Professor Richard Werner, the father of Quantitative Easing (QE), spoke to Oscar Wendel from MCH Global at an event hosted by Fintech Surge and MEA-Finance at the Capital Club. The controversial economist laid out his arguments for opposing the introduction of Central Bank Digital Currencies (CBDCs) and stressed the importance of retaining cash and alternative digital settlements.
To set the scene, Prof. Werner posited that it is a fundamental misunderstanding in mainstream economic theory that interest rates set by Central Banks cause economic growth. “I did the first empirical study to find out how interest rates and economic growth are related, and it turns out, the truth is the opposite of what they tell you; the causation doesn’t run from interest rates to growth or from growth to interest rates. Instead of lower rates leading to higher growth, the truth is high growth leads to high rates, low growth leads to low rates.”
He continued by outlining how the Bank of Japan intentionally orchestrated excessive credit creation in the 1980s, resulting in a bubble and subsequent banking crisis. However, central planners intentionally creating crises is not unique to Japan. Central banks effectively create boom and bust cycles and cause recessions, which results in transfer of ownership by generating bankruptcies and distressed assets.
Following each and every banking and economic crisis, central planners request more authority, arguing that they need additional powers to achieve stable economic conditions. The introduction of CBDCs is a significant step in this push for greater control and central planners’ desire for more power.
The most significant scenario involves banks using this money to purchase ownership rights, notably in the property market. This process is also subsidised by Basel Capital Adequacy Banking rules. When banks engage in credit creation for assets like property, it leads to the creation of new money, which drives property prices higher. This, in turn, contributes to the occurrence of boom-and-bust cycles in the economy.
Prof. Werner highlighted three use-case scenarios related to bank credit creation and its impact on the economy. Firstly, banks create credit for asset purchases, which is not considered part of GDP as it does not add any value. In other words, simply transferring ownership rights does not contribute to economic growth.
Secondly, bank credit is used for GDP transactions. If directed towards consumption, it increases demand and consumer spending. However, it does not increase the quantity of goods and services. This situation often leads to consumer price inflation, which has been prevalent since March 2020.
Thirdly, and most importantly, is when banks create credit for productive business investment to enable the implementation of new technologies and creative ideas that enhance productivity and add value to the economy. Key examples are Korea, Taiwan and China, the latter progressing from a Soviet-style economy in recent times.
“What we will get if we allow CBDCs is a Soviet style economy. This is because CBDC is a misnomer. They are trying to confuse people with the acronym, saying the digital aspect is new. We have had Bank Digital Currencies (BDCs) for decades. The digital aspect is nothing new.”
What is new is the centralisation aspect of CBDCs and how they challenge the traditional relationship between banks and central banks. In effect, CBDCs have ushered in a fundamental change whereby individuals now have central bank accounts, breaking the long-standing agreement of central banks serving as “the bank of the banks.”
Prof. Werner argued that CBDCs introduce unfair competition as it allows a central bank, which is akin to a referee in a football match, now decides to participate in the game instead, namely the financial system, and compete directly with commercial banks. This direct competition creates a conflict of interest for central planners who also act as bank regulators. The result has been a consolidation of the banking system, with thousands of banks disappearing over the last few decades, impacting the financial landscape.
“Since the introduction of the youngest major central bank, the ECB, 5,000 banks have disappeared. The Federal Reserve has killed almost 10,000 banks in the last 35 years. That is what they are doing. They are consolidating the system,” said Prof. Werner.
Introducing CBDCs comes with potential consequences, warned Prof. Werner. An extreme scenario is that CBDCs ultimately drive traditional banks out of business. Therefore, during the next banking crisis, people could easily shift their funds to the central bank system, leaving traditional banks to “switch off the lights” and effectively cease to exist. This could lead to a centralised banking system similar to the Soviet Union, which is essentially the dream of central planners.
Therefore, he argues, it is important to have a sufficient number of banks. The value of small banks lies particularly in community banks that operate in local areas. He sees local banks as the antidote to European Central Bank’s consolidation efforts resulting in small banks disappearing.
Despite such challenges, banking remains lucrative. “It is now extremely profitable to be a bank because interest margins are now very large. And as a small local bank, banking is one of the most profitable industries,” said Prof. Werner.
Prof. Werner added: “Growth is a necessary condition, in my view, to solve the problems of humanity. Most of our problems are human-made, and they can be solved by people. So, let’s do it. Of course, the monetary system is key. That is a resource allocation tool. We have to understand it and make it transparent so that it really works for our benefit.
“What CBDCs are doing is usurping a parliamentary, democratic prerogative, including essentially fiscal policy, how money is and can be spent. That is a parliamentary budgetary prerogative. CBDCs will reserve that and hand it over to the central planners. Now, in many countries, central banks are still privately owned. Historically, they have been created by the big banking dynasties, the banking cartel that does not like small banks.
“However, that is exactly what we need to do, to work in the opposite direction. So, while the central planners want to increase their power over our lives, and it is literally not just about the total surveillance and monitoring of where we are, what you want and what you’re spending your money on, it is about this programmability intervention. And if you do not follow the rules, or you have stepped outside the 15-minute walking distance area, well, your money is not going to work,” concluded Prof. Werner.