Some of the reasons I’ve always advocated official emoney (by which I mean digital base money issued by a central authority) include that it would be a good way to overcome the negative interest rate problem, would help ease the shortage of safe assets in the system and be a good way of distributing and controlling for the inflationary consequences of a basic income, if it was ever introduced.
The problem with official emoney, however, is that it would essentially nationalise/monopolise the job of payments and safe liquid asset provision.
While I’m still pro the idea of exploring a digital base money, I’m increasingly mindful of some of the harmful/complicated consequences.
A market where unlimited official emoney is available to users like me — i.e. one where I’m happy to forgo interest in exchange for a risk-free par value investment — is one that theoretically allows me to store an infinite amount of wealth as liquid digital cash forever.
Yet, this is problematic for a number of reasons. One. It sees the central bank undercutting the banks’ own deposit services, because they can’t compete with an institution which has no restriction on base money production (apart from inflation). Two. It potentially underemploys capital in the economy. Three. It transfers the cost of payment provision onto the national balance sheet as a seigniorage input. And four. Par value protection becomes a national real-time concern (national equity instead of bank equity).
Think of if it this way. In the old model your rights to liquid national equity redemptions (by which I mean spending in the real-economy) would be deposited in a private institution which would make certain assumptions about the rate at which you were likely to drawn these claims down.
The overall presumption behind that framework, however, relates to the idea that the total liquid stock of the land — the float –is constantly changing (decaying and being replenished) in line with national productivity and consumption. The overall size of the float may stay pretty constant, but its internal composition is dynamic. This means any time period you forgo/delay your float redemption rights until tomorrow is a wasted opportunity for the system.
Banks lend what you choose not to consume today to someone else who needs it for a price (the interest rate), whilst promising you the option to change your mind if you so desire it.
This scenario allows for a much more efficient use of total liquid capital because it means nothing that is produced by the economy goes to waste. The problem is that banks can only ensure the profitability of this set up by making an extraordinary judgement — akin to a punt — about your real rate of consumption vs your entitlements. If they get this wrong bad things happen.
For example, if they over assume your consumption intentions, they compromise their potential profitability by keeping more liquid capital on reserve than necessary. If they under assume your consumption intentions, they can be left with a liquid capital shortfall and a bank run.
Which is why in exchange for the risk that they might get that balance wrong and leave you without the liquidity you need when you need it, they reward you with a share of the additional interest they create via the process. They also offer you incentives to guarantee you won’t need to withdraw your money any time soon. Banking is a profit-share relationship with those who bring liquid capital to their system.
All well and good.
In a national emoney system, however, there is no such synergy. Everyone’s cash is base money, meaning it’s the real deal. Whilst you are theoretically free to lend it on via a banking or P2P system if you wish, if you prefer not to, all par value decay risk lies with you and the state directly.
What’s the problem with that?
Well, mainly the fact that those who wish to keep their money as zero yielding liquid emoney at the central bank kind of take the system hostage, because the only way the redemption risk associated with those claims can be prudently managed is if a real-world buffer reserve representing all the potential consumption associated with those rights is constantly set aside in the economy just in case they choose to redeem it.
That’s a hugely wasteful system, especially if most of the time people are demanding to save unilaterally, essentially refusing for this liquid stock to be reinvested in such a way that can extend its shelf life and protect it from depreciative decay and reduction of par value.
The truth is that liquid claims not reinvested in the system are decaying claims.
Think of it in terms of claims on the contents of your fridge. If such claims are not consumed during their shelf life period, they go to waste. You’ve swapped your earnings (the product you produce for the system) for an oversupply of perishable goods which you were never able to take full advantage of. You’re a loser in that deal.
Of course, if you were to share the stuff you overbought before it went off with someone who has the capacity to consume it when you don’t, they can now owe you that surplus back when you really do have a consumption requirement for it. All of a sudden the full potential of the “sharing economy” comes into its own. Because you shared rather than hoarded, (providing the counterparty you shared with can be trusted) you have extended the duration of your saving.
It’s fairly likely that a central bank operating an emoney “full reserve” system would soon realise that it had in reality become the temporal guardian of decaying stock which unless it reinvested into something more productive or at the very least non-perishable (like gold or astronaut Soylent food) would lose its saving value over time and leave the system exposed to a capital shortfall problem.
Savings, in a nutshell, have to be offset with some sort of non perishable asset if they are to hold their value. The best non perishable assets are social promises since they have no physical carrying cost.
They do, howeveer, come at the cost of someone else’s leverage. If nobody in the economy is prepared to borrow, then the only real option savers have is putting their savings into non perishable assets that they perceive will always have some future value to society or themselves.
But that’s quite a punt. You simply cannot guarantee that by the time you are ready to cash in your non-perishable gold/commodity for consumption goods, that the market will have the will or capacity to service your consumption desires with useful product.
Herein lies the error with claims I often hear from the Bitcoin community that go something like “it’s my money, I earned it. And I have a right to keep it for myself only.”
Yes you do have that right. But you don’t have the right to insist that your money retains the same purchasing power it had when you earned it.
So how might an emoney system solve this problem? I imagine it could set limits on how much emoney you can hold at any given period. But this doesn’t then solve the safe asset or negative rate problem. All you end up with is the central bank effectively guaranteeing your deposits to a certain level, something it already does when you use the standing bank system. Does it really matter if the digital units are registered on the ledger of the central bank directly or a private bank? Not really. They’re one and the same mostly, and at least a commercial bank can compensate for the deadweight of holding these deposit reserves by using that guarantee to justify riskier constructive lending.
Forcing the central bank to make loan decisions instead of the private sector however exposes the economy to all sorts of command economy moral hazard risks. We’ve been here before as well. China’s PBoC has been trying to extend the shelf life of its surplus national earnings by investing in low risk governments for decades! It leads to things like subprime.
So basically emoney doesn’t necessarily solve the negative interest or safe asset problem at all. It potentially makes it worse.
Indeed, if there was no limit on how much base money we could keep directly at the central bank, all this would do is force the monstrous “I’m an elephant in any market” central bank to reinvest earnings on our behalf instead of the more diversified banking sector. Not allowing it to do so meanwhile would expose the economy to decaying value and inflation risk, something the cbank would find very hard to mitigate at that stage because once base money is out there in the hands of everyone it’s only attractive private or public sector investments that can restore the balance between money supply and output.
To conclude: emoney is only as good as the investment strategy of any central bank. Yet that’s an awesome power to give to a central bank without any democratic oversight. But, if you are to make these investment strategies publicly accountable, you might as well channel them through the fiscal account and have them become public spending strategies in their own right. If there aren’t any non-decaying options to lend to because the economy is maxed out on leverage, better to waste that surplus on the public good and projects that can help to reduce leverage via inflation than not to spend it at all — or worse than that, spend it on non-perishable reserve commodities which have a negative carry value because storing commodities comes with storage and insurance costs.*
Either way you end up in the keynesian world of private to public investment substitution for the purposes of stimulating and equalizing wealth distribution across the economy.
*the other stupid thing about emoney backed by non-perishable commodities is that it continues to encourage needless commodity production without solving for the fact that it goes towards the production of surplus perishable stock that can’t get consumed. It’s basically massively deflationary.