money market mutual fund”, the business of which is the buying of relatively safe short term debt. This puts the bank credit back into circulation as someone’s debt to the mutual fund.
Logically, as long as the CBDC stays in existence, the conventional bank credit it was bought with will remain unavailable to the borrower that created it. Jon’s private company will have grabbed the yo-yo and the original borrower will never get it back unless someone, Borrower 2, makes it available to earn by borrowing it from Jon Co. via the money market fund. Assuming that happens, the original borrower earns the bank credit, pays it back and extinguishes it. Note that Borrower 2 still owes that same money to Jon Co..
Note also that there is now a crypto-Krona in use as money that can be used to pay off Jon Co., and eliminate the otherwise impossible principal debt, but only provided the new crypto-Krona is never LENT. However, Jon proposes that retail lending be done with crypto-Kronas, and there is nothing stopping either Krona from being acquired by a lender and lent again, and again, resulting in multiple concurrent principal debts of the same money.
The money system becomes unstable in the “grow-or-collapse” manner I describe in detail in my comments on Steve Keen’s presentation. https://conference2019.positivapengar.se/steve-keen/
This process also doubled the amount of Kronas in existence. Would it not, by simple logic, also result in devaluation of the Krona at the same time as CREATING system instability?
The truth is that anyone can double a Krona right now, all quite innocently and legally. It is the basic principle of local community currencies that trade a note with only limited circulation within the community for conventional bank credit that is held in trust in perpetuity at a bank. The purpose of a local community currency is to prevent money leaving the community, a commendable goal for creating more self-reliant communities. Disregarding the nature of endogenous money as someone’s principal debt to a bank, it looks like a simple substitution of a local Krona for a conventional one.
However, taking the true nature of money into account, it is clear that community currencies grab other people’s yo-yo’s and make them permanently unavailable. At the same time, these captured yo-yos, the deposits held in trust by the community currency organization, provide the bank with “offsets” that enable the creation of equivalent NEW bank credit. The result is one Krona has become 2 Kronas: the local one that was originally someone’s principal debt to a bank and a new conventional one owed to the community currency’s bank.
There are now two concurrent principal debts to a bank of a conventional bank credit Krona and only one conventional bank credit Krona with which to pay them. This is the persistent problem with our current money system – it always creates multiple concurrent debts of the same money due to its design.
E-postadressen publiceras inte. Obligatoriska fält är märkta *