UK news has over the past few days been positive with Retail Sales growth and falling Covis-19 numbers. To that this morning we can add something of a gold rush at the Tokyo Olympics. But the weekend saw the establishment out in full force preparing for a more troubled view of the future and let me open with this from the Mail Online.
Cash in people’s pockets would be superseded by a new ‘Britcoin’ digital currency in a plan being pushed by Chancellor Rishi Sunak.
In what Treasury insiders say would be the biggest upheaval in the monetary system for centuries, the Bank of England would establish a direct digital equivalent to physical money and take control of it in the same way as sterling.
Its supporters in the Treasury say that it would allow the Bank to give the economy a boost in times of financial crisis by paying the ‘Britcoins’ directly into people’s bank accounts.
It is curious how we always need a new economic boost isn’t it? What is happening here?
A taskforce of Treasury and Bank officials set up to examine the merits of Britcoin – known as the Central Bank Digital Currency – is expected to report to Mr Sunak by the end of the year.
Okay and I note the Bank of England is shoving the blame onto the Treasury.
The Treasury is understood to be more keen than the Bank of England on the idea of creating an official British digital currency to compete with the rise of Bitcoin because they are wary of the huge numbers of people piling into cryptocurrencies. Some investors have lost vast sums as the price of Bitcoin has gyrated wildly.
Actually the truth is that overall Bitcoin has provided profits and sometimes large ones. The real issue for the Treasury is the lack of control over people as Bitcoin by-passes it and the Bank of England. For example there are no easy profits from seigniorage for it. Also last weekend with its 10% rise to US $38,100 for Bitcoin was not the best time to emphasise losses.
They have thrown out a real lemon to see if the journalists would be silly enough to print it and the answer is yes.
There are also fears the introduction of Britcoin would lead to higher loan and mortgage rates as millions of people switched cash to central bank digital currency, eating into the amount of money high street banks have on deposit to lend to borrowers.
It is an issue for the banks but it is hard not to laugh at the interest-rate view to which I will return later.
Also VOXeu has been on the case and demonstrated that they need a new panel of what they consider to be experts.
Central banks across the world are starting to experiment with digital currencies. This column summarises the findings from a survey of a CfM of experts on the UK economy, who were nearly unanimous in agreeing that a Bank of England-issued digital currency would benefit the British economy. Half of the panel also believed that a digital currency would have limited impact on the UK banking system.
Perhaps they thought it was April 1st.
Public Accounts Committee
It weighed in yesterday by publishing what sounded neutral via the title of Covid-19 tracker update but it had this.
According to the NAO’s COVID-19 cost tracker, the government’s response to the pandemic has exposed the taxpayer to significant financial risk for the foreseeable future, with the estimated lifetime cost of the government’s measures reaching an eye-watering £372 billion in May 2021, with £172 billion reported spent.
We were aware of such numbers but many were not. Also they pointed out the scale of problems with the loan schemes.
This is particularly the case in the estimated £92 billion of loans guaranteed by government as of May 2021, £26 billion of which we were alarmed to learn are now expected to be lost as a result of bad loans to businesses although the exact scale of loss is not going to be known for some time.
It looks like the schemes were not well run with that scale of loss. It is the Bounce Back Loan Scheme that seems to be the main source of trouble, trouble, trouble.
HM Treasury referred specifically to the Bounce Back Loan Scheme, which accounts for £22.8 billion of the forecast total write-off costs of £26 billion.
This is an area I have followed since the summer of 2012 when the Funding for Lending Scheme was supposed to boost bank lending to smaller businesses yet all these years later we are told this.
It was therefore an explicit policy decision to set up a scheme that would disburse loans quickly, and lenders were asked to set aside their normal processes for approving loans.
As you can see we have been actively misled for the past 9 years but as ever it will be nobody’s fault.
The Public Accounts Committee deserves credit for its work and I hope it leads to improvements. But if you are going to release numbers like this I think they need to be put into context. By the end of this week the Bank of England will have over £820 billion of UK government bonds on its books. With the actions of the other major central banks it results in a situation where as I type this the UK can borrow for 50 years at 0.81%. It also produces such a cheap borrowing environment that they should be doing something I have recommended several times.
Comment
There are three driving forces behind the new push for central bank digital coins but in many ways they come down to one issue. Here is the Bank for International Settlements or if you prefer the central banks collective mouthpiece on the subject.
Fourth, combining moderately negative policy rates with QE further improves economic stability by creating a little more room for policy rate cuts during downturns. It also limits the occurrence of negative term premia and thereby the negative side effects of QE on the profitability of maturity transformation activities.
They are tilling the ground for negative interest-rates having noted that what we have seen so far is not working. As we stand the nadir is the ECB with its -1% interest-rate for its liquidity supply schemes for the banks. But it is afraid that going deeper would create a run on the banks. Whereas the central control of a digital currency means that deeper negative rates can be applied because you can be forced to hold digital money.
It’s like the more money we come across
The more problems we see ( Notorious BIG)
Once you have to hold it then they can try to make you spend it by putting either an expiry date on it or more likely an exchange-rate. That exchange-rate means there will be a negative interest-rate of say 3% which is another type of tax.
That brings me back to one of my themes which is that on this road we are singing along with Elvis.
We’re caught in a trap
I can’t walk out
Because I love you too much, baby
Podcast
https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast136
Notayesmanseconomics's Blog 
Bit late to be jumpimg on the digital currencly but it was bound tom happen at some juncture. But as a lot of dodgy money is being traded in the likes of bitcoin, I suspect there would be less gryrations in the new britcoin if launched. What the various governments should be doing imo is making these other currencies illegal imo to put a stop to money laundering and get rich quick launches in these currencies and I know this is contentious. These dody digital curencies could destabalise the word financial system if they arent controled.
These dody digital curencies could destabalise the word financial system if they arent controled.
oh come on Peter , I wouldn’t say the CB’ers are any better , their track record to date puts them in the same catagory as used car salesman and estate agents !
digi currencies not tied to the CB are a threat – and they will be dealt with accordingly
FUD will increase
black ops too
you’ll see
Forbin
Come to think of it the world financial sytem is already destabalised with pumped up assets wherever you look.
Apart from “brown furniture” which no one wants in their homes these days but it may come back in fashion again.
What is interesting lately is both MARKS and now TESCO now closing down its banking operations
https://www.bbc.co.uk/news/business-57973960
TESCO and some of the other Supermarkets looked at one time where they could have taken on the banks with their large Supermarkets and its not worked out.
Will Sainsbury’s be the next ?
I’ve reworded your paragraph slightly for you
“What the various governments should be doing imo is making FIAT currencies illegal imo to put a stop to money laundering and get rich quick launches in these currencies and I know this is contentious. These dody FIAT curencies could destabalise the word financial system if they arent controled.”
Would you sit down and play monopoly (the board game) with someone who had a printer under the table and could print an unlimited amount of $500 notes. If you wouldn’t then you understand why so many people are fed up playing the equivalent game with a corrupt government/central bank money printer trying to keep a completely corrupted economy and political system upright.
Interesting that you bring up Monopoly.
If you read the rule book it says that if the game runs out of money, the banker should create more by writing denominations down on scraps of paper, which can be distributed (when someone passes Go! for example). The banker in the game of Monopoly is the currency issuer. For the game to be playable – for an economy to function – there needs to be an amount of currency in circulation. When there is not enough (because some players are saving it for example), the currency issuer needs to supply more. If it’s no longer needed, (because it’s being returned to the banker in the game through taxes and community charges) it can be torn up – destroyed.
That’s how a fiat money system works. How it has to work. Fiat money is not naturally occurring. It all has to be created. If there is need for more, more can and should be created (at a press of a button these days, not by writing on scraps of paper). If it’s no longer required it can be destroyed.
“Whereas the central control of a digital currency means that deeper negative rates can be applied because you can be forced to hold digital money.
Once you have to hold it then they can try to make you spend it by putting either an expiry date on it or more likely an exchange-rate. That exchange-rate means there will be a negative interest-rate of say 3% which is another type of tax.”
Or….
You use your digital wallet to move all your wages and incoming CBDC payments into a decentralised Crypto currency such as Bitcoin, Ethereum etc, (ie making your “crypto” account/s your “savings accounts”), then just move your money back into CBDC when you want to spend it in a shop etc.
With modern Crypto wallets (Apps) you can literally move money between crypto accounts with one slide of your finger!
That way negative interest rates won’t affect you, banks “confiscating your coins”, “freezing your wallet” can’t happen and the Banks will have thus still lost all control of money, they have anyway, of course, but they will also have lost control, access and sight of YOUR money, which is even more important.
Fun times! 🙂
Hi Colin
I expect them to block out such in and out of crypto moves. Probably not initially but as it settles and comes into common usage they will black transfers between CBDC and the private-sector coins. It will make the latter coins even more attractive but using them will face various hurdles.
Other than banning the tinterweb what technical hurdles do you envision here?
I was a tad surprised to “learn” banks lend out deposits but that’s by the by. What I’d like to know is what is this digital currency actually for? We already have digital cash on the form of debit/credit cards so why would us ordinary Joes use it? Are we all to have an account with the central bank? Where would this leave the private banks? I can’t see the point of this yet.
I would like too say that I was surprised that a financial journalist would write that (I’m not), because banks don’t actually lend out deposits. They create deposits.
Banks have roughly £2.5trn of customer deposits spread across current accounts and savings accounts. If they were to collectively make another £1trn of loans tomorrow’s, then if they were ‘lending out’ some of their deposits, total deposits would fall, to £1.5trn, surely…..yes? No. Total deposits would increase to £3.5trn.
Deposits, being liabilities of the banks, cannot be lent out. Banks acquire assets (such as a newly signed loan agreement) by creating their own liabilities – deposits.
How fortunate we are to have the FSCS to protect the banks’ liabilities.
is it not a good idea? It is an insurance that the banks pay a premium for, plus they have to submit to some pretty tight regulation regarding the quality of the assets they are permitted to hold and the quantity of their funding provided by equity and quasi-equity, which absorbs losses on those assets (should they materialise) to provide a first line of protection for those deposits
The private banks really are in an awkward situation. On the one hand many are trying to stop their deposits from flowing into crypto… Barclays, Santander etc. Which will merely see their customers leaving.
Though they aren’t very bright as their continued existence predicates upon Central Banks not setting up their own digital currencies. What would be the point of a private bank in that eventuality? A CBDC merely cuts out the middlemen, who are generally hated by society. Oh and also means the end to privacy.
So they’ll realise too late that in order to attract deposits and customers they have to invest in crypto themselves to provide savers with returns. This however would only be for the luddites that don’t realise they could get better returns in crypto direcly themselves.
The crypto market is growing faster than tinterweb did back in the day, and it is entering something akin to the dotcom boom. Meanwhile the shitcoins known as the Dollar, Sterling and euro will be inflating away… Not difficult to see where this ends.
Hence the response is going to be “we have to ban it! Regulate it!”. Which is genius… Surely the best possible way to increase adoption?
Meanwhile…. How do the authoritarians plan on banning or regulating it? I’m genuinely curious as to what mechanisms, other than FUD and verbiage, they think could be used.
when someone uses a bank deposit to by a crypto-asset (or other financial or physical asset, or anything), the deposit doesn’t disappear.it just moves from the buyer’s account to the seller’s. Once created, it remains within the banking system until extinguished.
Banks, collectively, cannot and do not ‘attract deposits’. The deposits are created and just move around the banking system. This is perfectly normal and banks are set up to facilitate this.
Deposits only get extinguished when:
used to repay a bank loan
used to make any other payment to a bank
used to pay a tax bill
used to purchase bank equity or a non-deposit liability of a bank.
exchanged for banknotes
There’s no way banks will invest in crypto to “provide savers with returns” precisely because crypto-assets don’t pay any return!
Negative interest rates are a direct bail-in for the banks.
There will be violence.
Journalists are not being silly; they are complicit in this theft.
I feel entitled to protect myself against theft, to the point of violence.
negative interest rates are effectively a tax on banks. Collecting more tax from banks is an odd way of bailing them in!
I don’t see how they are, they look like a tax TO the banks. Perhaps you can explain it to me please?
If BoE decrees a central rate of, for argument’s sake, -5%, & the banks set the rate that depositors receive at that rate or slightly worse, with the interest on mortgages etc. @ 0% & on credit cards, still anywhere up to 30%, the banks have a nice earner, without the incentive to do ANY new non-credit card lending, which is the real danger I see.
banks, collectively have about £850bn on deposit at the BofE. They have no control over this amount. The quantity is determined by the actions of the Treasury, DMO, central bank and, to a lesser extent, bank customers drawing down paper currency.
On the other side of the balance sheet, banks will have customer deposits they were instructed to create when the BofE purchased bonds from those customers. Banks will obviously have other assets and liabilities and equity, but £850bn is a not-inconsiderable portion of the banking system’s total assets.
The BofE gets to determine how much interest (if any) to pay banks on these deposits, or how much to charge them for holding them (and remember banks have no choice but to hold them). If it pays interest, that’s just money the BofE credits to the banks’ reserve accounts, with no offsetting increase to the banks’ liabilities. If it charges banks, it just debits money out of their reserve accounts, with no offsetting decrease in liabilities.
Paying money to banks in this way is just government spending, really no different to the government making welfare payments or pension payments, except in this case the payments are going to the banks. A negative interest rate is just like any other tax, with bank accounts (in this case the banks’ accounts held at the BofE) being debited.
Govt spending credits private sector bank accounts. Taxation debits private sector bank accounts. I’m sure the banks would prefer to have their bank accounts credited by the actions of the BofE, rather than debited. Which one is a ‘bail out’?
Great blog as usual, Shaun.
At the risk of repeating myself (one’s memory is unreliable when you get to be my age) Mark Carney writes in his interminable book “Value(s)” (see p.118): “Other design issues include whether interest should be paid on the CBDC. It would obviously reinforce the attractiveness of holding money in digital cash and thereby increase the fragility of the banking system. Conversely, it would also give the central bank the ability to charge negative interest rates, something which is currently limited by the fact that cash yields zero (actually slightly negative once the cost of storage is taken into account.)” None of the Canadian reviewers of his book, I stand to be corrected, seem to have noticed this pretty straightforward statement of why central bankers are interested in central bank digital currencies. It certainly isn’t mentioned in the TVO interview with Steve Paikin for which I provided a link. In a recent AIER post, Canadian economist J.P. Koning provides the pros and cons (mostly cons) of a CBDC:
https://www.aier.org/article/to-cbdc-or-not-to-cbdc/
Congratulations to the UK athletes on their splendid medal count so far. Canada only has one gold medal so far, in women’s swimming. I am sure we will get more, but we will never beat the UK in a summer Olympics.
Hi Andrew and thank you
It is hard not to laugh at ex-Governor Carney writing about higher interest-rates. I still recall his 2013 Mansion House speech when he said that interest-rates might go up faster than markets expect and his Forward Guidance for higher interest-rates. His next move was a cut thereby wrong-footing any mortgage buyers who listened to him between 2013 and 16.
Indeed he left Bank Rate at 0.25% after telling us the lower bound was 0.5%.Just over a week later it was 0.1%…
So the negative interest-rate bit I do believe.
Good luck to Canada in the Olympics.
I wonder how the bankers and politicians will railroad cash out of existence? OK, as more and more transactions are conducted outside of cash, the argument for cash diminishes, but on the current path we’d probably be living with it for another 10, 15 or even 20 years. Way beyond the tenure of any of the current crop of malfeasants in charge. With calls to support the elderly (many of whom vote, etc but can’t or won’t use modern tech) I can’t see cash dying for a while. Which means they’re going to keep all those plates spinning for how long without at least one or two dropping? And all the while cash exists, their plans for negative rates get kicked into the future. Retaining cash is probably one of the best defences against their schemes. I’d strongly advocate we all keep using it where possible.
And, if they are eventually successful, what then for measuring inflation? I have a balance that is now costing me in negative interest (I pay them) combined with an official % inflation rate (which probably means more like xx.x% in real life day-to-day costs)… adding up to what? Apart from being monumentally f*d?
They can’t deal with simple positive numbers now in the official numbers, so how in the name of Archimedes are they’re going to deal with negatives too? Beats me.
So, at what point do people move out of “money” in the accepted sense and just deal in barter and other forms of exchange? Going to have to mandate that food, water and shelter can ONLY be paid for in Britcoin – as well as taxes? And lock-out the formal exchanges / money changers in dealing with any form of “money” that provides a workaround – easy enough through a list of what is allowed rather than defining what isn’t. Assuming we’re left with anyone that actually has any money of course!
And then what of the “coke and hookers” component within GDP? Won’t that need a significant rate change to cope as a result too (since so much of the real economy will likely move to “under the table transactions” to avoid all of the above)? Could we finally see it becoming the biggest component of our economy?
The whole thing seems like a real recipe for making much of the population live like travellers, no fixed abode (or hostel at best), no sense of belonging, no food or security of life, reduced choices at best and break every social contract between the people and those that would seek to govern.
But, I guess it would work wonders for reducing carbon emissions as the entire consumer economy ultimately collapsed for lack of (measurable) participants and the bankers remit changes from 2% inflation targeting to ensuring the proverbial cake trolley does not spoil because of an allegedly overheating planet.
** The serious point in being that “they” probably want peeps to feel rich (by having assets) and not actually consume (which is bad for the environment). So, what better way than pump assets to the moon and devalue the use/value of money in circulation/saving? Of course, the proles that don’t have any don’t money/assets don’t count and no doubt some govt.-funded programme (ultimately backed by the BoE) will keep them at a subsistence-level of survival.
Depending on your political stripe either the provision of that support is via the private sector and the asset/money flows to the already rich or it’s by the govt. and makes dependant voters (buy votes) to keep a politician or 650 in the same.
Either way, money is politics. It’s ultimately about the distribution of resources. And those with the control of it / most of it get a bigger to say as to what the rest do. Until the pitch forks come out.
The trick is making people think they don’t have/need/want to use a pitchfork. Dodgy numbers and a complicit media, anyone?
Hi Mark and welcome to my corner of the web.
The cash issue is one I have looked at regularly on here. The headliner was the way that the ECB set out to get rid of the 500 Euro note. There are claims about the impact on financial crime but that ignores the fact that bank after bank gets convicted for the same offence.
As you imply it is all rather Orwellian…..
Hi Shaun,
I have followed for many years and I favour your style/approach. Not a “yes” man.
Reducing a denomination of a note/currency may prove somewhat inconvenient for the relatively wealthy, but for the avg person does it really matter so much? I don’t have the breakdown of cash transactions to really understand the nuance. However, aren’t the majority -and ultimately the most important transactions – conducted in lower (far lower) denominations?
I’m not sure of Orwellian versus outright incompetence… but the result for many will be much the same. I’m glad right now that life is good and somehow I’m kinda on the right side of the trade (I think). But, I know it’s precarious and fleeting at best and could so easily change for the worst.
What I do know is that no politician cares about me. Only the vote I can provide. Just as a banker cares not about me, but only the pound/bitcoin I can provide.
The business of economics may have always been thus – but has it ever been so skewed as now? Or do we misunderstand the links and history between “capital’ / “labour” and perhaps hark back to an era or state that never really existed?
Do the Treasury and BOE really not understand basic psychology. Yes negative rates will increase spending but most people also want to keep some savings. Most people I speak to, even those who like to keep savings in a bank accounts, say that if faced with negative rates they would empty their accounts and buy into other assets whether that be precious metals, cryptos, REITS, tech shares or whatever they think will be a good store of value. I don’t see how negative rates will do anything other than decimate bank deposits and further boost risk asset values. In particular the few Gen-Z’s I know already keep their “banking” money in phone apps like revolut and transfer to/from other sites like etoro/freetrade to get crypto and shares. Also I see that it appears Amazon will be allowing payment by crypto in the next few months (means they don’t lose the >1% commission to the card company and it also avoids issues with chargebacks). Initially the accepted coins will include bitcoin and some other established cryptos but likely later they will introduce their own Amazon coin. This will almost certainly force all other retailers to follow through and means people will increasingly hold more of their “cash” in non state crypto currencies rather than keeping fiat in bank accounts.
If those you speak to were to empty their bank accounts and purchase other assets, that wouldn’t ‘decimate bank deposits’
When these people purchase other assets using bank deposits, they are just carrying out an exchange with another party, whereby one bank account gets debited and another gets credited and title to the other asset changes hands. There is no overall effect on bank deposits (or on the other asset). Whilst the people you speak to might have made a decision to hold other assets rather than bank deposits, the other party has made the decision to hold bank deposits rather than that other asset. It’s just a switch. A mutually agreed exchange.
This is why talk of ‘money going into the housing market’ or money going into ‘the stock market’ is nonsense. At the same time as money is ‘going in’, money is ‘coming out’ of either market. From an individual’s perspective, when purchasing an asset such as a share, it looks like the money has gone and in return a share has appeared, so I can see why it is tempting to believe that money has ‘gone into’ shares, but at the macro level, there’s still the same amount of money in the system, and there’s the same amount of assets, but their ownership has changed hands.
The quantity of bank deposits only reduces when
a) taxes are paid by non-bank private sector entities
b) bank loans are repaid, or any other payment is made to a bank (eg when banks sell govt bonds or other assets to customers)
c) bank deposits are exchanged for other bank liabilities or bank equity
d) bank deposits are exchanged for banknotes or coin
Any reduction in bank deposits is accompanied by a corresponding fall in banking system assets (loans or reserve balances or vault cash mainly) or a corresponding increase in non-deposit liabilities or bank equity. The double entry accounting rule has to be followed. Balance sheets have to balance.
If your friends hold balances with Revolut or any other e-money provider, all that has happened is that they have instructed their bank to debit their bank account and to arrange to have Revolut’s bank account credited with the same amount (Revolut used to hold their account exclusively at Barclays, but I believe it also now uses Lloyds). Again, no change in overall bank deposits. When you use an e-money provider to pay someone else with an account at the same provider, it just debits your e-money account and credits theirs. When you pay someone without an account, or an account at a different e-money provider, the banking payment system is what gets used to facilitate that. e-money is just another layer of money sitting below bank-credit money and currency, that uses the infrastructure of both to operate.
BOE Vlieghe warns against raising interest rates with inflation rising
https://www.theguardian.com/business/2021/jul/26/bank-of-england-moves-to-curb-inflation-would-be-premature-warns-policymaker
Hi Peter
I think he has gone over to the dark side.
A Britcoin could drive bitcoin higher says deVere CEO
https://www.investorideas.com/news/2021/cryptocurrency/07261Britcoin.asp
Hi Peter
It could indeed but the real issue comes I think when they try to ban Bitcoin.
How?
There could be some competition from the Royal Mint’s ‘digigold’….
https://www.royalmint.com/digital-investments/digigold/
I wonder what the joined up thinking is and whether they’d have to ban it if its usage became more widespread and appealing than the BoE/Treasury own diminishing offering.