OPINION
Simon Angelo
Editor, Wealth Morning
Wealth Morning is New Zealand’s leading independent publisher of specialist financial and investment news. We are focused on covering critical issues that directly impact financial and economic health.
**This article is the author’s personal opinion and commentary. It is general in nature and should not be construed as any financial or investment advice.
It’s just money; it’s made up. Pieces of paper with pictures on it
John Tuld, Margin Call
so we don’t have to kill each other just to get something to eat.
John Tuld is the CEO of the New York investment bank where Margin Call is set.
Played by Jeremy Irons, he is the ‘villain’ of the movie, if you like. But like the best villains in any story, his motives are understandable.
(left to right: Jeremy Irons, Paul Bettany, Kevin Spacey). Source: Wikimedia Commons
It is the prelude to the 2007-2008 Global Financial Crisis. The GFC.
The firm’s survival is in jeopardy due to leveraged positions across MBS (mortgage-backed securities). When Tuld learns these are worthless, even ‘toxic’, he instructs his traders to sell them to unsuspecting clients. That is until the game is up. And the market crashes, with devastation to livelihoods and economies.
So it is that the world of finance attracts more than its fair share of fear. And villains.
In any financial transaction — with any financial instrument or asset — there is an imbalance of knowledge. Someone knows more than you do.
That is why it pays to ask this question: ‘Why does X selling me Y want my $?’
Central Bank Digital Currencies pose a similar concern
For the first time, central banks around the world could have a new power. Not only to supervise the monetary system, but to provide a digital money account to citizens.
The chief fear is that once these digital accounts are set up, they will take over from the existing banking system. At least to some degree. This will then pave the way for governments to eventually monitor, and if necessary, control how you spend your money.
We’ve been watching the Reserve Bank of New Zealand’s foray into what they are now innocuously terming ‘digital cash’.
In the early stages of information provision, I recall an alarming statement. Along the lines that there might be a reduction to the size of traditional banking. I was unable to find this again.
Currently at the consultation phase, the Reserve Bank is asking for feedback.
There is a repository of submissions already received available for public view.
Many of these responses are concerned about the risks of totalitarian control. Some mention the Chinese social credit system.
One I found particularly pertinent. From an anonymous contributor who claims 15 years banking experience and senior roles in the New Zealand Treasury:
‘The proposal is clearly an attempt to further increase controls over New Zealanders and represents a further invasion of privacy and freedoms as enshrined in NZ’s legislation. Both privacy and freedoms have been severely eroded in NZ over the past decade, not just since the Covid-19 responses of the Government.’
There are submissions from the major banks. These appear more supportive. But how else does one respond to their ultimate supervisor?
CBDCs are probably a done deal. Like it or not, they are coming…
Most central banks around the world are in the ‘research,’ ‘proof of concept’, or ‘pilot’ stages for the issuance of CBDCs. According to CBDC Tracker, only five countries have cancelled the projects: Ecuador, Kenya, Philippines, Denmark, and Finland.
Denmark’s cancellation is interesting. Particularly the follow-up comments from Danmarks Nationalbank Governor Signe Krogstrup:
‘Its introduction would change the structure of the financial system and the respective roles and demarcation lines between commercial banks, central banks, and other institutions in the provision of money.’
But more optionality is generally a good thing in finance, right?
I have to admit, initially, I was not too concerned about CBDCs.
The New Zealand market is already lacking financial options. Brokerage, banking, and payment services I had access to in Europe do not exist here, operate more slowly, or do not have the same level of protections in place.
Digital cash could be handy, particularly to pay the government. You would no longer need to give your bank account to the IRD. In fact, it could help provide another layer of separation between you and the government.
Banking accessibility remains a concern. When interest rates were lower, it was hard to find a transaction account without fees, unless you had a decent balance.
Offshore, we have seen horrifying examples of individuals being ‘debanked’ by the traditional industry. A CBDC would allow another repository or ‘wallet’ from which you could transact.
Then I thought back to the controls that were ramped up during Covid-19.
While some protections were reasonable and necessary, the treatment overreached the ailment. In some cases, the wrong limbs were amputated, and the economy is still dealing with the shock.
Further, the fear event provided an opportunity for the bullies, ideologues, control freaks, failed high school prefects, and Stasi wannabes to come out of the woodwork. Some elected. Some not. Others as media abettors.
The risk with a CBDC is that, once again, it hands power to unelected bureaucrats at central banks. Fine, if these ‘experts’ have our genuine best interests at heart. But recent experience tells us that such power vacuums are ripe for ideologies to form a base.
Governor Krogstrup in Denmark has raised an important point when he mentioned demarcation lines. A CBDC would become part of the ‘provision of money’.
Perhaps the idea of digital cash is not a bad thing in itself. A digital version of the New Zealand dollar is a good idea, as is the provision of accounts to provide an alternative to mainstream banking.
Yet, on balance, I don’t want my taxes going into another initiative for unelected bureaucrats to control and regulate life’s essentials.
Debasement of currency
Another consideration that comes through the Reserve Bank’s digital-cash feedback is concern over loss of spending power.
Of course, this occurs in whatever form a currency exists.
The modern credit based monetary system is flexible. Central banks can respond to crises, but with a degree of lag.
An economic shock? Monetary policy can loosen.
Too much government spending? Inflation gets away. Monetary policy can tighten; now with the crushing pain of higher interest rates.
For savvy investors, this reminds us of a disturbing sentiment. As John Tuld put it in Margin Call:
‘It’s just money; it’s made up...’
Prosperous investors tend to hold very little of their wealth in cash for this reason. They deploy it into assets that are poised to gain from the cycle. So, the risks of control from a CBDC may not be on their immediate radar. I doubt many would use it for anything more than when they need to pay Uncle Sam.
Not only is the key to be in productive assets, but to be in the right assets at the right time.
Last year, there was opportunity in commodities as inflation took hold. Stocks with exposure to copper did very well, for example.
Today, the curve has moved again. High interest rates will need cut at some point. Europe is leading the way there. Listed real estate still sits at a discount. Could that provide the next round of opportunity?
Those with their money out at work in productive assets also tend to have smart access to cash. Many have a standby line of credit on their assets. Revolving credit facilities. Margin accounts on stocks and so forth.
But there is seldom wealth generation without risk. In Margin Call, calamity came when the leverage was about to be called in.
It pays to keep in mind that disaster lurks in the unpredictable. The unforeseen. The black swans. Few predicted the GFC or Covid.
I doubt the current fears around CBDCs will come to pass. It’s the ones we haven’t foreseen that may savage us.
What is needed is a cost-benefit analysis on the use of taxpayer money for such an initiative. Weighing the benefits with all the risks and dangers posed.
On that scale, they should likely leave digital-cash initiatives to private business.
Demarcating the wolves from the sheep.
(This article is the author’s personal opinion and commentary. It is general in nature and should not be construed as any financial or investment advice.)