The Apocalypse Scenario, Part I
CBDC: The Hindenburg omen for the society (Free)
Issues discussed:1
The grip of central banks on our economies is likely to tighten.
Central bank digital currencies (CBDC’s) are a means for financial enslavement.
The implications of CBDC's are dire for banks, corporations and consumers.
A few days ago, I accidentally met a friend of mine, an associate professor, who was going to consult our new Prime Minister, Petteri Orpo, on certain matters. While we where talking, he asked about my absolute worst case scenario for the next few years. Well, I gave a short, five bullet point summary of how I see things progressing in the ‘Apocalypse scenario’.
I’ve been doing scenario forecasting, as a part of the small team at GnS Economics, for over 10 years. Rather strangely, my life has been such that it has fostered the development of my thinking towards catastrophic scenarios. This actually started with the sudden death of my father when I was just two months old. My general way of thinking is also “narratorial” rather than “completing”. This means that I have a tendency to view the world through stories rather than through pictures to be completed, which is the way people usually view the world (my ex-wife has a doctorate in Psychology; so my personality has been tested, rather extensively ;)). One could say that my brain has been wired to build scenarios, especially the “apocalyptic” ones.
As I am the CEO of our company, GnS Economics, this has affected the structure of our forecasting, where scenarios are the work horse. At the same time, I have discovered that generally people have difficulties understanding scenario forecasting. If, for example, just one, usually the most clickbaity scenario is presented in the media and even when a low likelihood (e.g. 20%) has been attached to it, many have viewed it as the forecast from us, even though it has just been one (usually the worst) of the three forecasts we tend to construct for each situation. Most recently, this misunderstanding has occurred with my worst-case scenarios (see, e.g., this, this and this) for the Russo-Ukrainian war.
My original worst-case scenario was that Russia will mount a crushing winter-offensive against Ukrainian forces possibly dividing the country in half. This never, fortunately, occurred. The consensus (most likely) scenario was that Russia will just hold the eastern and south-eastern territories, as it now has (the ‘good’ scenario would have been Ukraine taking back their lost territories, but the likelihood of this occurring was miniscule already in October).
My absolute worst case scenarios almost never reach the reports of GnS Economics, because they are highly speculative and often rather apocalyptic. However, I consider them to serve a very important benchmarks in mapping the realms of our world. History shows that sometimes truly horrible scenarios manifest, and thus they need to be mapped.
On that note, I have come to the conclusion that it’s time to present my current Apocalyptic scenario, which I have been constructing for little over a year, to my subscribers. This is speculative and should not, at this point, be taken as nothing more than a sketch of the worst-case scenario currently imaginable. The reason, why I consider that now is a good time to present it, is because there are some hints that parts of it may be coming a reality. This will be the first entry in a series.
Central banks taking over the world?
We have been very critical towards the actions of central banks since 2013. At that point it had became clear that the massive meddling of central banks in our economies and financial markets were creating something monstrous. In June 2013, we wrote:
It is possible that the banking sector and the world economy were saved by using too strong methods in 2008. As a consequence of this, it is also possible that the world economy is more like a zombie economy, where unprofitable banks and companies are kept alive with easy money and rescue packages from the governments. This kind of an environment is extremely sensitive to shocks or market disturbances, and this is a reason to be worried although there is no reason to panic, yet.
So we, correctly, saw that the role of central banks was changing and growing beyond their original role and what was probably good for the economy. In December 2019, we mapped the scenarios of the world economy through the global economic crisis, which at that time looked inevitable (we naturally had no knowledge of Corona at the time of writing). There we envisaged the ‘Global bailout’ scenario:
At the heart of this catastrophe would be the harnessing of the money-creation power of the central banks to finance a massive growth in government spending. This would be the “bailout for all”.
As we noted in Q-Review 4/2018, the size of the global risk-asset universe is currently somewhere north of $400 trillion dollars. For the bailout to succeed, central banks would need to absorb at least one quarter, if not half of this pool. This would mean a gargantuan increase in their balance sheets, which currently stand at over $20 trillion, with central banks effectively seizing control of global capital markets. It would be the end of capitalism as we presently understand it.
This would be the ‘dystopian’ response of authorities to the economic collapse which, at that time, we assumed to consist of four phases during 2020-2023:
Crash of the asset markets.
Failure of the European banking sector.
Failing zombie companies.
Collapse of China.
The Coronavirus, lockdowns and bailouts naturally changed our scenarios rather drastically, but they did not remove the threats of the above four developments, but just changed their forecasted timelines. We did expect the European banking crisis to emerge in late 2020 or 2021, but that never manifested. This was our single biggest forecasting failure.
A year later, we warned, for the first time, on the threat of central bank digital currencies, or CBDC’s. In December 2020, we wrote:
Notably, a much more problematic situation emerges when we notice that with CBDCs a central bank will become a competitor of the commercial banks. Thus, the central bank would function in the role of national banking supervisor, the ‘lender of last resort’ and also as a competitor in the commercial banking sector. It is clear that these obvious conflicts of interest could quite readily lead to the further corruption of any such central banking system.
In a banking crisis it is the responsibility of a central bank to 1) provide emergency liquidity support (money, and lots of it) to the banking sector, and 2) organize and oversee the restructuring of the banking sector. It is plain that when a central bank is also a competitor of the ailing commercial banks, the situation would become completely untenable. In a banking crisis, deposits would flee to the safety of the central bank, aggravating the crisis. Moreover, why would a central bank support its competitors? It could easily announce the closure of all unstable banks and the transfer of deposits to the central bank, with the tacit approval of apprehensive politicians. In the worst case, the whole banking sector would be nationalized.
This would effectively raise the central banks to dominate the monetary and financial realm of a country. Next, I go through the implications of it for consumers and corporations, including banks.
CBDC: A tool for domination
In a banking crisis, there would likely come a point, where depositors would seek the safety of the central bank, if a CBDC was offered (see our post for a description of the CBDC structure). This would, most likely, escalate the runs on commercial banks. There are several ways how a central bank could respond to this.
First would be an open-door policy, where every depositor could transfer their funds to the central bank. As the likelihood of failure of a central banks is miniscule, this would, most likely, lead to a deluge of deposits to the central bank in a banking crisis (like described above). This would leave banks in a very precarious situation, because they would lose their main funding source for loans. This would lead to an utter collapse of the banking sector. To cope, the central bank would probably lend the deposits back to commercial banks. This means that the central bank would act in such a way that the deposits would be collateral against the loans. This would give the central bank control over the lending practices and, effectively, control of the businesses of every commercial bank in the country. In this case, commercial banks would become mere semi-independent branches of the central bank. We can call this as ‘Gosbankification’ of the economy.2
To stem the deposit outflow, the central bank could also limit deposits it accepts. However, in a deep enough crisis, the public pressure to open the whole central bank balance sheet to protect depositors would most likely become unsurmountable, if a CBDC had been issued.
The central bank could also issue a ‘synthetic CBDC’, where private sector payment service providers would issue liabilities matched by funds (reserves) held at the central bank. That is, the private issuers of digital currencies would act as mere intermediaries between the central bank and the end users: consumers and firms. However, even this structure would aggravate the banking crisis, because the financial intermediaries issuing the CBDC would be fully backed by central bank reserves, making them safer than commercial banks, which follow the fractional reserve banking doctrine.3 Basically, the only solution to this would be to make each bank an intermediary for the CBDC, which would mean a takeover of the commercial banking sector by the central bank, and effectively a transfer to a “non-synthetic” (retail) CBDC.
Alas, if (when) a CBDC is introduced, it will, most likely, eventually engulf the banking sector. This gives raise to some rather dystopian scenarios.
Financial enslavement
Christine Lagarde and the general manager of the Bank of International Settlements (the “central bank of central banks”) Agustín Carstens, have raised the prospect that CBDC’s would be used to guide consumer behaviour. Moreover, the BIS chief is promoting the creation of a universal ledger, where commercial bank deposits and the so called central bank money (cash, coins and reserves created by a central bank) would have the same “programmable form on an integrated platform”. Essentially this implies a system, where central banks, through CBDC’s, would control all transactions in real-time (i.e. when they occur). In the worst imaginable scenario this would include all financial transactions, including those of stocks, bonds and derivatives.
In this, we arrive to the speculative side which, if we look at the developments, do not necessarily look so conspiratorial after all. It has been reported that the United Nations is planning to introduce a new global digital ID system, which is linked to individuals’ bank accounts. This would give whoever is collecting the data (the central bank), almost unlimited access to the life of every person within the system. However, even if in place, such a system could not be used to effectively control, or guide consumer behaviour, because commercial banks would be independent actors. With the introduction of CBDC’s, this would eventually change radically, as described above. In the worst-case scenario your transactions could be blocked based on, e.g. your previous actions, because central banks would be in control of your every transaction in real-time.
The crucial part of all this is that the control through CBDC’s will be incomplete, if cash is generally used as mean of payment. It’s possible that one reason why the digital payment systems have been enacted in developing countries, like India, is that they are testing grounds. That is, if countries that use mostly cash can be pushed into digitalization, it can be achieved elsewhere. The people in poorer countries also have limited means to object such a development.
We also need to remember that central banks are only quasi-independent organs of government. They report to the parliaments, which provide their capital, powers (on the legislative level) and to whom central banks settle their profits. Governments can dismantle a central bank or order it to be audited. So, any talk of central bank independence is just talk, nothing else.
Implications for consumers and corporations
The Dystopian scenario described above would naturally alter the operational landscape of consumers and corporations in a rather radical way with banking system falling under the domination of the central bank. We have not completed our analysis on the changes yet, but we will, and so here I will go through my preliminary thoughts on the issue.
The centralized control of payments thus needs to link the ID, the bank account, some payment provider (like Google or Apple Pay) and the CBDC in an universal ledger. Once the digital payment system has been installed, linking your ID and bank account to it, is rather straight-forward (or at least this is how I have understood it). At this point, I have no clear picture how the universal ledger would be formed, but after the banking sector would be dominated by the CBDC, authorities would have near total control of the economy. Like explained above this would create a system, where your every purchase would be tracked and subject to the scrutiny of central bank officials. The issue of individual, or personal carbon credits has also been raised. If these would be linked to your digital ID in a CBDC controlled system, they could be made personal. This means that your purchases could be controlled based on your personal carbon credit. Basically, the only way to object all this, at the consumer lever, would be to create local currencies, to make greater use of barter-type contracts and cryptocurrencies outside the universal ledger. Based on the information I received, this should not be too difficult nor expensive to accomplish.4
For banks, the implications of the Dystopian scenario are clear and dire. They would lose most of their freedoms as independent actors. While central bankers would not, at least in the very beginning, enact tough guidelines towards their newly acquired ‘commercial branches’ this would almost certainly change, when the economy falls into recession or if there was some major crisis. In such a case, the central bank would most likely issue strict guidelines on all transactions of banks, dictating what you could buy and from where (consider for example the sanctions against Russia). Moreover, in such situations, central bank and government policies would, most likely, also be strictly enforced on all lending activities. This means that lending to both corporations and consumers would be monitored and only those projects and investments would get financed, which would follow the agenda and policies of the government (and the ‘elite’). Think, for example, of the enforcement of the ‘European Green Deal’ in all investment activities.
Many large, multinational corporations could benefit from the CBDC controlled system, as long as they would follow the agenda of their ‘overlords’. However, the situation could (and most likely would) become rather tricky for small and medium sized enterprises (SME’s). This is, because the world seems to follow the Great Reset policy, at least to some extent (see our analysis of it here and here), which means that the interests of large corporations, and not those of SME’s, would be at the top of the agenda of governments. In the CBDC controlled economy, all funding to SME’s could thus suddenly simply dry up, if the overlords decided that they want to drive the whole or some parts of the SME sector down.
Even if this would not be pursued, CDBC’s would make the life of many SME’s very difficult. This is because both their purchases and the purchases of their customers would be subject to whatever is the current agenda was being of their governments. For example, if beef would consume carbon credits, the amount of beef a restaurant was able to acquire could be limited, as well as the consumption of beef by the customers of a restaurant. Moreover, any SME project that would not follow the current policy agendas would face serious hurdles in acquiring funding. There, essentially, would not be free entrepreneurship anymore.
Conclusion
The threat posed by central bank digital currencies, and the over-reach of central banks in general, is a serious threat that is not generally publicly acknowledged. However, many economists and bankers do express their concern in private discussions, and even academic journals.
The latter should be a wake-up call for everyone. For example, Fernández-Villaverde et al. raise the issue of heavy political and economic pressure the central bank would come under, if a CBDC would rise to dominate the monetary realm of a country.5 They argue that a central bank could be forced to use its profits and its ability to divert lending towards politically desirable ends, such as green initiatives, social, gender or racial equality, universal basic income, or even towards supporters of politically acceptable political parties. Such outspoken criticism against central banks and speculation on a massive political corruption are very exceptional in usually dull academic literature.
Moreover, Nicholas Anthony and Norbet Mitchell conclude their research on a CBDC of the Federal Reserve : “A U.S. CBDC poses substantial risks to financial privacy, financial freedom, free markets, and cybersecurity”.6 Christop J. Waller, executive vice president and director of research at the Federal Reserve Bank of St. Louis, stated in his speech on 5 August 2021 that: “I remain skeptical that a Federal Reserve CBDC would solve any major problem confronting the U.S. payment system. There are also potential costs and risks associated with a CBDC.“
These are dire and exceptional warnings. They show how grave many of the academics and Fed presidents, working on CBDC’s, see their threat to be. CBDC’s can be considered as a ‘Hindenburg omen’ (an omen for an ensuing collapse) for financial freedom and thus on our societies. Yet, the mainstream media is almost competely silent on this.
I consider the silence to be one part of the current control mechanism pushing the agenda of the globalists through. People are being kept uninformed and thus docile towards the coming developments, until they are ready to be implemented. At this point, a combination of massive media campaign spreading fear and a global crisis are probably needed to make people to accept the CBDC structure. The full extent of the cataclysmic change the CBDC’s would bring to our economies would naturally be left undiscussed, at that point also.
I will continue the Apocalyptic scenario during the summer.
To all Finns, I wish a happy Mid-Summer! Stay safe. :)
Disclaimer:
The information contained herein is current as at the date of this entry. The information presented here is considered reliable, but its accuracy is not guaranteed. Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.
No information contained in this entry should be construed as investment advice. GnS Economics nor Tuomas Malinen cannot be held responsible for errors or omissions in the data presented. Readers should always consult their own personal financial or investment advisor before making any investment decision, and readers using this post do so solely at their own risk.
Readers must make an independent assessment of the risks involved and of the legal, tax, business, financial or other consequences of their actions. GnS Economics nor Tuomas Malinen cannot be held i) responsible for any decision taken, act or omission; or ii) liable for damages caused by such measures.
I like to thank Dr. Peter Nyberg for insightful comments and suggestions and Otto Peltola for checking the grammar. Remaining errors are my own.
Gosbank was the central bank and the only bank of the now defunct Soviet Union.
In fractional reserve banking only a small portion of the liabilities, like deposits, and assets, like loans, are covered by the reserves or the capital of a bank.
I thank Otto Peltola for rising this issue.
Review of Economic Dynamics (Volume 41, July 2021, Pages 225-242).
Cato Policy Analysis (April 4, 2023, Number 941)