Faustian Easing

CBDCs are the greatest threat to liberty that have ever been devised

Your government is eventually going to offer you money under the guise of dealing with the next global or national crisis similar to the stimulus checks that were handed out during the pandemic. It will be different in one very important way. Rather than sending a check, they will send a QR code that will guide you to install an app on your phone to accept the funds.

This will seem innocuous at first. Everyone loves free stuff so almost everyone will immediately follow the instructions to get the cash. After all, who would blame anyone for cashing the pandemic stimmy check? I even have well off friends whose children or themselves directly received the checks. It may be foolish of the government to do these kinds of things for all sorts of economic and philosophical reasons but declining to cash the check as a statement of principle is equally foolish in that case.

Except in this case, it will be materially different. The app will not simply be an innocent conduit of money from the Treasury to your wallet. This will be the beta test for a central bank digital currency, or CBDC, and will eventually result in the largest decrease in individual liberty since the PATRIOT Act did away with habeas corpus or the RESTRICT Act is threatening to do to digital communication today.

In China, they have a social credit score and corresponding app. You have to be in good standing to, for example, ride public transit. If you are forbidden, there is no recourse. During recent issues in their banking system, they turned a bunch of people’s access to public transportation off to deal with a bank run. A CBDC is not exactly this but it is the thin end of a wedge where such controls can be implemented one day.

Once CBDCs are accepted everywhere, and they will be because not accepting them will become illegal just like not accepting legal tender is illegal, they will no longer be transferrable from your government account to your private bank account. In effect, you will have a banking relationship with the US Treasury and Federal Reserve directly. This may sound like a cool privilege but it is a faustian bargain.

Faust reading the CBDC EULA. Jean-Paul Laurens via Wikipedia

Imagine you tried to buy a fountain soda or an airline ticket and the transaction failed because there was a ‘temporary’ prohibition of those things. Perhaps you had reached your monthly carbon emissions quota. Imagine you received a tax refund except the funds were set to expire after 90 days. Perhaps, you would be encouraged to donate to a specific cause or political candidate by being matched dollar for dollar by the US taxpayer. Maybe you would be prevented from donating to something else altogether.

In the end, one hand giveth and the other hand taketh away much more than was given. The monetary authorities cannot wait until they have fine tuned control and tracking of the money supply because once they do and can see every dollar in every location at all times, every transaction can be selectively controlled and precisely taxed. They will have direct transmission of monetary policy through this mechanism to the economy. For whatever amount of money they give you during the pilot phase of the initial rollout, they will demand multiples in return in the form of tax and denied transactions in the future.

All financial crises start out as debt crises and the recent bank runs are breaking the surface tension of financial stability. So far, the contagion is fairly well contained. Eventually, something will break that is too big for the authorities to contain. The cracks are becoming too big to ignore.

3x the tension than during the GFC

The crisis that results from this tension will provide the air cover policymakers need to spring their already crafted CBDC on the public.

In my past life, I worked as an backend infrastructure software engineer and led teams which worked on large systems — hyperscaler in the buzzwordy parlance of the industry. When you want to roll out a new and risky piece of infrastructure, and all new infrastructure is inherently risky, you do it in phases. First, you build the backend, then you roll that out to internal customers or at very small initial scale to shake out the bugs and look for bottlenecks, eg. 0.01% of the anticipated production workload. After it can gracefully handle that initial workload, you ramp it to 1%, 10%, 25%, and eventually, you can roll it out to 100% of users using a disciplined rollout schedule. This is not a useless tangent, I promise. It’s context.

The Federal Reserve has been beta testing and slowly rolling out a thing they’re calling FedNow for the past four years. This is being billed as faster payment rails to enable instant settlement of peer to peer and interbank transactions. (Emphasis added.)

FedNow will help transform the way payments are made through new direct services that enable consumers and businesses to make payments conveniently, in real time, on any day, and with immediate availability of funds for receivers.

Admittedly, the rest of the world already has had fast peer to peer settlement for a while so something akin to this technology is probably needed but it is a small step from FedNow as payment rails to FedNow as an app on your phone which you can use to store money in an interest bearing “checking” account and from which you can pay for things directly.

To be fair to Governer Bowman, she has argued against the idea that the Fed is considering rolling out a CBDC or at least cautions that its consideration should be undertaken with great care. This might be reassuring were it not for recent rulemaking by the Treasury to greatly lower the threshold for reporting on very small aggregate private transactions. They want to control every dollar. These are baby steps along that path.

My hope in writing this is that you’ll think deeply about the implications of a CBDC when your government offers you something compelling like a stimulus check or other perk in exchange for opting into the scheme. Consider resisting this by declining to use it. They will likely claim that what they’re doing is not a CBDC at all. Or that it is a temporary measure. “But nothing is so permanent as a temporary government program,” as Milton Friedman famously quipped. Think of the second and third order effects, a few of which I’ve outlined above. It’s probably even more distopian than we can imagine right now.

I’ll leave you with my favorite Japanese aphorism: ただより高いもの がない (tada yori takai mono ga nai) -- There is nothing more expensive than ‘free’.

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