Article written by Tyler Durden
In the aftermath of the COVID-19 shutdowns, when US consumers and businesses alike were suddenly exposed to massive financial pressure, the Fed, with help from the Treasury, launched a “helicopter money” plan. The result was a direct transfer of funds from the U.S. government to to US corporations via PPP loans, while consumers were given support through a $600 weekly unemployment benefit (which is set to expire shortly).
However, even as trillions of dollars created by the Fed and Treasury were distributed out, they did not make it to those who needed it the most, the end consumer.
In response, two former Fed officials: Simon Potter, who led the Federal Reserve Bank of New York’s markets group, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, are among the economic innovators brainstorming solutions to what has emerged as the most crucial and complex problem facing the Fed, and other Central Banks globally, the ability to get money swiftly to people who need it most in a crisis.
Their response was resounding and unexpected, as the two propose creating a monetary tool that they call recession insurance bonds, which draw on recent advances in digital payments, which will be wired instantly to Americans during recessionary times.
Coronado explained the system, Congress would grant the Fed an additional tool for providing monetary support, for example, a percent of GDP, in a lump-sum to be divided up equally and distributed to households during a recession.
Recession insurance bonds would be zero-coupon securities (i.e. no interest payments). The trigger (i.e. when payments are sent out) could be reaching the zero lower bound on interest rates, such as a 0.5 percentage point increase in the unemployment rate.
Potter added, “It took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure (i.e. digital Fed currency). The Fed could buy the bonds quickly without going to the private market”. The bonds (i.e. digital cash) will be on the asset side of the Fed’s balance sheet while the digital dollars in people’s accounts will be on the liability side
In summary, the Fed is proposing creating a hybrid digital legal tender unlike reserves, which are stuck within the financial system alongside sticky red tape, and which it can deposit directly into US consumer accounts.
Cleveland Federal Reserve chairman Loretta Mason delivered a speech Wednesday morning titled “Payments and the Pandemic”, which sounded strikingly similar to what Simon Potter and Julia Coronado are advocating for.
In the section titled “Central Bank Digital Currencies”, Mason writes that “the experience with pandemic emergency payments has brought forward an idea that was already gaining increased attention at central banks around the world, that is, central bank digital currency (CBDC).”
“Legislation has proposed that each American have an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.”
However, in turning to a digital currency to help with recessionary times, the Fed could ultimately purge physical currency entirely, even track each electronic bank note from its inception to its journey of transactions.
The wheels seem to be already turning on a plan that sees the Fed depositing “digital dollars” to each American, a remarkable development that essentially sees the Fed bypass Congress, endowing the Central Bank with targeted fiscal stimulus capabilities.
Are we seeing the future of monetary policy weapons? It seems the space-age of monetary policy has begun…
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