Moreover, by transferring payments from private to central banks, a CBDC-based system would be a boon for financial inclusion. Millions of unbanked people would have access to a near-free, efficient payment system through their cell phones. The main problem with CBDCs is that they would disrupt the current fractional-reserve system through which commercial banks create money by lending out more than they hold in liquid deposits. Banks need deposits in order to make loans and investment decisions.
In other words, the fractional-reserve banking system would be replaced by a narrow-banking system administered mostly by the central bank. That would amount to a financial revolution — and one that would yield many benefits.
So far, no country has decided to go this route, perhaps because it would entail a radical disintermediation of the private banking sector.
One alternative would be for central banks to lend back to private banks the deposits that moved into CBDCs. Lagarde, for her part, has advocated a third solution: private-public partnerships between central banks and private banks. This is a clever compromise, but some purists will argue that it would not solve the problems of the current fractional-reserve banking system.
There would still be a risk of bank runs, maturity mismatches, and credit bubbles fueled by private-bank-created money. And there would still be a need for deposit insurance and lender-of-last-resort support, which itself creates a moral hazard.
In due time, CBDC-based narrow banking and loanable-funds intermediaries could ensure a better and more stable financial system. If the alternatives are a crisis-prone fractional-reserve system and a crypto-dystopia, then we should remain open to the idea.
This article first appeared in Project Syndicate. Cookies are small, simple text files stored in your computer, tablet or mobile phone when you visit a website or use an app. Some cookies are necessary, while others make the website more personal and relevant to you. Learn more about how we use cookies in our cookie statement. Finally, in Argentina, assuming that the new government and the IMF already recognise that they need each other, the threat of mutual assured destruction could lead to a compromise.
Yet it is still only a matter of time before some shock triggers a new recession, possibly followed by a financial crisis, owing to the large build-up of public and private debt globally. What will policymakers do when that happens? One increasingly popular view is that they will find themselves low on ammunition.
Budget deficits and public debts are already high around the world, and monetary policy is reaching its limits. Japan, the eurozone, and a few other smaller advanced economies already have negative policy rates, and are still conducting quantitative and credit easing.
Even the Fed is cutting rates and implementing a backdoor QE programme, through its backstopping of repo short-term borrowing markets. They will be under intense political pressure to prevent a full-scale depression and the onset of deflation.
In fact, views from across the ideological spectrum are converging on the notion that a semi-permanent monetisation of larger fiscal deficits will be unavoidable — and even desirable — in the next downturn. Left-wing proponents of so-called modern monetary theory argue that larger permanent fiscal deficits are sustainable when monetised during periods of economic slack, because there is no risk of runaway inflation.
Despite differences in terminology, all of these proposals are variants of the same idea: large fiscal deficits monetised by central banks should be used to stimulate aggregate demand in the event of the next slump. Leading economic policymakers are now considering whether central banks should issue their own digital currencies, to be made available to everyone, rather than just to licensed commercial banks. The idea deserves serious consideration, as it would replace an inherently crisis-prone banking system and close the door on crypto-scammers.
This conversation is past due. Cash is being used less and less, and has nearly disappeared in countries such as Sweden and China. Most of these fintech innovations are still connected to traditional banks, and none of them rely on cryptocurrencies or blockchain.
Likewise, if CBDCs are ever issued, they will have nothing to do with these over-hyped blockchain technologies. Already have an account? Log in. For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever — and we remain committed to fulfilling it.
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