From the Notebook posts were first published exclusively to my Patrons and are expanded upon here. This one was from 4/12/2021
One of the things that converted me to the Austrian way of thinking about the economy was the concept of money with an expiration date. Early articles at Lewrockwell.com and Mises.org covering hyperinflations of various forms and kinds horrified me when banknotes and government scrip reached the point of forcing people to spend money versus having it lose its ‘legal tender’ status.
Money that ‘expired’ like points on your credit card was simply a horrifying idea.
Martin Armstrong makes the point all the time that the main reason why the U.S. dollar is the world’s reserve currency is because it is the only modern government-issued currency that hasn’t been defaulted on in over two hundred years.
In fact, it was the consolidation of the Colonial government debt held over from the Revolutionary War which ultimately doomed the government under the Articles of Confederation giving rise to the current U.S. constitution and its monopoly power to issue dollars.
That power gave the Constitution its power as an international player, telling the world the new government honored its debts. The inability of the ECB today to control the debt issuance of the euro-zone states is that currency zone’s fatal flaw and why any move towards consolidation of that power is the goal of all EU fiscal and EU monetary policy.
Absent that the EU is doomed to the same fate as the Articles of Confederation.
Fast forward to today with the world awaiting the birth of the first Central Bank Digital Currency (CBDC), the Digital Yuan from China, and we see the concept of expiration being embedded directly into what looks like the next monetary system planned for us.
We’ve come full circle, folks.
From Zerohedge came this great article going over most of the concerns anyone should have about a digital Yuan.
Fast forward a few months when China’s preparations to rollout a digital yuan gathered pace, and we reported in October that China was poised to give legal backing to the launch of its own sovereign digital currency, “cementing its trailblazer status in virtual currencies far ahead of other countries, after already recently experimenting with large-scale trials of actual payments by consumers, which was met with mixed results.” Specifically, the South China Morning Post reported that “The People’s Bank of China published a draft law on Friday that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time the digital yuan has been included and defined as part of the country’s sovereign fiat currency.”
There are plusses and minuses to everything about the digital yuan. From China’s perspective it gives them a currency which can easily bypass the U.S.’s control over the flow of U.S. dollars while giving China much more control over capital inflows into the country and the terms under which it can come in.
With tensions rising between the U.S. and the Russia/China/Iran axis all three of these states are making profound moves to insulate themselves from aggressive dollar diplomacy. Today’s announcement of new, sweeping sanctions against Russia not just targeting diplomats and members of the government but limiting access to Russia’s sovereign debt greatly accelerate these tensions.
As expected the White House and Treasury’s actions against Russia today are sweeping and have some serious teeth, with the US expelling ten of its diplomatic personnel from the Russian Embassy in Washington, which is said to include intelligence officials.
Further, the US will ban American banks from buying new Russian sovereign debt starting June 14. The White House fact sheet detailing the Biden executive order’s multi-layered action details:
Russia, for her part, has already announced plans to ban MasterCard and Visa from use there. They, like China, already have a homegrown analog to the U.S.-controlled SWIFT system for international payments and are as well exploring the development of a digital ruble.
The digital yuan, which has already cut a deal with SWIFT to provide a bridge between them, will however, be used for far more than just evading U.S. sanctions so international trade can continue.
A CBDC is a digital token issued directly by the central bank with holders of the tokens being tied directly to the central bank. There is no ‘going outside that system’ because there will be no physical cash equivalent.
So, this is a completely trackable credit system that can come with, you guessed it, an expiration date to perform Keynesian (really Samuelsonian) fiscal stimulus whenever the ruling class feels there’s too much paradox of thrift happening.
CBDC’s are the ultimate power move by the central banks to consolidate their power and just the mere threat of an expiration date on your money creates a powerful incentive, they think, to spend that money as quickly as possible. This keeps money velocity high and the economy humming along in a macro sense.
Of course it does nothing to incentivize people into spending that money wisely or productively. It’s all about the flow, baby. That’s what keeps the Ponzi scheme alive. And they would only move to this type of system, unmoored from any opportunity cost for producing new monetary units, if the old debt-based system wasn’t already beyond repair.
Moreover, this is beyond Orwellian and anathema to anyone with any shred of individualism still coursing through their veins. I know that’s a lot to ask in today’s terminally woke culture which has elevated the state to godhood, but dopey me for having such provincial ideas in the insouciant 21st century.
But aside from my backwardness it still begs the bigger question what are the consequences attached to this?
From where I sit, people aren’t stupid. They may make dumb decisions but these maximized thanks to the misaligned incentives of a corrupt monetary system. Absent consequences for dumb decisions, people will continue to make them until they can’t. And yet our feudal overlords there is no limit to this.
If we were half as dumb as they think we are, would they constantly have to lie to us about literally everything to keep us believing in their unlimited power and wisdom?
If there is one thing I have learned in my 53 years circling the sun it is that there is one thing people are more passionate and knowledgeable about than anything else and that is their money. They may not always spend it wisely, getting bamboozled out of large sums of it buying over-priced cars and homes, but when it comes to the day-to-day use of it they know exactly what the stakes are.
So, don’t for a second think that China will have a whole lotta success rolling the digital yuan out to the world with a CCP-controlled expiration date. Not in a world where Bitcoin has a $1.2 trillion valuation or DASH can moves millions in a few seconds for a penny.
They can lock down and force this onto their people but they can’t get the international community to embrace it with these kinds of land mines. Because it gets back to that same problem the first U.S. government had, if no one believes you’ll pay back the debt or honor the value of the currency its based on why would anyone accept it?
The most curious thing I’ve seen in all my years of studying markets and economics is that for some odd reason everyone agrees that the Law of Supply and Demand and its progenitor the Law of Diminishing Marginal Utility are universally true……
…. except when it comes to money.
Once we sprinkle the magic fairy dust and unicorn farts on the latest commodity to ascend the mountain of Mises’ Regression Theorem all of a sudden money operates under a completely separate set of rules.
Or so the Monetary Cranks who want control over your life want to tell you. They spend billions every year convincing you that monetary theory is different than the theory of action surrounding car buying.
And yet, it simply isn’t. Even the best analysts on the planet fall victim to this on occasion because they believe in the power of government to alter reality through the studious and ruthless application of coercion to do so.
The best description I’ve even seen of the US Dollar recently was its a Proof of Guns Stablecoin. Absent the proof the guns which can be used to enforce the its primacy the dollar loses a lot of marginal demand.
The same will be true for a digital Yuan where the Proof of the CCP’s Guns to expire its digital yuan simply will not be able to climb that Misesean Mountain. Because once trust is lost between the consumer and their money, it 1) never comes back and 2) catalyzes a switch to something else very quickly.
Because the rules covering branding of any product are just as universal. Just ask Coke.
This is why first mover advantage in markets is so important, if properly nurtured. There’s an emotional connection to all the things we use and the inertia of using one money versus another is, of course, a big barrier to climb, but don’t think for a second that the PBoC will retain the people’s confidence the moment it tries to actually retire old tokens sitting in savings accounts as a hedge against future uncertainty, the only reason people save for the future in the first place.
Money is moving digital. The market is choosing this. The question is whether that digital money will be custodial with property rights or not. The digital yuan will not have property rights. Bitcoin and other real cryptocurrencies do. They are a necessary antipode to the type of tyranny the central banks have planned for us.
This is why all the gold bugs bitching about Bitcoin’s meteoric rise is so ungodly silly and counter-productive. We’re watching the collapse in confidence of the central banks in real time, the very thing Austrian economics told us would lead back to gold in the first place. Bitcoin trading 24/7/365 creates a different dynamic and grew up in an unregulated space where it didn’t ask permission from the tyrants to operate. It just did.
They are just bitter they picked the wrong asset in 2021 to prove that long-held conclusion correct.
Gold will have its day when the over-55 Boomer/Gen X set finally give up on thinking Proof of Guns is a valid monetary system. We haven’t even begun that process yet. They are still wedded to the old system. But the younger crowd gets it, and it’s not just here in the U.S.
If the CCP ever follows through with the threat of cancellation of digital yuan tokens to cover its incompetence it will learn the hard way that betraying the trust of the people you govern at such a fundamental level is a breach that creates real, lasting change.
The kind that real guns don’t create, only safeguard against.
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