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If Russia implodes (see my analyses and the NYTs and from the Head of MI6), the world is going to need to finance more than the reconstruction of Ukraine. There will be a need to shore up whatever is left of Russia and whatever is about to spin out of Russia due to its demise. It is too early to say Ukraine will win, but it is not too early to say Russia is already losing. The leadership may face trials for war crimes, but the next Russia, and any new nations that will spring to life as Russia ceases to have influence, will want and need financial support. Others, from Finland to Turkey and from the Caucuses to Central Asia, will also request aid and financial support. They will inevitably direct the request to the US and Europe. Maybe none of this will come to pass. But, if it does, how will the US and its allies find the cash to build a new future for a post-Putin world? Central Banks are broke or broken, as Morgan Stanley points out. The assets on their balance sheets are now not worth what we all assumed they would be partly due to Putin’s efforts. QE is no longer possible, given inflation. Defense spending had been a reliable back-door method of pumping cash into the economy, but it won’t work if a peace dividend is coming. No, the only way to sustainably pump new money in now is to change to an entirely new financial system. Such a radical transition from one system of money to another occurs from time to time. The war is accelerating today’s transition.
The White House announced the new framework for the new financial system on September 16th. What is it? CBDC – sovereign digital currency (Central Bank Digital Currency). This new system of money and accounting (it’s both) has particular qualities we need to think about now. CBDC will permit something we’ve never seen before – personalized, unlimited monetary policy or PUMP. In other words, CBDC will allow the authorities to choose who gets capital and who doesn’t probably based on all the data that CBDC will easily collect from your smartphone once you register for the airdropped CBDC. You’ll want the $1000 that suddenly shows up in a text message. The registration needed to retrieve it is likely to give governments, and private providers of the CBDC, access to everything on your smartphone and thus your digital life. That data will increasingly be used to decide whether you should get more or less CBDC in the future.
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In other words, monetary policy can and will become personalized. We’ll talk about a generalized Fed Funds rate with nostalgia as we try to understand how the world looks when the government can provide capital (or tax) on a company-by-company or person-by-person basis. The post-conflict world is going to have a monetary policy regime we have not even begun to imagine or understand. Remember that the financial system is the infrastructure that holds the social contract together. A new system of money = a new social contract.
We already know how CBDC will work from a practical perspective. The government will drop a tempting amount of money into your smartphone in the middle of the night. You will wake up to find something like $1000 is suddenly available if you register. The registration process will effectively give the government permission to access anything on your phone. If you are involved in illegal stuff, this is going to be a problem for you. But it’s those who are not involved in illegal stuff that we have to think about. This is where AI algorithms will be running through all your data to find correlations and reach conclusions about how capital should or should not be allocated to you. Imagine being an entrepreneur who is having an affair, creating a venture that is in an area government really wants to have developed, like, say, Quantum computing or genetic research. The algorithms comb through your data, noting that your walking gait indicates you are depressed and that your spending habits reveal that you are statistically likely to be getting a divorce in the next six months. In a CBDC world, decisions can be made to allocate capital to others who are more stable and to get capital to you after your divorce is finalized. If this sounds like micromanagement, then you have not understood AI and data collection. You have not understood why all the superpowers are racing to collect and process data on their citizens using supercomputers and quantum computers.
The irony is clear. Just as Russia and China begin to clock that the economy does not grow well when you place the citizens under massive surveillance, we in the West move in this direction. In the West, surveillance capitalism is not so much about the desire to surveil as it is about efficiency gains. CBDC will still permit the banking system to allocate loans and raise capital for private entities as it always has. But, CBDC will also introduce a new layer of highly personalized credit allocation. Ultimately each one of us already has our own personalized news feed, our own personalized music feed, and our own personalized advertising stream. Now we will have our own personalized interest rate and opportunity to access capital.
Digitization as a word is almost hackneyed now, and yet most have hardly begun to understand what it actually means. Take the digitization of money. Even professional investors shrug their shoulders. Nothing to do with me, they say. They are wrong. Digitized money is set to totally transform everything we know about monetary policy. It is set to profoundly change the balance of power between states and citizens and between companies and customers. Think about what’s happening to cars as a result of digitization. You increasingly won’t own a car. You’ll have a subscription to a transportation method where the car you use may not be yours but borrowed from a network. You may be charged per feature (for using a baby seat or heated seats) and per mile instead of being charged all at once. This has huge implications for the ownership of critical assets, including your home and the power grid, as Izabella Kaminska points out in The Blind Spot,
“Bar a mass change to the outlook for the rate market, mortgage holidays won’t evolve into repossessions or defaults. To maintain market order, the government will have no choice but to intervene. It will become the buyer of last resort of the nation’s distressed housing stock. And since it has no interest in repossessing or kicking out occupants, it will see to it that the same stock is leased back to the original occupiers on more affordable monthly terms. The overly indebted, however, won’t get off entirely scot-free. Some sort of additional conditionality regarding energy footprints, insulation, spare rooms and goodness knows what else will likely be added to most agreements. The government will, at this point, become your landlord.”
Why? because the government can’t kick everybody off the power grid just because they don’t have the cash to pay their heating bills. They can’t evict everybody who cannot afford their rent. So, the government needs a way to both inject more cash into households and get paid for providing services to households. Presto - CBDC.
Then the question will be who should get energy and be allowed to pay for it over time? The elderly? The young? The rural? The urbanites? Over how much time? The power grids, which Mrs. Thatcher went to great lengths to privatize, may now end up nationalized and leased back to the public on a subscription model. Those points you got for speeding or your aggressive last-minute braking technique (as revealed by the 8k sensors scattered throughout your car) may well now cause your cost of energy to your home to be higher than it is for those with a cleaner or safer driving record. What is private in a world dominated by CBDC? There may be nothing to privatize. We may be sliding into government-administered subscription access to goods, services, capital, and shelter based on behavior assessments.
Sounds like the Chinese Social Credit system. If the goal is to produce creativity, innovation, productivity, and entrepreneurial solutions to problems, then the digitization of assets and penalty distribution based on personal behavior is not working. If the goal is to control, then yes, it’s working. Locking citizens into digital prisons, often before they are even aware they are in one, does into work well in a democracy. It sure feels like this is a similar situation to where we were after the GFC. No policymaker said, “Let’s inflate!” And yet, by making certain policy choices and dismissing others, each for good reasons, we ended up on a path that ensured inflation would inevitably follow. Today, there is a desire to allocate more money. There is a desire to allocate money more efficiently. There is an ability to judge who or what is the most efficient person or business to give the money to (or take it away from). The government isn’t trying to spy on individuals. It is trying to cut waste and avoid mistakes. The sensors in trash cans now show what you placed inside and even when. Too much trash or not the right kind will result in a fine. That’s income. Stealth tax. It’s social engineering as well. It’s also going to clock what you throw away. Kit Kat wrappers and empty beer bottles mean you are becoming a likely cost to the government. One can imagine a market for trash swapping. Can I have your Tofu packaging, please? Thanks! The end result is that we are drifting into a world that the Stasi would have loved
.The answer is PUMP. The key thing is that PUMP – personalized, unlimited monetary policy – is the future. Few have considered the implications of a customized approach to the allocation of capital. Think about a world where your DNA becomes a reason for allocating you capital or denying you access to capital. This is one reason why the Chinese are racing to collect DNA on all the citizens. It allows not just the immediate verification of identity. It also allows you to see if your behaviors, like say your consumption of alcohol, match up with a genetic inclination towards alcoholism or Alcohol Use Disorder. When we think about correlations in the financial markets, we think about Ethereum and Bitcoin or TIPS and inflation. In the future, under CBDC, we’ll have to consider the correlation between alcohol consumption and eligibility for business loans. Or, imagine if government ties your social media stances to your eligibility for capital at a certain price.
The government does not even have to be the allocator of capital. They can leave that to the banks. But government can create the financial equivalent of a “no-fly list” based on the data revealed by your smartphone. You don’t know you are going to have Alzheimer’s in six years, but your phone does. That means the government will too, which means it’s not smart for a bank to lend you money now for your startup. You may not know you have unusually large neurons, which makes you a “super ager” who lives longer than most, but your data bank reveals this to a financial system that might love or hate this about you, depending on their interests.
The rollout of CBDC is starting in large and small markets, where we can observe how it’s going to look. Australia will be live with CBDC in 2023. India’s pilot project for its new digital rupee is on track for 2023 as well. The EU is now preparing its version of CBDC. Notice that the ECB has chosen Amazon as one of the issuers of the new CBDC. Amazon is not only the largest consumer transaction platform in the world but it also runs all the data centers for more than 17 US intelligence agencies. Notice that the Biden team is also pursuing new Executive Orders to make data sharing with the EU much easier. Britain, being newly independent of the EU, post-Brexit, has also announced a new GDPR data protection system.
Few are tying all this together. Fewer still are considering that CBDC may mean that monetary policy in the future may be based on the nationalization of personal data. Of course, everyone will say the data is anonymized. But correlations are very efficient at pinpointing who we are based on behaviors. Fewer still can see that CBDC may allow central banks to allocate capital, or not, in ways that we can’t track very easily.
Another great irony is that digitization usually results in greater transparency. In the case of CBDC, everyone, whether an individual, or a company, or an institution, becomes radically more transparent to the government. But how will anyone know how much CBDC has been issued or retrieved? That will depend on the government’s records. CBDC may allow governments to be even more opaque.
We’ve seen individuals de-platformed by big corporations. CBDC can make de-platforming individuals and businesses vastly easier. What does all this mean for cryptocurrencies? It means they have to comply with what regulators want when it comes to transparency. It will become ever harder to maintain an anonymous or undeclared crypto account without the authorities knowing about it. Take a look at Quant, a firm that facilitates the clearing of crypto assets in compliance with government directives. Let’s just say in the aftermath of the crypto crash, not much has rallied like Quant has, and for good reason (thank you to Real Vision for holding an event where we all got to learn about this new firm).
So, on one level, CBDC is about creating money out of thin air and distributing it to the right people while withholding it from the wrong ones. This means CBDC is all about holding people accountable for their behaviors, even those they are unaware of.
It seems ironic that millions of Russians, and others who have had to operate within the Russian system, may soon be released into a freer future. The war in Ukraine has now created Russian refugees. Many have already come to the West or escaped into peripheral countries. Most will be thoughtful individuals who are trying to forge a better life. Some will be working for the people who are currently in charge. How will government distinguish between them? Tracking systems.
There has been no trickier time to reinvent yourself. CBDC is all about confirming your identity and holding you to account for it. Con women and con men beware. But, reinvention of the self is not a con. It is a necessary element of human growth and maturity. The history of America and the American dream is all about the reinvention of the individual. As CBDC slowly and deliberately locks us all into our identity-driven place, and chooses who is worthy of capital and who is not, one wonders whether this will encourage or discourage the rest of the world from choosing the American way just at the very moment they may be free to so. CBDC may let governments PUMP money into the economy on a much more personalized basis but it may turn out that the average person is not what the algorithm thought and won’t be what the algorithm expects in the future. Make no mistake, CBDC with a PUMP approach will pit AI-led algorithms against humans. The geopolitical war on the ground in Ukraine may be ending or changing, but the citizen’s personal war with algorithms via CBDC is just starting.
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