At a APEurope Correspondent's Pool workshop today (21/08/2021) the current apparent aims of central banks were reviewed. The developments that have taken place in parallel to the announcement of "a New Bretton Woods" and the concept of a CBDC (central bank digital currency) reflect a desire of central banks to control consumption.
This is Part 1 of a 2 part article covering the morning and afternoon sessions.
How things went wrong
Following the 1971 closure of the gold window the increasing financialization of the economy has seen private banks increasingly investing in financial instruments as assets as well as providing loans for the purchase of physical assets. This has, over time, drained funds from productive investment, leading to falling productivity and wage levels and therefore declining real incomes of a large proportion of wage-earners. The 2008 financial crisis caused by an asset price collapse has resulted in central banks attempting to raise asset prices again through quantitative easing. As a result this has exacerbated the state of the economy, as exposed by Covid-19 with very few people having enough savings to survive more than a few days. Some had no savings at all, a reflection of the state wellbeing and a need for state support.
Although this has been caused by private banks and other forms of intermediation who in fact generate the funds they use, against collateral, out of thin air, it is the central banks who are getting the blame.
Any centralized operation dealing with the economy faces what Ludwig von Mises, in 1920, termed a "calculation and knowledge problem" and Hayek in 1945 called a "knowledge problem" also revisited by Ronald Coase in 1960 to criticize Pigou's tax on private corporate externalities such as pollution.
Because of the heterogeneity of economic actors and of local constraints, the invariable impact of centralized policies is to create winners, losers and those who end up in a neutral policy impact state. As a result, the externalities are not created by the participants in the economy but rather by central government policies. This criticism applies to monetarism, and to Keynesianism, to a lesser extent. Central banks face the same issue, but their problem is more clear cut and it relates to the issuance of money by banks and the destinations of these money flows. Central banks, in spite of "aggregate demand theory" and notions of macroeconomic management based on money issuance and interest rates, have not had any control over macroeconomic markets. They have had even less control or visibility of the massive grey market in financial securities since its initiation associated with the Black Scholes options pricing model in the early 1970s which formed the basis of computer-based hedging trades. This took off during the 1980s/1990s and today the grey market is bigger than in 2008 and several times the size of the main GNPs of the richer nations.
As a result, central banks are considering a Central Bank Digital Currency (CBDC) over which they will have oversight and control.
Basel III is an internationally agreed set of measures developed by the Basel Committee of the Bank of International Settlements which coordinates central banks policies. The Basel Committee on Banking Supervision was formed in response to the financial crisis of 2007-09. Basel III's measures aim to strengthen the regulation, supervision and risk management of banks. Like all Basel Committee standards, Basel III standards are minimum requirements which apply to internationally active banks. Members are committed to implementing and applying standards in their jurisdictions within the time frame established by the Committee. a new set of regulations are now being introduced.
Bank of International Settlements coordinating most of the research on CBDC
Most of the research into CBDC is coordinated by the Bank of International Settlements. Clearly one objective is to reduce the risks associated with the use of financial instruments as bank assets.
One of the concepts of the lines of development is to use a CBDC to be able to supply funds directly to companies and retail customers (public) while another line of investigation is to work out how to gain oversight of how companies and individuals spend that money. Wages paid in CBDC could be tracked, and in the end, taxation authorities either national or as a new role for central banks would be secured by deductions from monies held by companies and individuals electronically. Monies flowing into assets would be controlled and even be subjected to a discriminatory tax to moderate speculative inflation. As a way to ensure money velocity another line of investigation is to test the concept of issued
In December, 2020, a previous workshop explained some of the techniques in relation to the REX proposal where it is possible to track funds in the way some of the researchers working on CBCD desire, see:
"Moving out of depression with tag and traced money - Part 2"
The information technology techniques which make this possible were identified by Hector McNeill who headed the ITTTF Delta Programme in 1985 in Brussels.These were Locational-State Theory (LST) which is a series of techniques to maintain oversight of the state of anything in space-time locations and identified before the first GPS satellite system was launched and the Accumulog a type of blockchain identified a decade before the Bitcoin blockchain.
Feasibility does not justify central bank application
In terms of the central bank objectives, Hector McNeill gave a short presentation on the problems associated with the apparent intent of central banks. He stressed that even with tag and traced digital currencies there remains a specific problem with central banks. This is their narrative and agenda with respect to their objectives in "controlling" inflation. This has no relation to productive investment or the state of real incomes of the majority of constituents because there a persistent fallacy of the validity of the Quantity Theory of Money (QTM). Quantitative easing has disproven the QTM. On the other hand, controlling inflation on the basis of investment in productive activities, as proposed by the Real Incomes Approach, requires an intimate knowledge of the context of each investment. Most banks, and certainly central banks, have no clue of this level of detail which means they face von Mises' "calculation and knowledge problem".
The clearest exposition of the problems with the central bank narratives can be found in Richard Werner's blog. He also proposes a solution based on the German model of non-profit small banks lending directly on a localized and contextual basis to SMEs. This system, which goes back generations, is, in reality, an impressive cultural phenomenon where that society has valued and cultivated the expertise of "craftspeople" through a world-leading technical education system which is supported by industry. As a result Germany has over 1,500 SME's who are exporters who remain internationally competitive in high tech and precision engineering and other products.
McNeill stressed that this integrated system has developed since the 19th Century and in order to catch up countries like the United Kingdom would have to introduce broad-based technical education at secondary school level in order to accelerate the contribution of apprenticeships and sandwich courses at the higher level. By introducing general technical education earlier, the quality of intake at the vocational training level would be higher. Our current academic and over-theoretical secondary school system is not fit for purposes for the future of the country.
In the context of small local banks having a more intimate understanding of any investment they support, the role of LST can help them gain a higher level of investment risk reduction just as can the SME in drawing up their investment plans. Therefore it would be preferable for the small non-profit community banks, referred to by Richard Werner, to make use of their own digital currency systems enabling them to track and trace its use, in agreement with their borrowers. This would add a hitherto added quality to bank portfolio management and learning.
In order to avoid central banks imposing a system that, like Bretton Woods and QE, will not work, it would be preferable for there to be an alliance of people working on the issue of the small local bank infrastructure required to make this a success. On the national front there needs to be a rapid introduction of a broader secondary education system that exposes pupils to the full range of materials, technologies and techniques involved in the production of a wide range of products. This can help instill an understanding of the disciplines required in design and production of anything and is also an important contribution to those who might wish to head for administrative type employment because they would have a better understanding of what is involved in running the systems they might manage. Clearly the best managers are those who have worked themselves up through a career path understanding all aspects of the systems managed and, of course, including refresher and retraining periods to accompany the advance in technology.
Timeframes and issues
The overhang of Bretton Woods is the remaining domination of world trade by the US currency. The USA is unlikely to reliquish this considered-to-be-profitable status of its currency but rising powers such as China are likely to resist. The timeframes involved are significant but China has already experimented with digital currencies to learn the ropes for the required infrastructure. SEEL-Systems Engineering Economics Lab has suggested 5G is an essential requirement and yet this has been delayed for political reasons while China is already introducing 6G. The perspectives of governments on all of this in relation to the loss of "power" to central banks has yet to be assessed. Central banks being "independent" escape a considerable amount of constitutional oversight with the electorate having no say in monetary policy along with Parliament. However, the big tech companies are relishing the idea of providing platforms for CBDC to accompany their support of intel organizations. The ease with which financial groups capture political parties through becoming benefators weakens the role of political parties acting in the interests of the majority. The control of political party benefactors over the media combined with the commercial interest of high tech and social media firms, are used to keep control of the agenda and to stifle criticism and opposition; this does not present an attractive picture.
People need to organize to keep the control of the economy local to get rid of the "calculation and knowledge problem" by keeping what they know to themselves and using this to calculate and design their future as free citizens. There is a need to resist the state of affairs pointed out by Hayek,
The afternoon session of this workshop, now under way, will be the subject matter of Part 2 of this article.