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An ocean of Money, a sea of Debt - and the CBDC lifeboat

The world today is awash with money. The global broad money supply is reaching $ 90 Trillion, the United States alone contributing about $ 30 Trillion. Roughly 30% of US money supply was added in the last 2 years - with rest of nations also been adding similar quantities in recent past in their natural objective to be competitive in international market compared to USD.

The total derivatives market is valued at a whopping $1.5 Quadrillion. The industry is so highly leveraged that world's global debt is approaching $300 Trillion. No one really knows the amount of credit involved in international finance market.

The numbers are staggering to a layman and leaves him wondering if all these monies are actually real - are they representative of real underlying wealth. Unfortunately not - as much of these monies is flocking around in stock markets, asset markets and speculative trading markets instead of being available to productive economy, thanks to the 'financial industry' - an industry to make 'money from money' -  contrary to other GDP contributing industries.

Sadly there is massive impact on all strands of the society due to this ocean of money and debt sloshing around. The objective of this thread is to touch upon these impacts, and finally to say how CBDC is a glimmer of hope at least to alleviate, if not avoid, some of the problems.

National Economies & Central Banks - There is hardly any surprise why there is frequent booms and bust cycles in the modern economy that is causing immense losses to common man and societal inequality. You can imagine nation’s economy as an aircraft, let’s say US being a Boeing 747 and China being an Airbus 380 and so on, with central banks controlling the aircraft using various cockpit levers (monetary policies). Nations operating with such excess monies is equivalent to say the Boeing 747 loaded with 10 times its prescribed load. Question is if the same old cockpit levers are sufficient for central banks to keep the flight on course. That is exactly what is happening to nations that crash-landed recently (Greece, Argentina, Venezuela...) and many who are now flying off the trajectory (Turkey, Italy).

The United States has a much larger challenge due to the fact that USD happens to be world’s reserve currency, and it has the responsibility to quench the world's global liquidity needs. While at the international level, the dollar is in shortage and strengthening in value, domestically the US economy is reeling in inflation.

This raises a real question if USD, or for that matter - any national currency is really appropriate as a world reserve currency going forward. Isn’t this time to look at alternatives?

Banks & Central Banks - Due to continuous stimulus programs banking system is flush with liquidity. Banks reciprocate to this by creating credit (debt), the benefit of which, instead of being enjoyed by individuals and SMEs', is mostly enjoyed by corporates (including investment banks) buying equities and assets, hiking asset prices contributing to societal inequality. Some of these assets that are eligible as collaterals finds its way back into the central bank balance sheets as part of asset purchase programs - creating more reserves for the banks, and then in turn resulting in more credit. Its a progressively expanding vicious circle.

Individuals - The excess money is now a cause of great distress to individuals, instead of what it used to be - a savings for rainy days. With the fear of inflation eating up, we are all in constant struggle to invest them, mostly investing in industries which we have genuinely no interest on, nor on companies looking at its organic growth (dividends). In this way, sub-consciously, a large mass of our current society is now part of speculative trading. Stock markets are no more than a Ponzi scheme today, drawing large number of (including a large mass of otherwise jobless) people into this newfound easy-money-making business, and they in turn further drawing another larger set of people, and so on.

Availability of cheap credit (as low as 0% interest in some countries) means many of us are drawn into buying assets far larger than our means. Individuals are drawn into larger than capable debts (meager down payments), and larger tenure (as long as their working life). Long tenures of repayment means the debt stays afloat in the economy, people living a debt-ridden life (in assets with over-hyped values).  

Corporations & Banks are in no better state than in distress to be fully competitive with their monies. Everyone is in game to prevent its loss of value, or extract maximum benefit of all these excesses, having established their own investment wings and treasury office for this purpose.

Private Cryptocurrencies - To add fuel to the already raging fire is the crypto-curries, another form of private money. The impact of crypto on economy is still to be known, but I think it has too much negative potential, far outweighing its benefits compared to fiat currency, and overall to the society.

Central Bank Digital Currency - A glimmer of hope!

CBDC is no way a one-stop solution but it definitely is a path to seek some sense to all this madness. To the least there is some comfort to know that if majority of money movements go through central banks, there is better scope for measuring the movements, and hence possibly managing it ('only what can be measured can be managed').    

International Market - CBDC has high potential to relieve the world from the currently highly leveraged, unregulated and possibly rigged international finance market. Only when international financing can start to operate through sovereign central bank monies, can one say the market is measurable or predictable. It is quintessential for governments to take control - so that they know how much of money is being moved across internationally, its exact purpose, and how much of credit is bubbling up.

Domestic Market - CBDC has high potential to bring sense to domestic markets by eliminating banks as intermediaries for real GDP, non-speculating transactions, and a clear sovereign store of value, esp benefitting the common man and SMEs. Banks can still have their share to handle credit requirements, handle corporate needs, and provide investment services (investments, hedges or speculations). In essence splitting these roles to the least gives us the sense of distinction between what is real money base v/s volatile money base.

World Order - Greatest of all is CBDC platform's potential to eliminate the single global reserve currency system that we have today. Instead we can possibly have a reserve system of 'many tradeable currencies' - a world which is decentralised for its risks and dependency on one nation's economy.

How I think CBDC can impact international and domestic payments world is described in my article from June 2021.

In summary - CBDC is a game changer. it naturally invites massive opposition from the major money market players who control the world market today. Central Banks hopefully are warmed up to such challenges, and is on its course with CBDC agenda.

Also sharing this yet another great (private) platform in the making for banks to perform international money movements using Central Bank Money - coined as 'Liquidity v/s Liquidity'. See RTGS.global.

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Shaju Nair

Shaju Nair

Payments SME, Product Manager

Temenos

Member since

30 Jul 2008

Location

Bangalore

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