Sunday, May 16, 2021

"Are Debt And Climate Transforming Central Banks?"

The writer is, how do you say, wired in to the transnational finance system at a very high level.

From Finews, May 14:

Central banks are increasingly weighing in on challenges facing our society, dramatically broadening their perspective beyond financial markets and banking, Fabrizio Pagani writes in his article for finews.first.

This article is published on finews.first, a forum for authors specialized in economic and financial topics.

Central banking is facing three pressing challenges: debt, digital and climate. We believe the response to these challenges by the major central banks will change the nature of monetary policy and the role of central banking in the economy and society at large.

Since the 2007/2008 Great Financial Crisis (GFC), central banks have enriched the toolkit of monetary policy by introducing new non-standard instruments and enhancing existing ones. Among these unconventional policies, quantitative easing stands out. Major central banks have engaged in quantitative easing (QE) in the years following the GFC and have made further, massive, recourse to this instrument in response to the COVID–19 pandemic.

«Existential questions loom over this debt»

So also the Federal Reserve (Fed), European Central Bank (ECB), Bank of England and Bank of Japan did. In the last decade, central bank balance sheets have grown dramatically. For example, the number of bonds bought by the Euro-system through its different programs (APP and PEPP) stood at around 4,000 billion euros in mid-April 2021.

More than 75 percent of the securities owned by the ECB are government bonds, the purchase of which will continue at a substantive pace until at least the end of March 2022, further swelling its balance sheet. Equally in April 2021 Fed-owned assets amounted to more than $7700 billion, with a striking ninefold increase since early 2008. The ECB and Fed will end up owning between 25 percent and 30 percent of their government's debt, and the Bank of Japan over 40 percent.

Existential questions loom over this debt, well beyond contingent issues about the length of the extension to the current purchase programs. Will central banks embark on its indefinite rollover, possibly extending the maturity? Will this debt eventually be made perpetual or even canceled as has been proposed? In the case of the European Union, will the ECB progressively replace national debt with a supranational one issued by the Commission under programs such as the Next Generation EU?

«A technological revolution is taking place: money could not remain unaffected»

Each central bank has its own mandate, culture and practices and these questions can, possibly, find narrow, technical answers according to each jurisdiction. However, there is a general interrogative on the long-term role that central banks will play vis-à-vis the increasing levels of government indebtedness and the rising amount of national debt which they own. Perhaps we have not yet reached a time to fully answer these questions.

In recent years, we have seen an acceleration in the pace of digitalization in all aspects of the economy and within society more broadly. A technological revolution is taking place: money could not remain unaffected. Indeed, it is not the first time money has undergone a radical technological transformation and each transformation, such as from gold coins to banknotes, has had its own challenges.

There is much confusion around the exact definition of the digitalization of money. It is a notion that includes different phenomena such as electronic payment systems, the most successful being the digital wallets of China’s WeChat and Alipay; the emerging array of fiat cryptocurrencies, such as the popular bitcoin and stable coins on the blockchain; and the possibility of central banks issuing digital currencies.

Central banks and governments globally are considering introducing central bank digital currencies (CBDCs). For some time, the Bank of International Settlement (BIS) has been trying to find clarity and provide some early taxonomy. Central bankers are eager to stress the difference between CBDCs and cryptocurrencies that they prefer to call crypto-assets....