One week ago, we published a remarkable interview with two former Fed economists - Simon Potter and Julia Coronado - who have tremendous impact and influence on prevailing thinking at the Federal Reserve, and who hinted at the Fed's last ditch reflationary strategy: wiring digital money into the bank accounts of Americans, bypassing the reserve system entirely, and sparking an inflationary conflagration. As we said last Monday, "the two propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments, which will be wired instantly to Americans."
"One of the issues Congress had in passing the Cares Act is identifying who’s got mainly tip income, who doesn’t have sick days. If society wanted, you could use large datasets to direct fiscal transfers to those people." - Bloomberg Interview with Coronado And Potter
And while this idea may have seemed absolutely ludicrous as recently as just one year ago, the fact that the just as ludicrous Helicopter Money is now de facto policy means that direct deposits of cash by the Fed into individual accounts is becoming increasingly probable, the only thing missing is the "digital currency" that would be used by the central bank.
Addressing this issue, on Thursday afternoon, Federal Reserve Governor Lael Brainard hinted once again at the coming monetary revolution when she said that the Fed is studying the opportunities and challenges presented by central bank digital currencies.
"To enhance the Federal Reserve’s understanding of digital currencies, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology in a multi-year effort to build and test a hypothetical digital currency oriented to central bank uses."
The objectives of our research and experimentation across the Federal Reserve System are to assess the safety and efficiency of digital currency systems, to inform our understanding of private-sector arrangements, and to give us hands-on experience to understand the opportunities and limitations of possible technologies for digital forms of central bank money. These efforts are intended to ensure that we fully understand the potential as well as the associated risks and possible unintended consequences that new technologies present in the payments arena.
In prepared remarks of a speech titled simply enough "An Update on Digital Currencies" and prepared for delivery Thursday at a Fed technology event, Brainard said that "a significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and a broad set of other stakeholders."
The punchline: "It is important to understand how the existing provisions of the Federal Reserve Act with regard to currency issuance apply to a CBDC and whether a CBDC would have legal tender status, depending on the design. The Federal Reserve has not made a decision whether to undertake such a significant policy process, as we are taking the time and effort to understand the significant implications of digital currencies and CBDCs around the globe."
So what would prompt the Fed to undertake this significant policy process? Why another crisis, of course.
For those who missed our comments on the recent interview with Potter and Coronado which lays out quite clearly just what is coming and what the motive is behind the Fed's fascination with digital currencies, here are excerpts from our Aug 3 post again: From "The Fed Is Planning To Send Money Directly To Americans In The Next Crisis"
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We read with great interest a Bloomberg interview published on Saturday with two former central bank officials: Simon Potter, who led the Federal Reserve Bank of New York’s markets group i.e., he was the head of the Fed's Plunge Protection Team for years, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, who are among the innovators brainstorming solutions to what has emerged as the most crucial and difficult problem facing the Fed: get money swiftly to people who need it most in a crisis.
The response was striking: the two propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments, which will be wired instantly to Americans.
As Coronado explains the details, Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.
As Potter then elucidates, "it took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more. The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side."
And that, in a nutshell, is how the Fed will stimulate the economy in the next crisis in hopes of circumventing the reserve creation process: it will use digital money apps (which explains the Fed's recent fascination with cryptocurrency and digital money) to transfer money directly to US consumers.
To be sure, the narrative is already set for how the Fed will "sell" this direct transfer of money to the rest of the world and the broader US population: as Coronado explains "it’s the most efficient from a macroeconomic standpoint in supporting spending and confidence. The fear of unemployment acts as an accelerant on a recession. There’s a shock—people are losing their jobs or worry about losing their jobs. They get very risk-averse. [By] getting money to consumers you can limit the depth and duration of a recession."
And the kicker:
"you could actually generate real inflation. It could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve."
So there you have it: the one thing that was missing from a decade of monetary tinkering by the Fed, the spark of inflation, will finally arrive as the Fed gives money to those most likely to spend it: the lower and middle classes of society.
But wait, there's more: now that the Fed is implicitly focusing on racial inequality, and soon explicitly with Joe Biden going so far as to urge the Fed to fight "racial economic inequality" and former Minneapolis Fed president Kocherlakota writing an op-ed in which he said the Fed "should have a third mandate on racial inquality", the stage is now set for the Fed to specifically release funds for those who have "suffered from inequality", and once the time comes when the narrative allows to deploy reparations or direct funding to minorities, the Fed will be ready.
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Below we republish the Bloomberg Markets interview with Coronado and Potter because it lays out, very clearly, just what the next monetary stimulus will look like now that helicopter money is fully engaged and money is about to be sent by the Fed directly to those Americans the Fed finds to be "in need."
BLOOMBERG MARKETS: How would recession insurance bonds work?
JULIA CORONADO: Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.
And so instead of these gyrations we’ve been going through to get money to households, it would happen instantaneously.
SIMON POTTER: It took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more. The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.
BM: Aside from speed, what are the main advantages of this approach?
JC: It’s the most efficient from a macroeconomic standpoint in supporting spending and confidence. The fear of unemployment acts as an accelerant on a recession. There’s a shock—people are losing their jobs or worry about losing their jobs. They get very risk-averse. [By] getting money to consumers you can limit the depth and duration of a recession. And you could actually generate real inflation. It could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve.
BM: What are the origins of the idea?
JC: The Bank of England has proposals for digital currency. And a number of people have talked about the need for monetary financing—the idea that the interest-rate tool is simply less effective in lower growth, slower credit growth economies. Helicopter money [making direct payments to the public] goes back to Milton Friedman, but Ben Bernanke revisited it. Some people proposed doing that through financing fiscal stimulus. We think going directly to consumers is more efficient than wading through that sticky fiscal process.
BM: This policy could be complementary to Treasury stimulus?
JC: It’s not a replacement for fiscal policy. It makes sense from a fiscal perspective, for example, to authorize unemployment insurance benefits for people who lose their jobs and other assistance for medical-care providers in the current situation.
SP: The central bank is not elected. It cannot make allocation decisions about fiscal transfers. It’s now being pushed to make allocation decisions around credit with the Treasury, because we believe this situation is so unique that the private sector cannot make those decisions itself. The simplest way to do this would be a lump sum. Not in the way Congress did it. We’d take the bluntness of monetary policy and say anyone who’s eligible should get the same amount of bonds.
Fiscal controls could use the same infrastructure. The imperative to invest in it is high. Nearly all Treasury payments at some point touch the Fed because it’s the Treasury’s bank. The digital payment providers—called interface providers in the Bank of England proposal—would manage these accounts and link them to the Fed and Treasury.
BM: What are the objections from the Fed, and other challenges?
SP: The reaction from some of my former colleagues a while ago to the notion of helicopter money was not the most embracing. Some of those concerns have disappeared.
The two objections were related to the switch of deposits in normal times from the traditional banking system into digital accounts and the extra stress in crisis times as people want to get safe. An account with the central bank is safe because the central bank can always print money to honor that claim. A private bank can’t do that because their asset side has all kinds of credit on it. What we’ve created is a narrow bank-type model [narrow banks only take deposits and invest them in the safest assets] that’s small and fit for purpose, with a cap of $10,000 [per person].
JC: One challenge is making it profitable for digital providers. We want strict limitations on the fees so we’re reaching people that are underbanked, but we also want a public-private partnership with a diversity of competitors jumping into this market. Privacy is just as important, because one thing that might induce them is access to people’s data. As the Fed, are you blessing that, and what structure do you put around that?
SP: We’ll all have to deal with deep questions of privacy in the digital world. One of the issues Congress had in passing the Cares Act is identifying who’s got mainly tip income, who doesn’t have sick days. If society wanted, you could use large datasets to direct fiscal transfers to those people. But that’s a job for Congress.
BM: Have you seen similar trials elsewhere?
SP: Sweden is a leader in thinking about this in part because they had a large decline in cash use. China is testing versions of digital currency. Fintech firms in the U.S. are interested in this—there’s a stable coin version of our proposal. There’s easily sufficient innovation within the U.S. to do this. How to do it in a way that’s well regulated and serving the public purpose is something the Fed should focus on over the next few years. It would be a key accomplishment of the Fed and Treasury to get this infrastructure in place.
