The European Central Bank is considering introducing a digital euro. It is a dangerous undertaking. It opens the door to nationalization of the credit market and total surveillance of the citizens.
In John RR Tolkien’s novel “Lord of the Rings” (published 1954/1955) the deeply evil Sauron secretly created his own master ring, which dominated the rings that the elven forge had made, and with which he sought to enslave the world: “A ring to rule them, to find them all. To drift into the dark and to bind forever. ”The narrative of this classic of fantasy literature is almost imposing if one looks at the hustle and bustle of the central banks.
The master ring that the central banks, including the European Central Bank (ECB), are currently forging is called digital central bank money. In professional circles, the money creature Central Bank Digital Currency (CBDC for short) is called. What mainstream economists hail as innovative and progressive turns out, on closer inspection, to be extremely dangerous for freedom and prosperity. This becomes clear when you look at how our monetary system works.
The state central bank has the monopoly on central bank money: only it can issue banknotes, coins and central bank balances. Therefore, the central bank cannot go bust. She can print the money she uses to pay her bills at any time. Commercial banks generate commercial bank money. But they can only do that if they have central bank money. If a commercial bank does not have enough central bank money, it can become insolvent and in the worst case scenario the customer loses his money.
Fail-safe money – the banks’ business model under pressure
With the introduction of a digital euro, every bank customer should have the opportunity to exchange their credit balances that they hold at a commercial bank for digital central bank money – and hold it in an account that is offered by the commercial banks or directly by the central bank. Nobody then has to fear that their bank balance could be lost. When banks falter, you can transfer your balance to digital central bank money with a click of the mouse – and that cannot fail.
An electronic central bank money euro would be a serious problem for the banks: In times of crisis, people want to exchange their accounts that they hold with commercial banks for the digital central bank money euro. This would make commercial banks illiquid. Because at the moment it is the case that the banks lose deposits when their customers withdraw, with which they refinance their lending business; the same would be the case if customers were to transfer their funds to accounts they have with the central bank.
The digital euro central bank money can, however, be turned into a stable means of refinancing for banks: by allowing the central bank to show the accounts for digital central bank money on their own balance sheets. Then the banks will no longer lose money when customers exchange their deposits for digital central bank money. That would require creative bookkeeping, but the central banks and government regulators would very likely allow it.
Because digital central bank money is secure and payments via smartphone or PC are convenient, the central bank is likely to quickly steal market shares from commercial banks in deposit and payment transactions. It could also compete with banks in the lending business by offering loans to consumers and companies in digital central bank money. That would make digital euro central bank money attractive to bank customers.
If the central bank attracts more and more payment and credit transactions, the business model of private banks is eroding. The willingness of investors to make equity available to the banks is decreasing. This opens a gateway for the state: It can appear as the savior of poorly capitalized banks and nationalize them directly or indirectly. The pressure to nationalize is likely to be great, especially in times of crisis.
Goodbye cash – more control over citizens
Central bank digital money competes with cash. It is just as fail-safe as coins and bills. In addition, its handling is user-friendly and inexpensive. This increases the likelihood that it will find widespread acceptance among citizens and displace cash – in payment transactions as well as in the keeping of precautionary funds. That plays into the hands of those interest groups who want to withdraw the cash from circulation.
But without cash, people’s money is trapped in bank balance sheets and exposed to financial repression through negative interest rates. In addition, digital central bank money makes it easier for central banks to issue helicopter money. The central bank can fill people’s accounts with new digital central bank money at the push of a button – and turn society’s financial situation on its head.
If people use central bank digital money for payment purposes, the state monetary authority can track who is buying and selling what, when and where. The end of financial privacy would be heralded. Assertions that the anonymity of digital central bank money payments will be ensured are not convincing. China’s central bank says it all: people are to be effectively monitored and controlled with digital central bank money.
The behavior of the citizens can be steered along lines planned by the state, for example by linking access to digital central bank money to political good behavior. China with its social credit system shows how it works: It is conceivable that only citizens loyal to the government will receive an account for digital central bank money. In addition, it could only be made available to those companies that convert their production to CO2-reducing technologies or apply politically prescribed criteria in their personnel policy.
Central bank digital money may be convenient, but its introduction may seem modern and innovative. But the citizens should not be blinded by the technical advantages. Central bank digital money is a poisoned apple. It destroys the remaining market economy elements of the credit and monetary system, gives governments and states more power and prepares the ground for the expropriation and surveillance of citizens. Especially since the European Central Bank, as a supranational institution, is beyond the control of the national parliaments.
The ECB is considering introducing the digital euro as early as the middle of next year. The chances of thwarting the project are slim. But it is not impossible for citizens to realize the malicious potential of the digital euro. In Tolkien’s novel, there is still a tragically good ending in an almost hopeless situation: In Mordor, Gollum Frodo, who has been seized by the dark power, bites off the ring-bearing finger and stumbling with the ring into the fires of the Mount of Fate. The ring is destroyed, the power of darkness vanquished.
More on the subject: Politicians, economists and central bankers ignore all warnings and pump trillions into the system. But what helps in the short term buries our economic order in the long term.