Deceptive Innovation: Central Bank Digital Currencies

Government have worldwide started a crackdown on Public Digital Currency (“PDC”) to fiat and fiat to PDC’s access points, this crackdown intensified in 2018 and no deceleration of this trend is expected in the near future. Anti-money laundry and terrorist financing are key arguments used by governments.

This does not mean that governments are not interested in cryptocurrencies, the opposite is actually the case. In Europe (led by Bank of England and central bank of Sweden) governments are actively looking into central bank digital currencies (“CBDC”).

With the best intentions of cryptocurrency protagonists in place, we will most likely see the rise and adoption of CBDC by the general public before PDC’s. In time CBDC will likely fail and the general public will potentially resort to PDC’s. I expect that the rise of CBDC will decrease the adoption speed of PDC’s as the general public first needs to witness the abuse of CBDC’s possibilities by governments. This could evolve in the following pattern:

  • Governments will issue their CBDC on private chains. Exchange possibilities will be set-up between CBDC’s and governments will ban PDC and other forms of payment outside their network. Enforcement will be subject to new regulation and penalised by criminal prosecution.
  • Once all currency flows are controlled, full transactional monitoring by governments is a fact.

New monetary and political tools become available once countries shift from current electronic / paper currency to CBDC’s, examples as per below:

  • Automatic taxation on wealth, VAT etc.
  • Steering and controlling society by high tax on “unhealthy products” directly controlled via smart contracts.
  • Social benefits restricted to usage for specific products.
  • Negative interest rates automatically be settled via smart contract forcing people to spend money.
  • Capital controls become possible.

CBDC’s will potentially increase transparency on government spending, dramatically reduce accounting expenses due to automatic reconciliation and exclusion of double spending and bring real-time worldwide payments closer.

So far we have seen a lot of positive elements of CBDC’s. Looking at these positive elements from a government’s perspective and taking into account the legislative and enforcement power of governments it is unlikely that PBC’s will gain mass adoption / traction in the close future.

Only after the general public will witness the abuse of CBDC’s by governments (high taxation, property forfeiture etc.) a shadow payment network in the form of a PDC may find wide adoption. Other forms of shadow payment networks are the use of foreign currency or another forms of value like silver, gold etc. Arguments that CBDC will likely decrease the underground economy are debatable. It could be that the underground economy will actually paved the way for the general population to escape the control of CBDC’s.

Bitcoin as an asset is another story, I can see governments diversifying their reserves with partial allocation to Bitcoin when we shift slowly towards a multipolar world order. This topic requires an article on its own.

Is deflation good for the People?

August is a time that new economics students start as freshman and a new generation learns that deflation is bad an inflation is good. Interesting enough is that this understanding of inflation is relative new to the vocabulary of the common people.

Many people say that inflation helps an institution or person with a lot of debt. This however is not always that case as the inflation component is included in the interest that a debt holder pays over its principle loan. Indirectly a borrower partially repays its loan in real terms by just paying the interest.

Countries in general pay a lower real interest (interest – inflation) compared to the average citizens due to a lower perceived probability of non repayment. Inflation however has the same impact for both an individual person as well as for an institution. The above is true in case of monthly adjusted interest rates. If however the inflation rate increases but the interest payment (coupon) is fixed. The amount initially borrowed (principle) decreases in real value (eg. interest does not fully cover the inflation). This has happened many times when the government instructed the central bank to print additional money.

The question is if deflation changes the above, my rationale is that it does not change the above. However, a bank will not borrow money to a person or institution in case that a bank has to pay that person to keep its money. This is likely the problem in the banking structure we have today.

Savers on the other hand will not stall their money at a bank when they have to pay the bank to keep their money (also taking into account the counterparty risk (bank default) a saver always has). I see no downside for the people in general if this happens.

The banking sector will then likely shrink to historic proportions of the total economy. In the short run consumer spending will likely decrease, due to decreased availability of consumer credit. On the long run this will lead to increased investments in capital goods.

The above will likely result in increased austerity within governments (government debt is set-off against GDP), which is something governments are not good at. Consumers however are much more able be flexible in their spending behavior.

It might take some years until the economy normalizes, however it is more likely to result in a sustainable future compared to the last century with high inflation.

Trends in the below inflation chart are explained in the other article I have written: Government Debt and Personal Wealth – USA. One can see that long term inflation was “invented” in the 20th century.


And as a bonus some dates which may have had a great impact on the above chart:

Government Debt and Personal Wealth – USA

Government Debt and Personal Wealth

And as a bonus some dates which may have had a great impact on the above chart:

Dutch online marketplace – pro scam?

Dutch online marketplace – pro scam?

The US has Ebay, China has Alibaba and the Netherlands has (owned by Ebay). On the Dutch marketplace many items are traded between a willing seller and a willing buyer. But on an increasing occasions, people get deceived in a scan in which they believe they are buying a good, but never receive the item.

On many Dutch TV programs they discuss these scams and come up with a number of resources to decrease the likelihood of being trapped in a scam. Items like googling e-mail addresses / names / bank account numbers pop-up frequently. Another important item is the number of years the trader is active on the platform, with 8 years of activity many people believe that they are trading with a reliable person.

But what makes so attractive to scam compared to Ebay and Alibaba is that there is no possibility to send feedback to the seller that all users can look into, reviews and scoring of sellers is not possible. I have previously notified Marktplaats of this fact and have not received a reaction.

Multiple brand new iphone 5s are advertised on marktplaats for €300 by a seller with 7,5 years of activity. Many people will know that when a deal looks to good to be true, it usually is…. I hope Marktplaats will do the same in the future.

Is the current financial system at the end of its physical life cycle?

I do not know…

I have tried to compare the current financial system with a machine. A machine which after being used for a long time becomes obsolescent. I could however not find a reasoning that would satisfy an answer to the question raised in the title. Money has been used for a very long period of time and is still being used all over the world.

But money is an umbrella definition of a trade instrument (like a dollar and a euro which are created in a monopolistic environment). So I then tried to look at this question from a different point of view. I have tried to look for examples in history where there have been monopolies in sectors for a long period of time. In the end all these monopolies have seeded to exist. Sometimes due to human ingenuity, overproduction, other times by obsolescence and perhaps also after a period of time due to lack of existence/total depletion.

Can the current financial system be described as a monopolistic system? Is it different when the existence and continuity of a monopoly is enforced by law? In history there have been many examples of situations in which a monopoly has been misused to the advantage of the few. Is this the case with our current financial system as well? Is the current financial system misused by the few? Who has benefited from the monopoly? Who benefits from QE?

Perhaps the answers to the above will provide us the answer to the question raised in the title….

France & UK, a battle for energy

France, a country for 78% dependent on nuclear energy has had many faces in recent battles for energy. UK generates 45% of its energy from Gas, 32% from coal and 13% from nuclear power.

The UK and France have been supporting Turkey for many years via the EU funds. Turkey is key in terms of decreasing Europe’s dependency from Russian Gas. And perhaps the only reason they have been in talks to join the EU for many years.

Russia has two recently new pipelines to Europe being the North and South stream pipeline. The Nabucco pipeline sources Gas via Georgia And Iran through Turkey to Europe. With Iran as the second largest country in terms of proven gas reserves an important future partner.

It has been reported many times before, but Qatar (third largest country in terms of proven gas reserves) has tried at least from 2009 on to connect to the Nabucco pipeline. First with negotiations with the Syrian regime and when this did not work, through supporting the “Syrian freedom fighters” with multi-billion funds and weapons. The intended pipeline from Qatar was supposed to go through Saudi Arabia, Jordan, Syria and on to Turkey. This as a pipelines through Iran or Irak was politically impossible. France and the UK PM’s have always supported the Syrian “freedom fighters”. It was not until the UK MP’s voted not to support military action, that the US made a 180 degrees turn in its diplomacy.

Since then it seems that things have changed very quickly. Saudi Arabia seems to have a silent diplomatic war with the US. France just vetoed a resolution with Iran. I just wonder when Hollande will fly to Saudi Arabia to shake the hands of his new friends. Has France just secured its oil supply for the next decade, just as they did with their Gold supply when helping Mali. And then I wonder, where is the pay off for the UK? Has their insubordination to Saudi Arabia just backfired and are they now desperately looking for cheap gas from Qatar? The BBC just reported that energy prices are expected to increase with >10% next year in the UK.

We will see the development in the coming years….

FED will likely expand QE instead of Taper in next half year

So, I’ve said it.

With Saudi Arabia in a diplomatic crisis with the US, Central banks all over the world entering into cross currency swap agreements with China, Europe’s stalling economies and a further increased demand in physical gold holdings we will see a decrease in foreign US treasuries demand in the coming months.

The FED will not allow that this decrease in demand, as an increase in interest rates of US treasuries will further lower expected GDP growth rates and ultimately destroy the fragile US economic recovery. This is because increasing mortgage lending rates will result in decreasing property prices and lower consumer spending. In the end will will see a Wealth Effect in reverse.  To keep interest rates low the FED will likely increase QE and not taper in the coming half year.

It is not likely that the US government will cut spending’s and run a surplus within 2 years. Therefore the key question is, when will this increase in QE result in a spiral that we have seen so many times before in history?

PS. are the declining oil prices a silent diplomatic war between the US and Saudi Arabia? We all know that the governmental expenses of Saudi Arabia (keeping the population happy and pay for the 10.000+ princes) have increased so much that historic oil prices are likely to result in civil unrest.

Who owns the US debt?

Corruption and Prosperity

For me, one of the most important items for predicting economic growth and future prosperity is a countries increase in ranking or position on the below mentioned table:

The Netherlands ranked 7th in 2010/2011 and decreased to a 9th position in 2012. Lets hope this has been a temporary decline.

Please have a look for yourself how the GIIPS are ranked compared to Germany, Netherlands, Austria, Denmark etc. This is Europe 🙂

Euro crisis – no easy way out

I’ve talked about the Euro crisis with a lot of friends. Many know my strong feelings against the Euro as a political currency for many years. I always get the following question: “what I would do if it were me to decide which direction the Netherlands should take”. My strong suggestion has always been to exit the Euro and start a dual currency at first, where taxes and governmental expenses were collected and paid in the new currency. The current treaties do not say how such an exit should take place, they however do not oppose a country to exit.

Some economists suggest the best way forward is kicking the GIIPS out would solve the situation, this however would bring no solution to countries who have all their debt in the Euro currency. Their new currency would directly depreciate in value against the euro making repayment nearly impossible. (debt issued under local law would be eligible for conversion however).

Strong (hard) asset backing of the new currency would increase trust and therefore increase international acceptance of the new currency. It is likely that the new currency of the Netherlands will appreciate against the euro, this will have a positive effect on government debt repayment. International competition will likely decrease at first, but will likely return due to innovation and price/salary adjustments.

In time, the dual currency will be replaced by a single currency again, this can only be accomplished when cross liabilities with the ECB and other members have been cut. I strongly advice the DNB and members of parliament to start this process while we still can.