Cryptocurrency: GovCorp Digital Currencies = Weaponizable Money, For Them, Against You
grarpamp at gmail.com
Sun Apr 25 16:18:38 PDT 2021
Make No Mistake: Programmable Digital Currencies Are Weaponizable Money
In the end, sadly, the only thing “trickling down” from Greenspan’s
“wealth effect” policies have been the debased dollars in your
hip-pocket not the Fed “having your back.”
To have monetary planners drawn from central banks and their
governments directing economic activity through the selective
application of CBDCs would be the final nail in the coffin for
Make No Mistake: Programmable Digital Currencies Are Weaponizable Money
Authored by Peter Earle via The American Institute for Economic Research,
Earlier this year, China began to roll out a project that had long
been in the works - a digital version of its currency, the yuan, is
now being used in four Chinese cities. The Chinese government sees two
major potential benefits to the experiment: a tangible challenge to
the U.S. dollar’s global ubiquity, and a way to control how Chinese
citizens spend their money.
As a government-issued currency, the digital yuan can be manipulated
and monitored in a number of ways. Importantly, it is programmable.
Writes The Wall Street Journal, “Beijing has tested expiration dates
to encourage users to spend it quickly, for times when the economy
needs a jump start.”
Although the concept of a currency which is artificially
inflatable/deflatable on demand seems novel, it has its roots (as do
so many concepts) in the theorizing of a long-dead economist. A German
entrepreneur by the name of Silvio Gesell witnessed Argentina’s 1890
financial crash firsthand. The ensuing unemployment, poverty, and
economic stagnation convinced him that something needed to change.
Such crises occurred, he theorized, because people hoarded money out
of fear and brought business to a halt, argued Gesell––this he dubbed
“poverty amid plenty.”
To encourage quicker spending, disincentivize saving, and therefore
avoid more catastrophic financial crashes, Gesell proposed money with
an expiration date. “Currency Reform as a Bridge to the Social State,”
his first published work, detailed a system in which paper bills would
expire unless they were stamped––renewed––for a fee. This ultimately
meant that holders of money incurred a demurrage cost, which is the
cost of holding a given currency. Because of Gesell’s proposed renewal
fee, savings had a negative interest rate.
He called this Freigold, or “free money.” Speaking of his system’s
perceived benefits in The Natural Economic Order, Gesell wrote,
Only money that goes out of date like a newspaper, rots like
potatoes, rusts like iron, evaporates like ether, is capable of
standing the test as an instrument for the exchange of potatoes,
newspapers, iron and ether. For such money is not preferred to goods
either by the purchaser or the seller. We then part with our goods for
money only because we need the money as a means of exchange, not
because we expect an advantage from possession of the money. So we
must make money worse as a commodity if we wish to make it better as a
medium of exchange.
At a time when nations were largely on the gold standard, Gesell’s
idea was unorthodox (and unpopular).
Gesell died in 1930, having never seen his monetary system realized.
But just two years later, in the deepest depths of the Great
Depression, a handful of small and medium towns in the United States
and Europe looked to his proposal to soothe their economic distress.
The best-known of these cases was the small town of Wörgl, Austria, in
which town official Michael Unterguggenberger convinced Wörgl to issue
stamped money known as “Certified Compensation Bills.” The experiment
came to be known as the “Miracle of Wörgl,” reflecting the town’s
success in reducing unemployment and the relative ease with which
Wörgl weathered the Depression compared to the rest of Austria.
Hawarden, Iowa, and Anaheim, California, inspired by Wörgl’s
experience, soon enacted similar policies.
But it must be said that Wörgl’s experiment was likely successful
because it, similar to the currency itself, had an expiration date.
After just one year, the town put the project to rest. As Jonathan
Goodwin wrote, “Once the taxes in arrears were completely paid and
when people had paid enough taxes in advance to feel safe and
comfortable (at some point they would stop paying forward), the scrip
would lose a key part of its attractiveness.”
Of course, even if consumption drove economic growth (and there are a
number of both economic and reductio ad absurdum arguments that point
out the flaw in that concept), the idea of money that can be coded to
decay at tailorable rates is disconcerting.
Chinese Yuan spot (40 years)
(Source: Bloomberg Finance, LP)
Central banks are monetary central planners, and the many criticisms
that apply to central planning in every other field apply here as
well. Their insularity, the blizzard of information they face, and
political manipulation result in a preponderance of erroneous,
ineffective, or late policy choices, all of which bring about
unintended consequences. At times, those unintended consequences
become new crises, which demand further policy intervention. Given
this inevitability, any expansion of policy armamentaria should be
viewed with deep concern. This is true of China’s digital yuan, the
Wörgl experiment, and any number of other unconventional monetary
policy tools in use now or in the future.
In the specific case of a currency engineered for customizable
demurrage, pernicious applications come to mind immediately. The
extent to which those are realizable, however, pivots upon a degree of
theorizing as to how “targetable” the programmed change of purchasing
power will be. (Because such a system will ultimately require the
elimination of cash to be fully effective, the warnings associated
with a closely-related unconventional monetary policy, negative
interest rates, apply here as well.)
A preliminary question is to what extent, or even whether, the induced
loss of purchasing power will be communicated by the implementers of
monetary policy. It is conceivable that in some nations the disclosure
of an impending demurrage operation will be disseminated well in
advance and will include specifics regarding the anticipated amount of
change; other governments may be less forthcoming. This will likely
derive as much from the authoritarian character of the state as from
specific policy aims. Further, while in the 1890s the average farmer
understood the basics of inflation and deflation (owing to their
dealings in grains and other commodities), it may be difficult to
expect the same of citizens in the modern age.
By announcing that money will be debased by a discrete amount at a
certain point in time, individuals, firms, and other institutions
holding money––again, assuming these policies are applied on something
akin to an M3 basis––will make decisions based not upon their tastes
and needs, but rather upon the desire to convert money to another form
in anticipation of the loss of purchasing power. The effect of
individuals and large financial institutions singling out certain
goods as stores of value under the artificial upward ratcheting of
time preference would, as do most other forms of monetary tinkering,
inevitably create price distortions and possibly shortages, depending
on the availability of local goods and services.
Should the ability to direct the demurrage be more precise, the
implications are much starker. It is conceivable that financial
institutions might make the case that their money (more precisely,
money in their accounts) should be insulated from those policy
measures, thus creating a corporatist monetary system: consumers and
unfavored economic actors wrestling with concocted losses of
purchasing power, economic elites, their firms, and other court
favorites receiving, or being left with, unimpinged purchasing power.
Exactly where the lines between the favored and not are drawn, and the
occasions upon which they are invoked, are left to the reader’s
imagination. A look at the influence exerted by both special interest
groups and corporations on public policy is instructive.
Chinese CPI (YoY, 10 years)
(Source: Bloomberg Finance, LP)
But this only opens the proverbial door. History is rife with examples
of political initiatives which, however nobly intended or narrowly
designed, became blunt tools of widespread oppression.
Could a demurrage feature of a programmable digital currency,
nominally designed to spur consumption and increase monetary velocity,
not ultimately become a broad punitive instrument? It could serve as
an intermediate form of a fine for misdemeanors or other legal
sanctions: Rather than forfeiting a lump sum, a violator’s account
balance could be rigged for an accelerated loss of purchasing power.
The argument in support of such a measure may well be that it punishes
wrongdoers virtuously, afflicting the health of their bank balance
whilst “supporting the economy” or “fostering economic growth.”
Although it tempts speculation of a particularly Orwellian tenor, one
may imagine––I stress the term imagine as distinct from predict or
expect, as this is not a conspiracy theory––the tying of anything from
mandatory insurance coverage to getting vaccinated to compulsory
voting to be enforceable under the threat of individually-targeted
monetary penalties. Whether or not such a measure would fall under the
legal category of a Bill of Attainder would also, likely, be a matter
of considerable controversy.
A state determining that its populace is insufficiently supportive of
a military campaign may decide that hardships are not being
sufficiently shared: A sudden, unannounced attack on bank balances
resulting in an immediate loss of purchasing power could be imposed to
align interests. Could a failure to consume certain goods––say,
domestic versus foreign––trigger a government-decreed, disciplinary
lopping of an offender’s bank balances? In the same way that a former
president allegedly used the Internal Revenue Service to terrorize and
harass political opponents, a currently innocuous programmable digital
currency may, over time, morph into nothing less than weaponizable
China, by launching its digital yuan project, is traversing new
territory in the realm of authoritarian monetary planning.
Unfortunately, this endeavor may not be an isolated experiment for
much longer; already, officials with the U.S. Federal Reserve are
engaging in research to build and test a digital dollar. Central
bankers the world over, in fact, are signaling increasing openness to
experimental policy initiatives. This particular project is still in
its infancy, but one thing is certain regardless of differing cultures
or political systems: Central banks of all colors are prone to the
pitfalls of central planning and will necessarily inflict unintended
consequences upon the populations they serve.
Money, in its most basic form, is an irreplaceable facilitator of
economic calculation and a social instrument making cooperation
possible on a global scale. Policies of the sort which programmable
digital currencies bring into the realm of possibility potentially
turn those on their head, introducing new possibilities for
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