Crypto-euro: the ECB’s Ultimate Weapon

Disclaimer: what I explain here is viewed from the eyes of Central Bankers. If I were a Central Banker, I would think differently. But what I present here is the point of view of Central Banks, at least the one they make public. There is also quite a bit of speculation here on what choices they will make in the near future.

Introduction

With public debt at extremely high levels everywhere in Europe and a dying banking system, the ECB (European Central Bank) and the Euro are on the verge of collapse. So is the US financial system, but for now we will focus on Europe.

In my 2016 book “Money, What You Don’t Know”, I was already mentioning that Central Banks (including the ECB) were looking into crypto-currencies. During the last years, the ECB has revealed bit after bit the possibility of having a Central Bank Crypto-Money in the short term. Citizens would have a bank account directly at the ECB. It has also recently spoken about “helicopter money”. How does all this add up? Why are all these needed? Or are they?

The root cause

The root of the problem is the way money is currently created. Right now, private banks are the ones creating the bulk of the money. At least, that is how it works in the Eurozone and in the US, as well as in some other places on Earth.

The system is similar all over the world: Central Banks issue fiat money, then the private banks take as much fiat money as they can from the economy, and start giving credits (loans). When a bank offers a credit, it creates that money, rather than having to take into its reserves. And that money is destroyed upon paying back the credit. This system has many problems, as I have detailed in two of my books: “Money, What You Don’t Know” and the French « La monnaie : l’essentiel ».

But now we will stop on one of its problems: the need for more and more money. Indeed, to fuel the mechanism of credits, you need to have more and more money in the economy. If the money supply diminishes at some point, the whole system collapses.

The problem

So, why is this a problem at all? Well, since the 2008 subprimes crisis, the economy by itself does not generate enough “growth” for the whole financial system to be sustainable. By the way, only theoretical economists don’t understand why this is a real problem. You cannot have infinite growth on a finite planet, it is quite a simple concept to understand. In this regard, maybe asteroid mining will save us. Maybe not.

Anyway, after the 2008 crisis, Central Banks faced one big problem: how to create enough money so that the banking system can continue operating? Obviously, growth was not sufficient and not enough credits were being made to create more money.

The first phase (2008-2015)

Central Banks don’t have so many tools to fuel the economy. They can create bank notes, but only to a certain extent. Printing a banknote costs money. By contrast, creating money for a credit is essentially clicking the button of a mouse on a computer. This is why, in the Western world, 90% of the money is digital and created by the private banks. It is quite different in other places, where people mostly use cash in their daily lives.

Anyway, the role of Central Banks is to take care of the banking system, and ensure its survival. When they saw that money would be scarce if they didn’t do anything in 2008, they had to take action.

To save the banking system, the Central Banks used their first tool: the Official Bank Rate. Indeed, this rate has a direct influence on the interest rates at which private banks give credits. And of course, interest rates are one of the main drivers behind the decision to take a credit or not.

If interest rates are high, people are more reluctant to take a credit, given that they will have to pay back a lot more for the credit. Conversely, when interest rates are low, people are more inclined to take a credit. This is quite obvious.

By lowering the interest rates, the Central Banks managed to make banking credits very attractive, thus pushing people to take more credits.

The second phase (2015-2021)

This system looks great. However, when you still need to stimulate the credits and the interest rates have been lowered to the point where they are negative, you have a problem. No banking system can survive giving out money to people who take a credit. And indeed, the interest rates became negative in quite a short time.

The Central Banks, including the ECB, had to find another way of keeping the system afloat. The problem is that they can’t really do much. Normally, they are actually not allowed to create so much digital money. That digital money is also supposed to be only used by the banking system to exchange debts and bills between banks.

However, it was a matter of life and death. The ECB, along with other Central Banks, started using a tool which is normally prohibited and used only in emergency cases: Quantitative Easing. Basically, the Central Bank is “buying public debts” and injecting money into the financial system.

Through all those actions (interest rates and quantitative easing), the Euro money supply has doubled every 10 years in the last 2 decades! That is a 10% yearly inflation rate! For more detail, I explain all this in my book.

What now?

Quantitative Easing cannot go on forever. Furthermore, it doesn’t seem to solve the problem so much. Indeed, I have mentioned a 10% inflation rate, but that is not what we observe in everyday life. Yes, prices increase, but they don’t double every 10 years. In fact, the money that is generously dispatched by the Central Banks never goes back to the “real economy”. It remains in the banking system, where banks use it to gamble on the stock market and also keep it in their accounts as a safety net. Who thought tickle down economy was real?

Central Banks have to face the fact that they need another tool if they want the banking system to survive. Maybe the best way would be to acknowledge the failure of that system, but doing this would put their credibility at risk.

Debt and Inflation

So far, the ECB has set a target for a 2% yearly inflation (roughly). Although inflation can be calculated with a lot of biases, let’s pretend it did achieve that goal in the last 10 years.

The problem is that there is a lot of debt in the economy right now. Private companies are especially accumulating debt following losses during the Covid lockdowns and the general slowing down of the economy. Similarly, the already very indebted states everywhere around the world are forced to have more debt to finance their collapsing economies.

From the standpoint of a Central Bank, there is one way to fight debt and relieve the economy from it: inflation. The idea is simple: if your owe a fixed amount of money, and money is worth less and less value, then you owe less and less as a result. Typically, if you manage to have 10% inflation per year, your debt is simply halved in 10 years.

However, remember that a Central Bank is not supposed to create money directly. So they have to change the rules.

A Digital Currency

The ECB is making more and more statements in favor of a “digital euro”. Some call it a “crypto-Euro”, but this is clearly a misnomer since a centralized crypto-currency is nothing more than an oxymoron!

Anyway, the idea behind the ECB’s digital money is that every citizen of the Eurozone would have a digital wallet at the ECB. In other words, along with your bank account, you and I would also have an ECB account. The amounts allowed in that account would be limited to a few thousand euros, but it would be there.

The main driver between this, the ECB says, is that “citizens are ditching cash”.

Really? What is the point of this? Why such a big change, a big communication, on an account where you could have a few thousand euros, when there are billions of euros turning around every day?

Helicopter Money

“Helicopter Money” is simply money created by the Central Bank and freely distributed to citizens. In Europe, Mario Draghi, the President of the ECB at the time, said that the concept was “interesting”. Peter Praet, the Chief Economist of the ECB, stated:

Yes, all central banks can do it. You can issue currency and you distribute it to people. That’s helicopter money.

Although there is no official statement that the ECB is looking into it, there are many people pushing toward it.

Now, you need a system to distribute helicopter money. If every single person has 5 bank accounts in 5 different private banks, it is quite difficult. You also have to distinguish between associations, private companies, and individuals.

Now, if every individual in the Eurozone had a bank account directly at the ECB, now things would be made much easier! The digital account at the ECB is the prerequisite for Helicopter Money.

Is it a serious option?

Think about it. The banking sector lacks money. They are literally paying people to take credits! The ECB has tried everything it could to inject more money into the banking system, and it’s running out of options. There is a lot of debt around that will simply choke the economy on the long run.

Now, you have a tool that lets you inject money directly into the economy, by giving it directly to the citizens. You create money. You create inflation, which will lower the overall debt. And in the meantime, you get rid of cash, which costs you money and empowers your citizens – along with money laundering.

If I were in a Central Banker’s shoes and I wanted to keep the system alive, I wouldn’t think twice. I would go for it without a micro hesitation.

What about us?

Again, this is only the vision of a Central Banker. As an individual who has thought a lot about money, we would be better off throwing away the current banking system. Restart from scratch. It wouldn’t be the first time in history. And sometimes, a fresh start with a better system is much better than let the older one rot away.

Some people may think that this is a version of a Universal Basic Income. Well, maybe. But I warned in my books that the UBI can also be a trap. A sneaky method to help the corrupt system survive.

But for us, citizens, there is already an alternative, and every single one of us can choose it freely: Libre Money. Be sure to check out the Relative Theory of Money, as well as my book “Money: What You Don’t Know” to discover your options.

Take a quiz!

 

(Ce test existe aussi en français !)

Communicating about money is not always an easy task. Even bringing up the subject in a conversation can be difficult.

Reactions generally go from “Let’s speak about something else!” to “Such a boring subject!”.

But when you trigger the ego, there is generally a response. Indifference turns to vanity of knowing something.

So here it goes, take this quiz and see how much you know about money! Test your friends! Some results may sound strange to you: it’s perfectly normal, I selected the most common misconceptions on the subject.

Do you think you know enough and you don’t even need to see the answers?

Take the test without answers!

You don’t feel confident and want to learn something?

Take the test with answers!

 

The Yom Kippur War did not Cause the 1970s Oil Crisis (in fact, it’s the other way around)

In my book, “Money: What You Don’t Know”, I write that Nixon ditching the Gold Standard was the trigger for the “oil crisis” of the 1970s. But when you read this, you obviously think: “That can’t be true. We all know that the bad OPEC guys caused the Oil Crisis and that Yom Kippur was the culprit.”

I certainly won’t deny that some political reasons may have played some role in the crisis. However, I claim that they are not the main factor. Want proof? Here it comes.

Rather than believing what we are told, we should always look at the numbers.

Oil price surge

Here is what they present us: the Saudis with their OPEC friends started an embargo on oil in 1973. The reason given for the embargo was to protest against countries that were supporting Israel in the Yom Kippur War. Or in the worst case, we’re told it was the OPEC guys who got really greedy. As a result, the prices of oil skyrocketed for good:

Yes, indeed, when looking at prices in real dollar (the blue curve), there is a very big price surge. We are even given the price in “constant dollars” (the yellow one), and yes there is also a big step there.

We actually have to ask two questions:

  • was it the war that caused the embargo,
  • is the “real dollar” a correct and “non flawed” reference?

Let’s answer those two questions.

The Saudis: Kings of the Oil

First of all, the Saudis were Kings of the Oil at the time. In fact, they were at the same production levels than the US:

The Saudis were not only one of the top producers. They also relied on oil exportation to fuel their economy.

Let’s check how much they depended on oil:

So they were getting 30% of their revenue from oil in 1970. It jumped to 70% in 1974. Maybe they were greedy, after all!

But maybe they just exported more of it? Let’s double-check:

Well, indeed, they exported more of it for sure. They multiplied their exports by 4 between 1965 and 1975. So if it was greed, that greed wasn’t really reflected on the price, but rather on the volume.

As a side note, do you see a huge fall in production in 1973? The small fall dwarfs the rise in price at the same period. Could there be another reason? Let’s dig further.

US and World Production

Now let’s have a look at the world production.

The production didn’t really stop at all in 1973. At most we have a less than 10% decrease in the Middle-East. Surprisingly enough, there is also a decrease at the same period in North America. How could the US produce less oil when they were under an oil embargo??? Let’s have a closer look:

Well yes, that’s exactly what it looks like: US production started slowing down after 1970 and did not go up during the embargo. It only resumed in the late 1970s when most of the crisis had already passed. Isn’t that like shooting your own leg? Maybe we should look at other charts?

Okay, it’s confirmed. While we see the 1973 very small slowdown in imports, the US reduced its production. The rationale being: “let’s consume all the oil from everywhere else and keep some reserves for ourselves”. Which it eventually succeeded in doing. The Oil Crisis was the price to be paid for it.

Cultural Biases

The Arab world, like many other places in the world, is a very traditional one. It relies on ancestral stability. It relies on hard values like gold. Even today, the Arabian Peninsula is world famous for its extravagance around gold… among other things.

Besides, gold is traditionally a very important part of showing your riches to society

The Gold Standard

As I explained in my book, the Bretton Woods Agreement in 1945 settled the gold standard and the USD as an international currency. However, because the US printed too many dollars, President Nixon had to give up the gold standard in 1971.

As a result, the USD plummeted compared to gold:

On the other hand, all international trade was still done in USD. So buying oil was still done worldwide in USD. Until recently, it was still the case. Everyone who has challenged that stance went down. Saddam Hussein. Qaddafi. Only the Russians and the Chinese have been challenging this in the last years, and they are setting the pace.

Now let’s go back to 1973. Place yourself in the shoes of a Saudi. You value gold very dearly, in the meantime you are paid with pieces of paper you could use as toilet paper. What you see is that your Golden Oil has been quite stable for the last decade, but in the last years, it plummets if compared to Gold:

What can you do? You know that your last embargo did take the price back up a few years ago, it is quite visible in the chart above in 1968. And anyway, this fall in price is too much to take. You must find an excuse to raise the price back to where it was.

The Yom Kippur War was the perfect excuse.

Comparing Oil and Gold

Let’s go on with the analysis and see how Oil behaved compared to Gold, maybe we’ll find some stability there. In the meantime, don’t forget that the world is going through massive currency devaluations, crises and such.

Well there IS some kind of stability there. Until 1985, even if there are waves, the global trend is quite stable. As if something was trying to pull oil back to a given price in gold, around 0.08, whatever happens.

Let’s analyze this new chart with the historical events in mind. Suddenly, everything makes sense.

So the Saudis and others forced the price relative to gold back up to its level before the gold standard was ditched. But they went even a little further, raising the price to level that are higher than the 1973 oil crisis. Apparently, someone else was following that chart too at the time and the physical attack against OPEC leaders was launched as the price of oil forced its way toward 0.1 in gold.

Five years later, the oil price had plummeted again when compared to gold. The Saudis launched a long term embargo by cutting their exports drastically. They were forced to finally give up around 1985: new competitors came in the oil sector and they were losing some ground. They switched back to volume to earn some money. Bye bye, Oil-Gold standard!

If you still believe that there is no connection between oil and gold in that period, give me a shout! Since then, other events have occurred and may blur this vision. But at that time, I strongly believe this last chart explains everything.

As for the chart in “constant dollars”, it is obvious that the way the “constant dollar” is calculated is flawed. Saudis didn’t care about “constant dollars” or “inflation” calculated by some obscure panel somewhere in the world. They cared about hard gold that they could harvest in their vaults.

The Yom Kippur War was just an excuse, and Westerners knew very well what they were doing with oil prices, trying to grab some cheap oil as the dollar was going down.