In a crisis, how does central bank digital currency affect the economic market?

Source: 52CBDC

The US stock market has triggered the circuit breaker mechanism five times in a row recently, and the Asia-Pacific stock market has also triggered the circuit breaker mechanism one after another. Warren Buffett's stock portfolio evaporated $80 billion in a month. Cryptocurrency has also experienced an extremely fierce "mining accident" incident in recent years before the Bitcoin halving market! From March 12 to March 13, the price of Bitcoin was halved from a high of $7,980 to $3,800, and the total liquidation of the entire network in 24 hours was $2 billion.

As the COVID-19 pandemic continues to spread around the world, the suspension of work and school in various countries and the shortage of urgently needed materials have made the situation even worse! Therefore, many central banks have successively cut interest rates to stimulate the market to revitalize. After the United States urgently cut interest rates by 0.5% on March 3, it announced another emergency interest rate cut on the 15th, with a one-step move to directly cut interest rates by 100 basis points to a historical low of 0-0.25%. However, the market's performance was counterproductive, and U.S. stocks fell instead of rising. The Federal Reserve's implementation of an aggressive monetary policy is very likely to brew the next financial crisis. In the face of difficult times in the global economic market, what will happen if the central bank's digital currency is widely circulated?

Before we start analyzing the impact of central bank digital currency on the economic crisis, let us first break down the problem, namely the causes of the economic crisis and the advantages and effects of central bank digital currency!

Treat the symptoms

To analyze a problem, we must first find the root cause. So let’s take a look at the causes of the economic crisis.

The first is caused by the imbalance of economic structure, which is the so-called structural crisis. The imbalance of industrial structure is the most prominent manifestation. The industrial structure directly leads to contradictions in employment structure and product structure, which leads to economic chaos and crisis. If the large-scale adjustment of economic structure is not handled well, it may also cause an economic crisis of overproduction.

The second is the contradiction between production and consumption, especially the long-term overstocking of important means of production, which may trigger a crisis once it spreads to other areas.

The third is caused by mistakes in the government's macroeconomic control policies and measures. The monetary policy, fiscal policy, industrial policy and income policy used by the government for macroeconomic control can also trigger an economic crisis if used improperly.

Fourth, when the world economy is in recession or serious problems occur in a certain field in a certain country, it may trigger a regional economic crisis or even a global economic crisis.

So, as a central bank digital currency that aims to solve problems, what are its advantages and functions?

① The digitization of central bank currency helps optimize the central bank's currency payment function, improve the central bank's currency status and the effectiveness of monetary policy; ② The central bank's digital currency can become an interest-bearing asset, meet the holders' reserve needs for safe assets, and can also become the lower limit of bank deposit interest rates; ③ The central bank's digital currency can also become a new monetary policy tool; ④ At the same time, the central bank can influence bank deposit and loan interest rates by adjusting the central bank's digital currency interest rate, and at the same time help break the zero interest rate lower limit; ⑤ It can greatly save paper anti-counterfeiting costs and printing, labor, quality inspection and other costs.

Next, we will enter the stage of interpreting the current situation and analyzing problems.

Implementing economic regulation measures with prevention as the main focus

Macroeconomic regulation and its policy, economic and legal means in the usual sense are emergency remedial measures after adverse results have occurred in the market. The central bank's digital currency is fully controllable and traceable based on the blockchain network, which makes it highly sensitive to market trends. This allows the government and the central bank to promptly introduce and implement effective macroeconomic regulation measures to ensure the smooth and effective operation of the economic market, and even to strangle the economic crisis in the cradle when it emerges! It can better avoid the occurrence of economic crises and realize the transformation of regulatory measures from remedial to prevention.

Currency circulation is controllable and traceable, and the effectiveness of economic regulation policies is maximized

Economic crises have existed as early as simple commodity production, which is related to the use of money as a means of circulation and payment. The economic policies implemented during an economic crisis usually refer to all the principles and measures stipulated and implemented by the government to guide and influence economic activities. It includes fiscal policy (such as the issuance of government bonds, adjustments to the scale and direction of fiscal expenditures), monetary policy (such as adjustments to the amount of money issued), industrial policy, credit policy (interest rate adjustments, deposit and loan policy adjustments, etc.), income distribution policy, price policy (adjusting market supply and demand by adjusting the prices of certain commodities), exchange rate policy, tax policy (such as adjustments to tax items and tax rates), etc.

If economic policies are to achieve maximum and optimal efficiency, they are often inseparable from the direction of currency issuance and circulation. Based on the current currency circulation system, cash liquidity is strong and it is difficult to control the flow direction, which is not conducive to accurate prediction and grasp of the overall economic market, nor is it conducive to better and more effective prevention and control in anti-money laundering. The central bank's digital currency based on blockchain technology makes the digital legal currency controllable throughout the process, and the flow of funds can be checked. It can timely grasp market changes and capital flows, respond positively to them, and accurately strike against illegal activities such as money laundering, so as to implement correct monetary policy means and legal means to stimulate and activate market stocks to create a healthier economic market and economic form.

Make negative interest rates possible, more effectively promote money flow and market economic prosperity

Negative interest rates are to change the usual deposit interest rate to a negative value. That is, the deposit interest rate (usually refers to the interest rate of one-year time deposits) is less than the increase in the CPI (Consumer Price Index) during the same period, and the depositor's wealth shrinks. The purpose of implementing a negative interest rate policy is to increase the cost of banks hoarding cash, encourage consumption and borrowing in disguise, guide funds to flow back into the market, drive economic development and lay the foundation for stable economic growth.

Ideally, negative interest rates would make residents more willing to preserve and increase the value of their assets through various other financial management channels, such as buying stocks, funds, foreign exchange, gold, etc., or spending money on shopping. The reality is that some Western countries and Japan have entered the era of negative interest rates, but the negative interest rate policy has not only failed to encourage people to increase spending, but has forced people to hoard cash in places other than banks, which is the so-called "liquidity trap."

A liquidity trap refers to a situation where, when the nominal interest rate is reduced to a point where it cannot be reduced any further, or even approaches zero, people would rather hold their wealth in cash or savings due to a certain "liquidity preference" rather than investing it as capital or consuming it as consumer goods for personal enjoyment.

Any increase in the country's money supply will be absorbed in the form of "idle capital", as if falling into a "liquidity trap", and thus will have no impact on overall demand, income and prices. But when the central bank's digital currency is issued and circulated, it will be replaced by the advent of a cashless era. Just like my country's central bank digital currency DCEP, which is designed to replace cash M0 circulation, this will clear the way for the implementation of a negative interest rate policy, clearing the way for the "liquidity trap" that may be caused by the existence of physical cash, and reducing or even eliminating the risk of bank runs caused by negative interest rate policies for banks and other financial institutions.

Promote reasonable and rich asset allocation and create a healthy economic form

Take the digital currency DCEP of the Central Bank of China as an example. It is issued by the People's Bank of China and is a digital payment tool with value characteristics and M0 attributes. As a substitute for cash RMB, DCEP certainly will not generate interest like savings, but based on the existence of digital currency on the Internet, its circulation, transfer, shopping and consumption will be more convenient. And investment behaviors such as buying funds, stocks, and gold on the Internet will also become simple and easy to operate. This is very meaningful for the reasonable construction of asset allocation and the enrichment of investment portfolios. The reasonable and rich allocation of national assets of the entire country will also benefit the country's economic health.

Of course, although the central bank's digital currency can respond effectively to the market in a timely manner, it is still a credit currency, and the increase in issuance is also likely to maintain inflation and cause currency depreciation. In addition, the central bank's digital currency is controllable and traceable throughout the entire process, which has a positive significance for maximizing the effectiveness of economic policies. At the same time, the era of strong capital supervision may be coming, which will play a significant role in anti-money laundering and other aspects, but the state's control over the market also needs to be kept within a certain limit, otherwise excessive control may cause the market to lose vitality and affect economic development.