PEOPLES BANK VERSUS THE US FEDERAL RESERVE

BOOM has often referred to the disciplined, tight control that the People’s Bank of China (PBOC) holds over its financial sector and its money supply. In contrast, BOOM has been critical of western monetary systems which are way too reliant upon the emergence of fresh new borrowers to appear at commercial banks searching (or begging) for loans.

To explain that further, readers must understand that Credit Money in the West, created when commercial banks make loans, is the chief source of fresh new money origination there. And most of that loan money requires a link to collateral assets as security for the bank (usually in the form of a house or other real property). In fact, in most advanced western economies, the Ratio of Credit Money at origin versus Cash Money is now at the ridiculous level of Credit Money 97 – 98 %: Cash Money 2 – 3 %. Such a ratio is fraught with risk to the real economy at large.

A move to a “cashless society” would make everything worse, much worse. In fact, Western economies must move the other way and incentivise the use of Cash. Increased Cash volumes would help stabilise the ship as Cash is non interest bearing and can be issued by the Treasury upon increased demand. Cash is a stabiliser, a buffer to excessive Credit money creation. Governments could even pay their bills with Cash – especially their wages bills. This would improve the Velocity of Money immediately in the real economy and render it less fragile.

The central bankers of the West understand this and have openly dallied with their concept of electronic cash – otherwise known as CBDC – Central Bank Digital Currencies. BOOM is definitely not a fan of this concept for many reasons. Such a proposal is fraught with risk and uncertainty. In fact, most central banks cannot issue currency by law into the real economy and with good reason. They can only buy and sell assets to balance the balance sheets of the financial sector commercial banks. Thus, any proposal for a central bank to issue an electronic cash into the real economy would meet stiff resistance from politicians who understand money issuance. And the central bank clients (the commercial banks) would also object vehemently. Then the people may also reject it out of hand, being suspicious of unelected “independent” central bankers fiddling directly with their money.

In fact, in China, this has been the case. As BOOM reported 2 months ago, the Chinese experiment with a CBDC (Central Bank Digital Currency) seems to be failing. Despite what you read in the West, the E-Yuan has not been adopted by many citizens. As reported by Reuters, the central bank governor, Yi Gang, recently said that total transactions settled with the E-Yuan (e-CNY) amounted to just 1.8 Trillion Yuan since August last year. Expressed in US Dollars, this is equivalent to only US $ 257 Billion in just under 12 months. The Annual GDP of China is about $US 18,000 Billion. So, this is roughly equivalent to 1.4 % of total GDP transactions. He also said that e-CNY in circulation accounted for only 0.16% of China’s M0 money supply, or cash in circulation.

These appear to be the cold hard facts concerning the Chinese Central Bank Digital Currency CBDC experiment as reported by the head of the Peoples Bank of China.

BOOM admires very few economic commentators on the planet but, occasionally (rarely), he sees wisdom. Such wisdom came recently in an interview given by Paul Gambles, head of MBMG Group in Thailand. In the interview Paul said —

“So far, the Peoples Bank of China has been very graduated, very incremental and very controlled. When we compare the PBOC (People’s Bank of China) policy to The Fed (US Federal Reserve), the PBOC is like a high-performance luxury saloon car gradually accelerating away when the traffic lights turn green, with a sense of always being in control, whereas The Fed is more like a pimped-up boy racer, flooring it, pedal to the metal, completely out of control. We’re more worried that the Fed is going to drive the US economy and markets off the road and crash and burn horribly. With the PBOC, we don’t see any signs of alarm. In the West the big worry remains stagflation. In China we have the opposite. Growth may be weaker but there is positive economic growth while we also have negative CPI inflation. This has never been achieved before. If this continues, it could be a lesson to other policymakers how to operate policy in a sustainable way.”