Can we fix it? No, it’s completely FUBAR!
I spoke to some old heads, people who have been around longer than Ethereum, and we discussed how long speculative and financial markets would exist once CBDCs are introduced. The conversation didn’t bring us to a happy conclusion.
We all need to be optimistic about the outlook of our investment industry, and it isn’t easy to comprehend a world in which people are not paid a lot of money to source private investors and investments.
Still, while we spend much time, and rightly so, discussing the effect of CBDC on our private and personal financial activities, what effect will CBDC have on the investment world and the economic growth it creates?
The whole idea of such a world is unthinkable. Nonetheless, that is the aim of most governments.
I could be flippant and make comparisons with Stalin’s Russia or Mao’s China. And conclude with a shout of “Bloody Communists! But the question is more important than that. Moreover, this question is crucial for those who live in economically declining, developed nations.
I am no scholar and have no alma mater on my CV, so studying is not my thing. But when I Googled “investing during a time of CBDC”, this is what came up:
Investing isn’t possible. (highlight was how it appeared)
Can this be true?
At first glance, this doesn’t make sense, especially when it clearly states that CBDC can be used for payments.
Indeed, if I can make a payment, I can pay my margin calls, and my broker can pay me from my investment account.
As I read, it explains that, like a dollar in my pocket, CBDC is not an investment but a different form of exchange. Fair enough. But what happens when I travel to another country?
As with Credit Cards, I will use my dollar-nominated CBDC card, and the financial institution will do the foreign exchange at the prevailing rate.
The question then arises, what happens if I want to hold 10,000 pounds or Euro because I will be travelling and expect to make foreign purchases?
Can I lock in an exchange rate that suits me and my business? And if I do lock in an exchange rate and hold various currencies on my CBDC card or app, is this not a form of investing or speculating on future foreign exchange movements?
The answer is that we do not know. Moreover, those bringing these CBDCs forward also do not know.
Then I moved my attention elsewhere.
When CBDCs are introduced, they say I can pay my broker, i.e., the necessary margin to cover my speculative activity. Pretty straightforward.
However, with a CBDC, my capital is controlled by the government; what is stopping them stopping me from selling dollars or stocks in an attempt to support the economy? And this doesn’t just involve short selling; it also involves covering long positions.
Some of you may suggest a complex algorithm could be used. However, most people have different reasons for exposure; it would therefore be impossible to write an algorithm catering to everyone’s requirements.
Moreover, whilst most of us consider these markets a medium to speculate, what would happen in the commercial world to people who need to hedge future forex needs?
As an ex-dealer in commodities, who traded millions of dollars of product every day and had to hedge my FX exposure on each deal, any restrictions would have made life difficult and expensive.
And this takes me on to hedging my factory’s needs. Will I still be able to use futures markets to hedge my cocoa transactions? And will such commodity markets be fit for purpose if speculators are driven away because of the government’s control over their capital?
If you do not have speculators to take the risk from producers and consumers, futures markets do not work.
I offer more questions than answers here, but I do it because the answers to these questions are not available. (or at least, Google can’t find them)
There are umpteenth commentaries on the evil of CBDCs, most focusing upon a communist tyrannical assault on our freedoms and wealth: and I have written my fair share of reports to underline everything wrong with these digital currencies.
Much of the stuff I read comes from players in the Cryptocurrency world, most of whom know little and care even less about using financial markets to hedge the exposures entered into when trading tangible products.
We see many comments from the same group suggesting innovative solutions to various economic concerns. But few have delved into the effects CBDC will have on we hedge our commercial exposures. Or indeed, what any of our markets will look like.
If you know how financial markets (outside of crypto) will operate, let alone thrive, after CBDCs, please answer in the box below.
Until next time.
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