Welcome to Eureka Street

back to site

Finance needs common sense, not cleverness

1 Comment


The world’s financial markets are afflicted by a deep irrationality that imperils their very existence. On the surface, finance looks logical enough with its numbers, charts, mathematics, forecasts, ‘modelling’ and so on. And the people involved are often exceptionally intelligent. But this only masks the fact that the system itself has been working on underlying assumptions that are either contradictory — such as that you can ‘deregulate’ finance when finance consists of rules — narrow minded or absurd.

Main image: Reserve Bank of Australia (Getty images/ Mark Metcalfe)

In the wake of the coronavirus crisis world finance and money is set to undergo cataclysmic changes that are being described by Christine Lagarde, president of the European Central Bank, as 'a new Bretton Woods' (referring to the meeting in 1944 among powerful nations which led to the current framework for the global monetary and exchange rate system).

We operate in what is called a debt-based money system, in which almost all of the money created has an interest rate on it. Cash is only a tiny proportion of the total; banks create about 95 per cent of what is in circulation. As finance analyst John Titus points out, that debt-based monetary system is disintegrating — a pattern that has repeated for thousands of years because interest costs compound too quickly and eventually become unpayable (hence the admonition against usury). The short-term response by the US Federal Reserve was to pump $US3 trillion into the system but it did not help. A third went to billionaires and only $US200 billion went to ordinary people (in Australia, by contrast, the stimulus was widely distributed).

Titus says: 'The system is fundamentally dysfunctional; we need to abandon the debt-based monetary system. That, however, is not going to happen. A rational person would abandon a game of musical chairs and move from a debt-based monetary system to a system of actual money.' What is needed is sound judgement and good sense — not cleverness — but little is in evidence.

The next step in the game of musical chairs is likely to be the creation of Central Bank Digital Currencies (CBDCs), whereby the central bank issues digital money, possibly without an interest rate on it, either to financial institutions or to individuals. CBDCs are being assessed by the Reserve Bank in Australia and China has already trialled it. America is looking at it, but little things like the Constitution might get in the way.

On the surface, CBDCs are potentially an alternative to debt-based money. As world debt has ballooned, the authorities have kicked the can down the street by dropping interest rates to zero to prevent collapse. This might be another street to kick the can down.


'What is needed is sound judgement and good sense — not cleverness — but little is in evidence.'


Yet the implications are wider and more sinister than that. One issue is the heavy surveillance and loss of privacy. Whereas cash cannot be monitored by authorities, everything with a digital currency is recorded. The Managing Director of the Bank for International Settlements, Agustín Carstens, in a recent conference call enthused about what sounds very much like a digital dictatorship. 'Unlike a $100 bill, the central bank will have absolute control on the rules and regulations that will determine the use of that expression [of central bank digital money] and will have the technology to enforce that.' Such enforcement could include simply cutting off anyone considered undesirable from access to money. Nothing at all troubling about that.

The second issue is geopolitical and, ultimately, military. The most reckless part of the finance system has been the creation of derivatives: gambles on financial instruments such as currencies, interest rates and shares. This is like a giant roulette wheel spinning above the earth. The aim is to make money out of money out of money out of money. Money may not grow on trees, but it does spring from complex algorithms that settle trades in nanoseconds.

The current stock of derivatives is somewhere between $US500 trillion and $US1000 trillion (the global economy is about $US80 trillion). One consequence of such extreme growth is that $US4 trillion goes across borders every day, most of it derivatives trades. Bizarrely, the gambling has entrenched the US dollar as the world’s dominant currency.

The proposal to create a single global central bank digital currency for cross border payments threatens that US dollar dominance. If CBDCs are used instead of the US dollar it would remove the main source of America’s power and, among other things, potentially undermine America’s ability to spend so heavily on its military. Because there is such demand for US dollars, the US Federal government can spend whatever it likes on the military; unlike most countries there is no need for it to balance its Budget. Central bank digital currencies thus constitute a genuine threat to US national security. One wonders if the central bankers have considered the implications of that.



David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image: Reserve Bank of Australia (Getty images/ Mark Metcalfe)


Topic tags: David James, COVID-19, finance, debt, CBDC, derivatives



submit a comment

Existing comments

Thanks for the article and the ensuing insomnia it brings. I don't blame the author; the idea of a "global digital currency" links three words of already complex concepts, each already individually fraught with problems...and the notion that some "central" entity could seek to control a global financial institution at least gives me an understanding of why Mathias Cormann is hitting the hustings internationally to "spend more time with family". A lot of people already struggle with the complexities of debt and finances, usually to their own financial detriment but as with all things pecuniary there are winners, losers and creative accountants to share the wealth. There will be a big slab of the world population who will be ignorant to the global digital monster, they have nothing now and some slick new form of crypto-currency won't put a roof over their heads or a meal on their plate. I wonder how superannuants will feel about having their savings converted to some new monetary denomination?

ray | 10 December 2020