Consider what happened during the global financial crisis of 2008-2009. Asset-backed securities such as mortgage bonds had become a form of money, the Wall Street equivalent of cash. The big players have put them down as collateral for short-term loans on what is known as the ârepoâ market, short for repurchase agreements. When foreclosures increased, people lost faith in the value of these mortgage bonds, and the borrowers who had used them as collateral were suddenly cut off from credit. In 2010, economist Gary Gorton compared it to an outbreak of E. coli: It only took a few bad connections to scare people in the whole class. Something that had worked like money abruptly stopped doing it.
Governments around the world have a vested interest in maintaining the public confidence that their money is not, in Professor Buchanan’s words, “entirely fleeting”. This applies both to money issued by the government, which consists of paper notes, coins and reserves at the central bank, and to money issued by the private sector, which includes bank accounts. , pensions and new products like cryptocurrencies. In the United States, there is no urgent crisis of confidence in government-issued money. The country is in no real danger of runaway budget deficits or hyperinflation or a modern equivalent of the bank runs of the Depression.
But money is different. It becomes technologically obsolete before the replacements have gained public trust and the support, or at least acceptance, of governments.
The two new types of money that increase as liquidity decreases are stablecoins and central bank digital currencies. Stablecoins, which like Bitcoin exist in virtual ledgers, are issued by private entities that promise to convert them on demand into government currency or another asset at a fixed exchange rate. âThe irony here is that cryptocurrencies were meant to keep us away from official money, while those that seem to work as a medium of exchange are backed by official money,â said Dr. Prasad, professor of Cornell, author of a new book, âThe Future of Money: How the Digital Revolution is Transforming Currencies and Financeâ.
The problem for stablecoin issuers is that to deliver on their rock-solid convertibility promise, they would have to hold $ 1 in cash in reserve for every dollar of stablecoin they put into circulation. It’s a lot of money for them to have tied up with no return. The temptation is to invest the reserves to obtain a certain return. But that makes the reserves less than perfectly safe.
The potential instability of stablecoins is one of the reasons for the growing demand for digital currencies issued by central banks. Central bank digital currencies are government bonds, like cash, but they are virtual, like a check or an entry in PayPal or a bank’s reserve account at the Fed. China, South Africa, South Korea and Sweden are among the countries that have piloted central bank digital currencies, and the Bahamas and Nigeria have officially launched them, according to the Council’s Central Bank Digital Currency Tracker. of the Atlantic. The Federal Reserve is more skeptical. Randal Quarles, who was vice president of oversight until October, hinted in a June speech that this was a fashion similar to 1980s parachute pants.
The central bank’s digital currency is less anonymous than cash, making it less useful to criminals, but also a greater threat to the privacy of law-abiding citizens. It could also be programmed to be used only for certain purposes, which many people would consider to be an infringement of their freedom. To combat a fall in spending, the central bank could even schedule it to gradually lose its purchasing power, causing people to spend it quickly, even reluctantly.