Powell & Intra Party Rift

Macro Perspectives: Thu 9 Sep 2021

As we discussed yesterday, there is a report due from the Fed this month on the viability of a central bank digital currency (CBDC/digital dollar). I suspect this will determine whether or not the Fed Chair, Jay Powell, keeps his job.

My view: If this report favors the adoption of a digital dollar, he keeps his job. If it doesn't, the Biden administration will appoint someone that does.

On cue, the Wall Street Journal ran a piece here yesterday setting the table for a close call on Powell's future - saying there's an intra party rift on the topic.

What's the big deal about a digital dollar? Digitisation of money is indeed already well adopted, at the wholesale (or institutional) level - digital currency already exists.

So there are plenty of questions as to why the government and the central bank are looking into a CBDC. In fact, one Fed governor has called it “a solution in search of a problem.”

While the problems it solves are questionable, it can certainly create problems. For one, it would take us a step closer to a cashless society - that means the disrupted parties in this new digital monetary system would be small business and "retail" (i.e. the people). The privacy of a cash transaction goes away.

With that, bitcoin looks like the bastion of wealth security and transaction anonymity, but this CBDC concept could allow governments and central banks to regain control on that front.

As for the future of private crypto currency, don’t underestimate the rule makers' appetite to change the rules when it fits their interest. We’ve already seen government encroachment on crypto accounts. I suspect the government wants to, and can regulate private crypto out of existence.

But haven't some of the very wealthy and sophisticated investors come out in favor of bitcoin and crypto?

Yes...however allocating 1%-2% of their wealth as a hedge against an extreme outcome (ex: Bitcoin widely adopted) is a way to preserve their wealth relative to the rest of society. They win, in both scenarios. They win more if their 1%-2% allocation goes to zero (i.e. the private crypto markets go away).