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Banking as We Know it, Will Die

Jun 21, 2016


History shows that the issuers of legal tender and banknotes have only one real play left when the public loses confidence in money. Once the public reckons that purchasing power is in rapid decline, they can't get rid of paper money fast enough. They trade it for anything of real, tangible, or longer-term value.

This is why hyperinflations are such dangerous feedback loops. The more money printed, the greater the decline in purchasing power and the faster people get rid of it. The whole process is accelerated. The shelves empty, producers go on strike (refusing to trade real goods for paper that daily diminishes in value), and normal economic activity (based on rational planning and expectations about a stable interest rate future) ceases.

Incidentally, this is why a monetary crisis is the precursor to a larger social, political and sometimes military crisis. When money dies, all sorts of values are thrown into chaos. This is what happened in the 1930s. A long period of stagnation and deflation gave way to World War Two.

But back to the way you short-circuit the feedback loop. When one currency is in terminal decline, you have to replace it with something new, something people would prefer and can easily switch in to. Or have to switch in to. This from the Financial Times (emphasis added is mine):

The Bank of Canada, the country's central bank, revealed in a private presentation in Calgary on Wednesday that it was working with the country's biggest banks to develop an electronic version of the Canadian dollar.

It is examining how to put a government-backed, or fiat, currency on blockchain, the digital ledger that underpins cryptocurrency bitcoin. Full adoption would mark a significant advance for the emerging technology.

In a speech last year Andrew Haldane, chief economist at the Bank of England, said the central bank may be able to use a government-backed electronic currency as a way to levy negative interest rates... Other central banks, notably the US Federal Reserve, have also been exploring its use. Earlier this month the US central bank hosted a meeting of 100 central bankers and regulators from around the world to discuss its future.

Do you see what's happening here? And do you remember where Mark Carney is from? The Bank of Canada is calling it Project Jasper. But it's really about how governments may use their central banks to co-opt financial technology and impose what Tim Price called Financial Martial Law last year. How?

Digital legal tender (DLT) allows the government to replace paper money with digital money. It also allows the government to replace commercial banks with the central bank. You don't need commercial banks to act as monetary intermediaries if the DLT solves the problem of trust and security in money lending. People can borrow straight from the central bank.

Banking as we know it dies.

That's where we're headed. And please note that when commercial banking dies and we've all moved over to DLT, Andy Haldane is just as right now as he was last September. DLT allows the imposition of negative interest rates on your money and savings.

The old bad paper money will have been replaced with the DLT; perhaps after some intermediary period where the two types of money operate in parallel so people can get used to the idea. But then the switch won't be voluntary. It will be compulsory.

And the new money will have some alarming features. You won't physically possess it, which means you won't be able to exchange it privately with anyone you want. And it can be... well it can effectively be deleted. It's permission-based money. Your permission to use it can be revoked.

It's a central planner's dream. You don't have to encourage people to spend or banks to lend anymore. You eliminate banks from the credit creation process entirely. You digitise money creation. And you digitise money deletion.

Spend it or lose it people. We must all do our part in the war against deflation.

Please Note: This article was first published in Capital & Conflict on June 17, 2016.

Dan Denning studied literature and history, moving to Agora Financial in Baltimore fresh out of college. Working alongside Bill Bonner and Addison Wiggin, he became managing editor of Strategic Investments. He then moved via Paris and London to Australia, publishing a book - The Bull Hunter - along the way, and opened Agora's successful office Down Under. He returned to London in 2015 and became the publisher of Fleet Street Publications' financial newsletters.

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