Britcoin, negative interest-rates and large debt are all linked

Sharing is Caring!

by Shaun Richards

UK news has over the past few days been positive with Retail Sales growth and falling Covis-19 numbers. To that this morning we can add something of a gold rush at the Tokyo Olympics. But the weekend saw the establishment out in full force preparing for a more troubled view of the future and let me open with this from the Mail Online.

Cash in people’s pockets would be superseded by a new ‘Britcoin’ digital currency in a plan being pushed by Chancellor Rishi Sunak.

In what Treasury insiders say would be the biggest upheaval in the monetary system for centuries, the Bank of England would establish a direct digital equivalent to physical money and take control of it in the same way as sterling.

Its supporters in the Treasury say that it would allow the Bank to give the economy a boost in times of financial crisis by paying the ‘Britcoins’ directly into people’s bank accounts.

It is curious how we always need a new economic boost isn’t it? What is happening here?

A taskforce of Treasury and Bank officials set up to examine the merits of Britcoin – known as the Central Bank Digital Currency – is expected to report to Mr Sunak by the end of the year.

Okay and I note the Bank of England is shoving the blame onto the Treasury.

The Treasury is understood to be more keen than the Bank of England on the idea of creating an official British digital currency to compete with the rise of Bitcoin because they are wary of the huge numbers of people piling into cryptocurrencies. Some investors have lost vast sums as the price of Bitcoin has gyrated wildly.

Actually the truth is that overall Bitcoin has provided profits and sometimes large ones. The real issue for the Treasury is the lack of control over people as Bitcoin by-passes it and the Bank of England. For example there are no easy profits from seigniorage for it. Also last weekend with its 10% rise to US $38,100 for Bitcoin was not the best time to emphasise losses.

They have thrown out a real lemon to see if the journalists would be silly enough to print it and the answer is yes.

There are also fears the introduction of Britcoin would lead to higher loan and mortgage rates as millions of people switched cash to central bank digital currency, eating into the amount of money high street banks have on deposit to lend to borrowers.

It is an issue for the banks but it is hard not to laugh at the interest-rate view to which I will return later.

See also  85% Of High Yield Bonds Have A Negative Real Yield (And Real 30Y Mortgages Rates At -2.5% While Real Fed Funds Target Rate Is -5.12%)

Also VOXeu has been on the case and demonstrated that they need a new panel of what they consider to be experts.

Central banks across the world are starting to experiment with digital currencies. This column summarises the findings from a survey of a CfM of experts on the UK economy, who were nearly unanimous in agreeing that a Bank of England-issued digital currency would benefit the British economy. Half of the panel also believed that a digital currency would have limited impact on the UK banking system.

Perhaps they thought it was April 1st.

Public Accounts Committee

It weighed in yesterday by publishing what sounded neutral via the title of Covid-19 tracker update but it had this.

According to the NAO’s COVID-19 cost tracker, the government’s response to the pandemic has exposed the taxpayer to significant financial risk for the foreseeable future, with the estimated lifetime cost of the government’s measures reaching an eye-watering £372 billion in May 2021, with £172 billion reported spent.

We were aware of such numbers but many were not. Also they pointed out the scale of problems with the loan schemes.

This is particularly the case in the estimated £92 billion of loans guaranteed by government as of May 2021, £26 billion of which we were alarmed to learn are now expected to be lost as a result of bad loans to businesses although the exact scale of loss is not going to be known for some time.

It looks like the schemes were not well run with that scale of loss. It is the Bounce Back Loan Scheme that seems to be the main source of trouble, trouble, trouble.

HM Treasury referred specifically to the Bounce Back Loan Scheme, which accounts for £22.8 billion of the forecast total write-off costs of £26 billion.

This is an area I have followed since the summer of 2012 when the Funding for Lending Scheme was supposed to boost bank lending to smaller businesses yet all these years later we are told this.

It was therefore an explicit policy decision to set up a scheme that would disburse loans quickly, and lenders were asked to set aside their normal processes for approving loans.

As you can see we have been actively misled for the past 9 years but as ever it will be nobody’s fault.

See also  If the Bank of England does not raise interest-rates in response to 4% inflation when will it do so?

The Public Accounts Committee deserves credit for its work and I hope it leads to improvements. But if you are going to release numbers like this I think they need to be put into context. By the end of this week the Bank of England will have over £820 billion of UK government bonds on its books. With the actions of the other major central banks it results in a situation where as I type this the UK can borrow for 50 years at 0.81%. It also produces such a cheap borrowing environment that they should be doing something I have recommended several times.

Comment

There are three driving forces behind the new push for central bank digital coins but in many ways they come down to one issue. Here is the Bank for International Settlements or if you prefer the central banks collective mouthpiece on the subject.

Fourth, combining moderately negative policy rates with QE further improves economic stability by creating a little more room for policy rate cuts during downturns. It also limits the occurrence of negative term premia and thereby the negative side effects of QE on the profitability of maturity transformation activities.

They are tilling the ground for negative interest-rates having noted that what we have seen so far is not working. As we stand the nadir is the ECB with its -1% interest-rate for its liquidity supply schemes for the banks. But it is afraid that going deeper would create a run on the banks. Whereas the central control of a digital currency means that deeper negative rates can be applied because you can be forced to hold digital money.

It’s like the more money we come across
The more problems we see ( Notorious BIG)

Once you have to hold it then they can try to make you spend it by putting either an expiry date on it or more likely an exchange-rate. That exchange-rate means there will be a negative interest-rate of say 3% which is another type of tax.

That brings me back to one of my themes which is that on this road we are singing along with Elvis.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

Podcast

993 views

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.