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How Central Bank Digital Currencies (CBDC) could endanger your financial privacy and freedom


CBDC, finncial freedom, financial news

Central Bank Digital Currencies (CBDCs) are not likely to enhance the effectiveness of monetary policy transmission mechanisms. On the contrary, they could lead to an increased role of the state in the economy. This enlargement might come through a decrease in the currency's purchasing power.


This perspective is brought forward by a notable economist who challenges the prevailing views on the benefits of CBDCs. He argues that instead of improving monetary policy, CBDCs might inadvertently lead to state overreach in economic affairs.


Major central banks globally have been contemplating introducing digital currencies, with many already in the development stage. For instance, the e-yuan is operational in China, and the Bahamas have the digital Sand Dollar. Other countries like Nigeria with the e-Naira are also part of this trend. This growing interest in CBDCs by central banks marks a significant shift in the landscape of global finance, moving towards digitalization.



A prominent economist raises alarm bells about the potential dangers and redundancy of central banks' digital currencies. This concern stems from the possibility that these digital forms of currency might introduce new risks and complexities into the financial system without offering corresponding benefits.


Daniel Lacalle, a respected economist and academic, criticizes central banks for losing credibility in recent years. He points to their failure to anticipate and address inflation properly. This criticism suggests that central banks may be ill-equipped to handle the challenges posed by the implementation of CBDCs effectively.


Lacalle notes that traditional banking channels, serving as monetary policy transmission mechanisms, help curb inflationary pressures through the demand for credit. He implies that CBDCs, by potentially bypassing these traditional channels, might disrupt these established inflation control mechanisms.



He compares the shift to a direct transmission mechanism via CBDCs to a change from a remote to an intrusive form of surveillance. Lacalle fears that CBDCs could lead to an excessive and direct form of control by central banks over economic activities, contrasting with the more indirect influence exercised through traditional banking systems.


CBDCs, according to Lacalle, could transform into instruments of surveillance, granting central banks unprecedented access to detailed information on individuals' financial activities. This scenario raises significant concerns about privacy and the potential for misuse of data.


Beyond privacy concerns, Lacalle argues that CBDCs pose risks of rapid inflation if central banks mismanage the money supply. He suggests that the removal of traditional monetary policy transmission limits could lead to uncontrolled increases in consumer prices.



The economist warns of a scenario where citizens have accounts directly with central banks, leading to higher inflation and the undermining of the private sector. He suggests that this could also lead to financial repression, a situation where governments use their policies to funnel funds to themselves at the expense of savers.


Lacalle firmly states that CBDCs are both unnecessary and dangerous. He argues that considering the history of errors and lack of autonomy in central banking, further empowering them with control over a new financial system is unwise.


He challenges the central banks' rationale behind CBDCs, highlighting their frequent misjudgments about savings surpluses and imbalances. Lacalle criticizes their approach of adjusting money cost and supply, which often overlooks significant imbalances caused by government debt and deficits.



Lacalle believes that CBDCs won't enhance monetary policy transmission but will rather amplify the state's involvement in the economy, leading to currency devaluation and persistent financing of public deficits.


There's a discussion around CBDCs enabling negative interest rates. However, Lacalle argues that such policies would not strengthen the economy but degrade the currency's value, potentially leading to risky short-term investments and an ineffective monetary policy.


He posits that the rise of cryptocurrencies like Bitcoin signals public distrust in fiat currencies and central banks' policies. Lacalle warns that new forms of financial repression through CBDCs could further erode trust in local currencies.



Lacalle argues that the current technological and digital advancements in transactions and currency management are sufficient, questioning the need for a new currency form like CBDCs.


Finally, Lacalle concludes that if central banks wish to compete with cryptocurrencies or other banks, they should focus on preserving the value and stability of their currencies rather than creating new forms like CBDCs.


These expanded paragraphs provide a more in-depth understanding of Daniel Lacalle's perspectives on CBDCs and their potential impact on the economy, monetary policy, and society.


06.03.2024



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