Central bankers basically have to lie to the people about their role and their actions and why they do it. They are trying to keep a system alive that is not functioning anymore. It is one big moral hazard, according to political scientist Sander Boon. In a new GoldRepublic podcast, he explains how central banks lost control over international monetary system based on the eurodollar market.
Boon explains how government bonds are at the core of our current monetary system. A fundamentally flawed foundation, because bonds are not always safe. While the Bank for International Settlements (BIS) declared back in 1988 that government bonds are risk free assets, the reality is that financial markets do price in risk. During the European debt crisis for example, spreads between German and Italian bonds diverged massively. Countries like Greece reached a point where they almost couldn’t refinance their debts.
Because government bonds are at the foundation of our current monetary system, central banks have no other option than to ensure that these assets are safe. That’s why central banks buy government bonds after each financial crisis.
“Central banks are keeping a system alive that should not exist. It is one big moral hazard. The Bank for International Settlements calls it expectations dominance. You have fiscal dominance, financial dominance and expectations dominance. Fiscal dominance is that central banks have to finance governments. Financial dominance is when the financial system is so shaky that the central bank has to act as a buyer of last resort, which we saw in 2008 and again in March last year.
Expectations dominance is the point where central banks are being forced by the public, by politicians, by finance, to put all positions on their balance sheets to save the world. And that is basically the moral hazard that is now in the system. It is a hostage like situation, we can not get out of it. And now, we see politicians waking up.
In the past, we could get our government bonds financed in the financial system, but we had to have some sense of discipline. We had to be fiscally conservative, because the markets do have to take our government bonds. But now, central banks are basically financing governments and politicians are saying: ‘Fine, now we can get climate action. All financed by the central bank.'”
Bitcoin and the clash between public and private money
According to Boon, the rise of Bitcoin and other cryptocurrencies is a resurgence of private money in a world dominated by fiat money issued by governments and central banks. He compares the emergence of cryptocurrencies to the period after the Middle Ages, when private money markets emerged in trading centers like Amsterdam and Venice.
These private money markets improved both trade and wealth, as it supported trade over both short and long distances. According to Boon:
“After the development of the money market, trade grew. Also over longer distances. This was all made possible with new innovations, with new forms of private money. Because it was private, people trusted it. There was no need for regulation, because everybody profited of it.
Basically, the eurodollar system which emerged in 1955 is also a private money initiative. The offshore dollar system is a private money system. And governments used and abused it. Now we are at a point where new technology, thanks to computer power, it is possible to get new technology and build a new private money initiative. And I think it is much needed, because the government system, the moral hazard system, needs a brake.”
Central bank digital currencies
Central banks are responding to the rise of Bitcoin by announcing their own digital currencies. And they are in a hurry to do so, as more and more investors start buying Bitcoin as an alternative asset. The Bank of Canada wants to issue digital cash within two years, while the ECB is planning to do so within five years. The Chinese central bank is already testing their new digital yuan. According to Boon, these central bank digital currencies could have a large impact on how people save and spend their money.
“Governments and central banks are reacting in the form of central bank digital currency. They want to implement it, and very fast. Canada for instance wants a central bank digital currency within two years. They say it is because of COVID, because nobody is using cash anymore, but I think they see the danger of the private money system and the crypto economy around Bitcoin.
The ECB already has stated that it will implement negative interest rates for consumers, for savers. So people have to spend it, because when they don’t they will lose money. They are forcing people to spend to get the economy going. I think it is weird to force people to spend, but the central bank can also look into your spending habits.”