CBDCs and loan guarantees: Dirigisme making a comeback?

Since the early 1980s we have seen the so-called free market expand. The state has withdrawn from its active management role. Now there are some indications that this phase is ending and that we are again experiencing state dirigisme, as was common in Europe in the last century up to 1979.

Why turn of the century?

In an interview with the NZZ a few weeks ago, the historian and investment expert Russell Napier explained why our economic system is immediately entering into a new logic explained. There he explains that it will now again be primarily up to the state to allocate resources, since public and private debt is too high to generate sufficient growth. This nominal growth, which is pushed by the state, together with inflation, is the only chance to free oneself from the debt burden – exactly what happened after the Second World War.

Hi loan guarantees, bye central banks

In this new phase, the state is increasingly reducing the central banks to vicarious agents. The last few years after the financial crisis have already shown the extent to which central banks have been put under political pressure by governments. Although absolutely understandable, due to Corona, the energy crisis and the Ukraine war, states are increasingly intervening in the monetary policy of the central bank. After all, they issue government-guaranteed loans that defy market logic and interest rates. The price of money (interest) is consumed more and more as a result. They are also trading with aid packages such as the 200 billion energy aid in Germany, contrary to the recent restrictive monetary policy of the central banks.

According to historian Napier, 40 percent of all newly issued bank loans to companies in Germany are already secured by the state. In France it should even be 70 percent. Credit guarantees to banks are thus becoming the state’s most powerful means of steering and supporting the economy. Especially since they are easier to implement socially than issuing direct government debt or raising taxes. From a political point of view, this form of central control seems to be the only viable way of tackling climate change or the energy transition or other challenges such as an aging society.

However, the great danger here is that the bank does not carry out a risk assessment to the extent that it would if it had to be liable for defaults itself. In some cases, the purpose of a loan becomes more important than the creditworthiness of the debtor.

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4 instead of 2 percent as the new inflation target?

Government efforts to increase nominal GDP point to structurally higher inflation. Three to four percent could thus become a new, unofficial compromise, on the one hand not to slow down economic momentum and on the other hand not to trigger panic among the population. Finally, the higher inflation can also be made bearable for a large part of the population by higher interest rates on the savings account, so that they only slowly become poorer and poorer.

For investors, this results in a new market environment that demands more active action in order to do something against the accelerating loss of purchasing power. At the same time, when investing in certain sectors, one has to take the steering power of the state into account. This can have positive effects, as huge inflows of funds can increase the market capitalization of relevant companies.

On the other hand, productivity is falling, as has been observed in China for years. Should mean that if capital is allocated by the state and not by the free market, less output is generated. The efficiency of the money is therefore constantly decreasing.

Line of conflict: decentralization vs. centrality

Against this background, we are experiencing a new role for decentralized control mechanisms, which are necessary to ensure long-term economic stability and market mechanisms. Planned economy may help to tackle temporary problems or to achieve political goals such as the energy transition. However, if you overdo it with the central control, then there is a threat of a market that becomes more and more dysfunctional and brings more and more side effects to light.

This is exactly where blockchain technology, Bitcoin and Web3 can develop into an important counterpoint. Contrary to state dirigisme, important decentralized market mechanisms can be regenerated, which enable high productivity and market-based interest rates, for example through decentralized credit markets. Our economy could thus increasingly transition into a hybrid model that is increasingly state-determined on the one hand and offers a liberal market economy on the Web3 on the other. This would be more necessary than ever to give signals and information flows to the market, parts of which are lost due to state dirigisme.

The CBDC instrument

As we can already observe in China today, CBDC can be used to weaken central banks and strengthen the state. Finally, the state can try to build up pressure to incorporate its own policy and governance into the design and control.

A simple example, as has already been implemented in pilot projects in China, would be that the state decides on discount campaigns for local public transport in order to implement its green agenda. With the help of programmable money and programmable money infrastructures, the state can paternalistically implement its own allocation preferences more and more easily. CBDCs thus lead to an expansion of the state’s toolkit and to strengthening centralism. Especially since this would even damage our very decentralized banking sector in Germany if retail CBDCs became widespread.

The urge for a counter-movement, ergo a recovery or retention of decentralized market forces and mechanisms, has never been greater than in this current phase of upheaval. The role of the state and thus also of the market is undergoing the greatest transformation in 40 years. The consequences of the reconfiguration and the associated tension between centralized and decentralized will lead to a completely new market environment in this decade.