Part 1 – Central bank cryptocurrencies: For what purpose? Who stands to gain?…. He who does not ask ….
The state and its politicians have a strong interest in not losing the lucrative monopoly on money creation. Spontaneously created cryptocurrencies threaten the central banks’ monopoly on money creation. Thus, Bitcoin & co. can be seen as “enemies of the state, and of the central banks”.
Why are politicians so concerned about cryptocurrencies?
Central banks, and hence the state and politicians, have an enormous interest in not losing control over the money supply. Non-state-created cryptocurrencies (such as Bitcoin) threaten a loss of state control over “sound money” and thus the No 1 instrument of power. As the saying goes: “money rules the world”.
Why is money creation so lucrative?
Whoever controls the creation of money and the initial distribution of newly created money can do the following:
- Redistribute wealth.
- Save economic units as desired (with attendant publicity) or to put them (“the enemies, opponents…”). into bankruptcy.
- Transfer private sector wealth and income to the state via an inflation tax.
- Enable politicians to hand out election gifts without the state having to borrow the funds for this.
- (Due to point 4 and its key role in managing the economy, a central bank has a great influence on the outcome of elections.)
- Create “seigniorage profits”, that is, generate profits through money creation.
- Carry out a rapid military build-up financed by the central bank, which is much easier than financing a build-up through (unpopular) tax increases.
- Implement over decades a repressive policy in which savers do not receive proper market rates of interest and borrowers (especially the state) do not have to pay them.
- Move asset prices (usually “upwards” but theoretically also “downwards”).
This list could easily be extended.
What are “seigniorage gains”?
“Seigniorage profits” are profits made by a central bank through money creation. A simple illustration: The central bank has low costs when it creates money. These include, for example, the printing costs to create paper money which obviously do not figure in the case of electronically created money. With the money thus created a central bank can buy assets (for example, bonds, shares or real estate) to generate an income. Users of cash hold the money without demanding a return in the form of interest, which means the central bank’s financing costs are zero. The central bank has thus financed itself in the long term, i.e. given itself a long-term loan without having to pay any interest. Conversely, users of cash have given the central bank a long-term loan without charging interest for it.
The achievement of “seigniorage profits” is not only a matter of interest to “penny pinchers”. Huge incomes and wealth can be generated in this way. That is why the pursuit of seigniorage profits has for millennia led to intense competition and even war (which some define as “the continuation of competition by other means”).
As an example, before the introduction of the euro the Bundesbank made annual “seigniorage profits” of around DM 5.3 billion. The more widely accepted and suitable a currency is for transactions, the higher the potential for “seigniorage profits”. Thus, it is logical that the Fed and the United States of America make by far the largest profits from their “world currency creation monopoly”.
Why do most states want to launch their own cryptocurrencies?
- Many politicians and central bankers feel that alternatives to legal tender are dangerous. Not only do they threaten the scope for lucrative money creation as described above. They powerfully undermine the state’s ability to control and manipulate. Therefore, spontaneously created cryptocurrencies are a significant threat to governments.
- The creation of state, monopolistically planned cryptocurrencies (coupled with a future ban on private cryptocurrencies) should not only help defend the profits from state money creation. It would also enable a more extensive control by the state of all payment flows. In particular, if the “proof of flow concept” were used, all historic payment flows would be traceable. The state would then have complete oversight of all transactions with the exception of barter, i.e., the exchange of goods for goods).
The Austrian school of economists has always opposed a state monopoly on money creation
F.A. Hayek (Nobel Prize for Economics, 1974) and many other liberal economists were fearful of totalitarian states and focused on the need to protect citizens from an “Orwellian omnipotent state” (whether of the “left” or the “right”). These economists called for the abolition of the state monopoly on money creation in order to force the central bank in the direction of monetary policies dictated by economic goals, as opposed to political goals or of corruption, and to prevent “moral hazard”. These economists saw the danger that “in the name of stimulus” governments would be tempted into ever more monetary inflation in order to achieve non-economic goals such as re-election or repression. They also saw the dangers of allowing central banks excessive freedom, be it the freedom to buy up for the state large parts of the economy (disguised as a stimulus measure) or the freedom to set negative interest rates, abolish cash and take over the private banking system. Worse, they saw the possibility that a takeover of large parts of the private sector might eventually become necessary in order to prevent a systemic collapse, including of the financial system.
Ultimately, they feared that, without the discipline of “private alternatives”, an ever-mightier central bank could imply ever more restrictions on a market economy, making room for an expanding planned economy and its associated “servitude”.
A little quiz
Which central bank/state is behind which of the following statements? Please assign the central banks of China, Switzerland, the Euroland and the US to the following statements. Then rank the statements according to the degree of “monetary totalitarianism”:
- “There’s no added value for payment transactions by business and the general public from a central bank-issued digital currency…”
- “…says lack of official digital currency risks loss of control”.
- “…creates its own digital currency, a first for major economy”.
- “The … this summer will take another step in developing a digital currency”.
Correct! The first statement comes from the SNB. The bourgeois Swiss constitutional state has no interest in completely monitoring all Swiss citizens and all other users of Swiss francs in a blockchain. Trusting in the strength of the Swiss franc, privately generated cryptocurrencies are not perceived as competition that might threaten the country or its institutions.
The third statement, reflecting an opposing view to that of the SNB, comes from the Peoples Bank of China and will not be commented on here. The second statement comes from a Eurocrat at the ECB. This leaves statement four, which must therefore come from the Fed.
Contact: Thomas Härter, CIO, Investment Office
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Disclaimer: Produced by Investment Center Aquila Ltd.
Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans
action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
