CBDC and loan guarantees: the return of dirigisme?

Since the early 1980s we have seen the development of the so-called free market. The state has withdrawn from its role of active management. Now there are indications that this phase is coming to an end and that we are once again experiencing state dirigisme, as was common in Europe in the last century until 1979.

Why turn of the century?

In an interview with the NZZ a few weeks ago, historian and investment expert Russell Napier explained why our economic system is immediately entering into a new logic. He explains that it will now again be up to the State to allocate resources, as public and private debt is too high to generate sufficient growth. This nominal growth, which is pushed by the state, together with inflation, is the only chance to free oneself from the burden of debt – exactly what happened after the Second World War.

Hello loan guarantees, goodbye central banks

In this new phase, the state increasingly reduces central banks to enforcement agents. The last years after the financial crisis have already shown how much central banks have come under political pressure from governments. Although absolutely understandable, due to Corona, the energy crisis and the war in Ukraine, states are increasingly intervening in central bank monetary policy. After all, they issue government guaranteed loans that defy market logic and interest rates. The price of money (interest) is increasingly consumed as a result. They are also exchanging aid packages like the 200 billion energy aid in Germany, contrary to the recent restrictive monetary policy of central banks.

According to historian Napier, 40% of all new bank loans to businesses in Germany are already guaranteed by the state. In France, it should even be 70%. Credit guarantees to banks thus become the most powerful means of the State to guide and support the economy. Especially since they are socially easier to implement than the direct issue of public debt or the increase in taxes. From a political point of view, this form of central control appears to be the only viable way to deal with climate change or the energy transition or other challenges such as the aging of society.

However, the big danger here is that the bank does not carry out as thorough a risk assessment as it would if it were to be responsible for defaults itself. In some cases, the purpose of a loan becomes more important than the creditworthiness of the debtor.

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4 instead of 2% as the new inflation target?

Government efforts to increase nominal GDP point to structurally higher inflation. Three to four percent could thus become a new unofficial compromise, on the one hand not to slow down the economic dynamics and on the other hand not to sow panic in the population. Finally, the rise in inflation can also be made bearable for a large part of the population by higher interest rates on the savings account, so that they only slowly become poorer.

For investors, this translates into a new market environment that demands more active action in order to do something about the accelerating loss of purchasing power. At the same time, when investing in certain sectors, the government’s steering power must be taken into account. This can have positive effects, as huge inflows of funds can increase the market capitalization of the companies involved.

On the other hand, productivity is falling, as we have seen in China for years. This should mean that if capital is allocated by the state and not by the free market, less output is generated. The effectiveness of money is therefore in constant decline.

Line of conflict: decentralization vs centrality

In this context, we are experimenting with a new role for decentralized control mechanisms, which are necessary to ensure long-term economic stability and market mechanisms. The planned economy can help solve temporary problems or achieve political goals such as energy transition. However, if you overdo it with central control, there is the threat of a market that becomes increasingly dysfunctional and brings to light more and more side effects.

This is exactly where blockchain technology, Bitcoin, and Web3 can develop into an important counterpoint. In contrast to state dirigisme, important decentralized market mechanisms can be regenerated, allowing high productivity and market-based interest rates, for example through decentralized credit markets. Our economy could thus increasingly evolve towards a hybrid model that is more and more state-based on the one hand and offering a liberal market economy on the Web3 on the other. This would be more necessary than ever to give signals and information flows to the market, part of which is lost due to state interventionism.

The CBDC Instrument

As we can already observe in China today, the CBDC can be used to weaken central banks and strengthen the state. Finally, the state can try to push to integrate its own politics and governance into the design and control.

A simple example, as has already been implemented in pilot projects in China, would be for the state to decide on reduction campaigns for local public transport in order to implement its green program. With the help of programmable money and programmable money infrastructures, the state can paternalistically implement its own allocation preferences more and more easily. CBDCs thus lead to an expansion of the toolbox of the state and a strengthening of centralism. Especially since it would harm even our highly decentralized banking sector in Germany if retail CBDCs become widespread.

The urgency of a counter-movement, therefore of a recovery or maintenance of decentralized market forces and mechanisms, has never been greater than in this current phase of upheaval. The role of the state and thus also of the market is undergoing the greatest transformation in 40 years. The consequences of reconfiguration and the associated tension between centralized and decentralized will lead to a completely new market environment in this decade.

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