The Curse of Monetary Complexity

The Curse of Monetary Complexity
Packs of freshly printed $20 bills are processed for bundling and packaging at the U.S. Treasury's Bureau of Engraving and Printing in Washington on July 20, 2018. EVA HAMBACH/AFP via Getty Images
GSI Exchange
Sponsored Content

Complexities come with an insidious burden and blindness that human nature oddly finds attractive. Complexity is often equated with sophistication, however, erroneously. Complex objects, ideas, and systems tend to elicit awe. Complex problems tend to be treated with complex solutions.

Not surprisingly, such is the state of monetary affairs.

The thing about complexity is that adding more of it on an incremental basis leads to exponential (or multiplicative) results. Before you know it, a complex passageway through a monetary hurdle becomes a labyrinth in which even its creators can easily get trapped.

This seems to be the state of "money" today. What used to be a simple object of intrinsic value—say a silver or gold coin—exchanged for a simple transaction, is now a "promissory" object "representing" monetary value flowing through a complex network of financial rules, limits, waypoints, and derivative processes simply to get to Point B (a seller) from a Point A (a buyer).

Fiat on Steroids

Instead of simplifying the process and getting back to the basic principles of a currency's function, confident leaders and lawmakers seem fixated and enamored by a seemingly "cutting-edge" solution to monetary matters: Central Bank Digital Currencies, aka CBDCs.
A CBDC environment is essentially the fiat monetary system on steroids. Sure, it innovates and optimizes fiat's potential. But do its advantages outweigh the risks? Let's step back and look at both.

What Are CBDCs? A Brief Explainer

CBDCs are digital currencies issued by central banks rather than commercial banks. Their values are pegged to that of a domestic fiat currency, in our case, the U.S. dollar.
Why are central banks, such as the Federal Reserve, looking to implement CBDCs?
  • It's free of credit and liquidity risk (read: the Fed can always print more money, right?).
  • Cross-border payments can be streamlined with greater speed and efficiency.
  • It ensures the U.S. dollar's international dominance, should nations go the CBDC route.
  • It promotes financial inclusion, allowing the "unbanked" to finally get "banked."
  • It can increase the speed and efficiency of transactions minus those pesky commercial banking fees.
"What's wrong with these innovations?" you may ask. The risks are eclipsed by the brightness of the solutions. In short, what's potentially at stake is the entire financial system. Let's take a step back and explain this.

A SWIFT Death?

SWIFT is an interbank messaging system that's used by most of the world to make cross-border payments. It facilitates global trade.

At this year's Global Blockchain Business Council symposium (on a panel adjoining the World Economic Forum's annual Davos summit), Mastercard CEO Michael Miebach made a seemingly tongue-in-cheek comment that elicited a collective gasp in the crowd.

When asked whether SWIFT might still exist in five years' time, Miebach said "no." What's to replace SWIFT? Possibly, CBDCs.

A seemingly efficient "evolution" to the current system, CBDCs add multiple layers of complexity that go far beyond the technological challenges of cross-border trade. As you can imagine, such a monetary paradigm shift would not only disrupt the commercial status quo but penetrate deep into the principles that define monetary function, down to the practical financial activities exercised by every individual citizen.

The American Bankers Association (ABA) is well aware of (at least) the commercial risks of CBDC implementation. And it made its position clear when submitting its comments on the Federal Reserve Board's discussion paper "Money and Payments: The U.S. Dollar in the Age of Digital Transformation."

ABA's 2-Cent Contribution to Future of Money

The ABA's comments go straight to the heart of the matter in the opening four paragraphs. The first point, that CBDC implementation could "change the structure of the U.S. financial system," speaks to the risks that CBDCs pose to the relevance of the commercial banking system. After all, if citizens can bank with the Fed, why use a commercial bank?

In the second point, the ABA argues that in a "real economy," there is a "lack of compelling use cases where CBDC delivers benefits above those available from other existing options." Besides streamlined process and cost efficiency, perhaps the ABA is right. But again, isn't the point to make transactions a bit more streamlined, efficient, and cost-effective?

It's the third point that delivers the blow, depending on the principles you espouse. I'll quote the most relevant part of the paragraph in full:

"In developed economies, public money, which includes cash and accounts held directly at the Federal Reserve, makes up about 5% of money. The other 95% is private money. … Introducing a CBDC would be a deliberate decision to shift this balance to public money."

Is the ABA warning that CBDC implementation would essentially "Socialize" (with a capital S) every American's "private" wealth?

There are plenty of other risks to a full CBDC system that exceeds this article's scope. For instance, what if the Fed decided for some reason or another to implement negative interest rates? This means that the Fed can force you to spend money since the funds in your savings will erode in value.

It also means that the Fed would have total control over the money supply, printing at will (especially if the government runs short of funding for yet another fiscal spending project).

A Simpler, More 'Sound' Solution to Global Money?

In 2021, central bank gold purchases were 82 percent higher than 2020, according to the World Gold Council (WGC). The WGC also expects central banks to be net purchasers of gold in 2022.
Currently, rumors are circulating in social media that physical silver is being withdrawn from Comex vaults at record levels. These actions on the periphery of mainstream focus indicate that perhaps something is afoot. But are they merely disjointed maneuvers seeking a favorable short-term positioning, or do they indicate a longer-term response to changes in the monetary environment?

While there are plenty of articles concerning monetary curiosities and oddities that we can point to, such a discussion would exceed the scope of our point, which is a very narrow one: the monetary system is overcomplicated, and adding even more complexity to it may overburden the foundation of what, essentially, originated as a simple transactional relationship.

Isn't it time we return to the gold standard? After all, the fiat system seems to have brought nothing other than rapid currency devaluation, ballooning national debt, fiscal overspending, corporate moral hazard, and increased wealth inequality on the social end.

GSI Exchange is the exclusive dealer of the Gold Standard coin in the United States and is currently the only way to set up a Gold Standard IRA in America. For more information on this GSI Exclusive Gold Standard Coin from the UK Royal Mint, visit us at standard or call 833-GSI-GOLD.
GSI Exchange is a retail gold and silver dealer in Palm Beach Gardens, Florida, and doesn't provide tax, legal, or investment advice. When making an investment decision, please consult your tax attorney or financial professional.
By Anthony Allen Anderson, senior partner