Dollarmageddon: Fed Says Ready to Launch Direct MMT and Digital Currency!

Burning hundred-dollar bill

Right now Magic Monetary Theory, as I last called it, or helicopter money is made possible by the Fed financing the government so the government can give out stimulus checks and augmented unemployment benefits to the masses, giving the unemployed more money than they had when employed. That keeps the accelerated money printing of MMT, as we’ve talked about in past Patron Posts, in government control because the government decides how much new money it will borrow.

That, by itself, will not cause hyperinflation so long as goods remain plentiful (not in short supply, which automatically pushes prices up due to scarcity) and so long as the amount of boost the government is giving merely offsets the amount of other financial losses people are experiencing due to the Coronacrisis and the recession that was coming anyway but was accelerated by the Coronacrisis.

In my last article on that subject, I highlighted the following concern expressed by iconic deflationist, Russell Napier:

What has just happened is that the control of the supply of money has permanently left the hands of central bankers – the silent revolution…. The supply of money will now be set, for the foreseeable future, by democratically elected politicians seeking re-election.

“Magic Monetary Theory Comes at a Price

The Federal Reserve, apparently, would like to recapture that control, grabbing the reins of Modern Monetary Theory by directly issuing stimulus money to the masses. As you’ll see below, the overarching plan is to use this as phase one for going to the Fed’s own CBDC (central bank digital currency).

In an earlier Patron Post, I discussed how the Fed was considering the possibility of opening direct bank accounts for individual citizens at the Fed into which the Fed could directly dump digital money.

Now that day is arriving.

Fed about to launch its own Central Bank Digital Currency

It is as if the federal government and the Federal Reserve are now both racing to see who can issue the most money directly into the hands of “consumers” (or, as I prefer to say, “people”) in order to save the economy.

Because “The Fed is Dead,” it needs to invent a new form of currency and direct-to-consumer deposits to resurrect its inflationary powers, or it will never be able to achieve its new policy of “symmetrical 2% inflation.” By that, it claims it means it plans to overshoot its longstanding 2% target to make up for the time in which it couldn’t get inflation up to that level for years, except in financial assets (which is not a cost but a positive value … for some) because nothing was ever trickling down to the little people.

(Or is this new symetric inflation policy a preparation for the fact that the Fed’s intro of digital currency directly to the people may spike inflation until they get their calibration to 2%? In which case, they are laying the argumentative groundwork for saying high inflation is by intent to calm people if things start running out of control while the Fed calibrates how far they can go with their new CBDC? I’ll lay that out below, too.)

With nor further adieu, here is a Fed president, talking about the Fed’s imminent launch into digital dollars. Cleveland Fed head Loretta Mester laid out the Fed’s readiness to launch its own CBDC in a speech to the Chicago Payment Symposium:

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)….

Payments and the Pandemic

I stated in previous Patron Posts that COVID made cash look dirty and made Modern Monetary Theory look essential to where we leaped right into it without any public discussion. I noted that CBDCs would, without any doubt, arise as the solution to getting new money directly into the hands of the masses in a manner the Fed can directly control. COVID created a desire not to touch hard cash, which, I claimed, would become a great accelerator for the introduction of central-bank digital currency.

That said, here is the coup de grâce:

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.

Legislation has already been proposed! I never heard of it. Maybe you did, but it is already running through congress (quietly I guess) according to Mester.

What person won’t sign up for free money? Once the Fed creates individual bank accounts directly at the Fed to deposit free digital currency directly to the hoi poloi, people will voluntarily run toward free money. As they love it, they will get used to it. That will, before long, enable the Fed to kill the physical dollar completely.

Thus, Mester continues,

Other proposals would create … digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency….

Let’s clarify, “other proposals” that are directly related to the creating of these new consumer bank accounts at the Fed. Her latter point about ending anonymity spells out a nice little enticement to the US congress to go along with this bank plot because of how much easier it will be to audit your taxes and collect them as well as to catch criminals who will not so easily be able to launder money.

Central banks could support [these digital currencies] without the need for commercial bank involvement via direct issuance into the end-users’ digital wallets combined with central-bank-facilitated transfer and redemption services.

I can’t see commercial banks getting cut out of the picture because they own the Fed, but I can see the Fed setting all of this up, getting all the bugs worked out so that each bank doesn’t have to design its own digital transaction system, and then see the Fed handing the accounts it creates over to the banks once everything appears to have stabilized, and I’m sure the banks that literally own the Fed are aware they will not ultimately cut themselves out of the loop. They are merely being insulated as the beta version gets released.

The two ingredients she mentions that are key for now are:

  • digital wallets and
  • central-bank processing of all digital-wallet transactions.

(We’ll come back to those “central-bank facilitated transfer and redemption services” in a moment when I talk about “FedNow.”)

Now, Mester does not say everything is launching tomorrow: (As I’ve pointed out in my Patron Posts for two years, saying you could expect it to go this way, the Fed is working out the bugs carefully and letting other central banks lead the way so they can work out bugs first. The Fed is in no rush.)

The demand for and use of such instruments need further consideration in order to evaluate whether such a central bank digital currency would allow for quicker and more ubiquitous payments in times of emergency and more generally. In addition, a range of potential risks and policy issues surrounding central bank digital currency need to be better understood, and the costs and benefits evaluated….

This does not sound to me like a masterplan that was fully figured out decades ago, but a plan that is being worked out in real time now. The technology is no more fully in place than cryptocurrency technology was twenty years ago, and the Fed is no smarter at creating such currencies than the techno wizards at Facebook, Google and other institutions that would love to own a big piece of the pie. (Mester did say, however, that legislation for the launch of what I will call, based on how I parse her words, “Phase One” was already proposed.)

The Federal Reserve has been researching issues raised by central bank digital currency for some time….

That is exactly what I have tracked for two years in these Patron Posts, being certain this is the major transformation in the Fed and all global financial systems that is coming. I’ve used these posts to give my patrons the solid facts (not conspiracy theories, but facts presented at their source through central bankers’ own public statements) that lay the trajectory for a global cashless society.

The Board of Governors has a technology lab that has been building and testing a range of distributed ledger platforms to understand their potential benefits and tradeoffs. Staff members from several Reserve Banks, including Cleveland Fed software developers [Mester’s bank], are contributing to this effort. The Federal Reserve Bank of Boston is also engaged in a multiyear effort, working with the Massachusetts Institute of Technology, to experiment with technologies that could be used for a central bank digital currency.

Clearly, this is ongoing development, as I’ve laid out for the last two years, not a fully designed plan that is just awaiting the right manipulation of the public for its timing. As I’ve said in past articles, the Fed doesn’t have access to any better technical wizards than all the FinTech companies listed on the NASDAQ. They all recruit from the same talent pool.

The Federal Reserve Bank of New York has established an innovation center, in partnership with the Bank for International Settlements, to identify and develop in-depth insights into critical trends and financial technology of relevance to central banks.

And, if it is in partnership with the BIS, it is in partnership with other central banks the BIS serves.

Experimentation like this is an important ingredient in assessing the benefits and costs of a central bank digital currency, but does not signal any decision by the Federal Reserve to adopt such a currency. Issues raised by central bank digital currency related to financial stability, market structure, security, privacy, and monetary policy all need to be better understood.

HOLD IT! Didn’t she just say above that legislation had already been proposed? I go back:

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.

So, if I parse that more finely, it sounds like the money going into those accounts will be created digitally, but for the moment that money will be transacted in the same way all money is, not as a CBDC. You will be able to transfer it digitally into your regular bank account, then write checks on it, use debit cards, or withdraw it as hard currency.

Still, Mester’s context here tells you where all of that is aimed. For the moment, however, we have the Fed creating the first mechanism, which is a way by which it can create money digitally directly into your wallet, though it does not move digitally afterwards other than in all the ways we are familiar with, such as debit cards, electronic funds transfers, etc. It is, in other words, not, at this point, a final replacement of hard currency. However, her other words in context tell you where this is intended to go.

This will be phase one, and is already in legislation, and it will give the Fed direct MMT power without need of government approval once that legislation gets government approval. It’s a way for the dead Fed to resurrect itself now that it can no longer effectively push the economy on its own by pumping a “wealth effect” into the stock market.

This is a direct push to the people (the “consumers”) so the Fed can better and more centrally manage the economy. (And there would be nothing like the recent government deadlock over stimulus to provide a reason to put that directly in the Fed’s hand as just more “monetary policy tools.”)

Conversations have helped inform the Federal Reserve System’s initiative to improve and modernize the U.S. payments system. That work is ongoing and has reached important milestones this year, despite the pandemic….

I would argue because of the pandemic. The pandemic has accelerated the process and made it much easier to make the launch, just as I’ve written in these Patron Posts it would.

Although it is safe to say no one anticipated an event quite like the pandemic, the industry’s forethought, investment, and preparation to ensure that the payments system would be resilient to extreme scenarios has paid off greatly. It has allowed us to avoid a collapse of the payments system – an event that would have made what was already a grave situation much, much worse….

In other words, the pandemic has made the transformation of the Federal Reserve’s “payment system” essential. This system, still in its nativity, is the new financial messiah to our plague, come to save us from the ruin brought about by our own financial sins.

The changes we have seen in customers’ payment behavior since February have happened quickly. The spread of COVID-19 heightened the reliance of businesses and individuals on digital services and faster connectivity, as many employees began to work from home and consumers turned to online shopping.

Necessity is the mother of invention … or, at least, the accelerant. In the present case, not all so immaculately conceived.

Have I not said the move to digital currency is inevitable as we have moved to more online shopping and the move to global currency inevitable as we move to more international shopping because the internet does not so clearly demarcate international boundaries? In more recent Patron Posts, I’ve noted that digital currency has been made more desirable even in our non-online shopping because people don’t want to handle cash, which the central banks started referring to as “dirty cash?” You can see here, that argument playing out further.

It would be wrong to say that the pandemic has been the catalyst for payments system modernization: the Federal Reserve Banks have been assessing our payments technology for some time…. We … have platform modernization initiatives at various stages of completion across nearly all of our business lines….

Yes, it was clearly in play as I’ve been laying out long before the Coronacrisis hit, but the Coronacrisis created the perfect semi-apocalyptic world into which this monetary messiah could be birthed and find ready acceptance. Its day has dawned, exactly as I proclaimed as soon as the Coronacrisis hit. It’s now emerging from the womb. We are counting the minutes between contractions and measuring the crowning as it is born.

However, the pandemic does underscore the need to have a technology strategy that will meet the needs of the future.

It has, in fact, effectively cemented it in place.

The changes we have seen for some forms of payment will be longer lasting. A consumer’s decision to use a different form of payment during the pandemic may have been driven by circumstances, but now that the consumer has had experience with it, that payment method may become a more routine choice.

So much so that many will believe the pandemic was intentionally created by bankers in order to bring wide and rapid embrace to the CBDCs they were already developing. While I won’t go into that possible conspiracy theory, one can hardly blame people for thinking it. I just did not and clearly still DO NOT need conspiracy theories to get to the right conclusions about where the facts on the ground and trends in consumer purchasing behavior and cash fears are all heading. (And avoiding them and staying with the actual words of central bankers, such as I am doing again now, makes for a more credible presentation.)

Industry efforts to replace decades-old core banking systems with more flexible, resilient, and cloud-friendly platforms, and to integrate the old with the new along the way, may need to be accelerated to ensure that we are prepared for the future….

Yes, COVID is an accelerant for moves already being planned and laid out here. If there is one thing social distancing and remote working has done, it has made it harder to pay with cash. This change in how payments are made, has not pushed cash out of demand, however, as the world has actually hoarded hard currency as a safety store at a time when banks are less trusted.

According to a Federal Reserve survey of consumers taken in May of this year, participants reported that, on average, during the pandemic, they had increased their holdings of cash on their person from $69 to $81, a 17 percent increase.2 And the amount of cash stored at home or elsewhere rose even more, nearly 90 percent, from an average of $250 to over $475.

… although …

Thirty percent of consumers did report they were avoiding using cash to pay for transactions, in favor of debit and credit cards.

So, there is a lot of hard cash under the mattress right now. However, digital cash (ones and zeroes on deposit in bank accounts) also came to be hoarded:

On the supply side, just as in other industries, the pandemic has affected the supply chain of cash. With the shutdown in full swing earlier this year, currency deposits to the Fed decreased, as retailers had less cash to deposit and banks wanted to maintain higher inventories in their vaults. The Federal Reserve Banks had to adjust their usual cash operations to ensure that cash inventories were maintained and cash was delivered to meet the higher demand.

In other words, banks transferred digital cash to the Fed in order to reserve hard currency back for their retail-business customers and to stuff their own vaults.

FedNow but not quite now

Not all components of such a cashless system are ready to go. As noted, Phase One is something more along the line of an ordinary bank account for each individual at the Fed, so the Fed can create new money digitally straight into that bank account. That will make people very ready to bank with the Fed directly in order to get the new money and will give the Fed a lot of additional control it wants now that it has sailed over the steep end of the Diminishing Returns curve with its old tools (or, as Stockman says, “run out of dry powder.”)

Even as Fed has already proposed through legislation to create consumer Fed accounts, the broader cashless architecture remains in development:

The Federal Reserve’s FedNow service, which is currently being built, will be an around-the-clock service whereby payments can be originated, cleared, and settled within seconds. The service is expected to provide clear public benefits in the form of safety, efficiency, and accessibility of instant payments…. Our goal is to bring FedNow to market as soon as practicably possible. The target release date remains 2023 or 2024…. In order to get the service up and running as soon as possible, we are taking a phased approach to its features….

Phase One (I’ll call it FedOne) is getting you used to banking directly with the Fed. Nothing like easy free money to do that, especially when that money is stimulus in a time of widespread unemployment due to continuing business closures, permanent closures and socially-distanced partial reopenings.

If you want to get your hands on the cash, you’ll need FedOne before FedNow.

Thinking ahead, a service like FedNow, coupled with a directory service with accurate information on where to route payments for final distribution to households and businesses [FedOne], has the potential to solve some of the challenges the government faced when distributing pandemic relief payments….

Surprise, surprise …

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).

Didn’t see that coming! (Uh, well, yeah, we did.)

That is what you get when you marry FedOne to FedNow — a CBDC. Hence …

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

FedOne. The rest of what she said (FedNow) will soon enough be history, too.

Famed economist warns of dollar collapse

Now you can see why the Fed has just prepared the way for inflation above its old target of 2% even though it was never capable of hitting 2% (on its skewed inflation gauges) anyway! In calibrating this new power of money to the masses (let’s call it Mass Monetary Theory) the Fed may overshoot its target. So, it has laid out its defense, should that happen: “We wanted more inflation to balance the years when inflation was too low. That is all that is happening right now. Things are not going out of control. We told you we intended higher inflation.”

New money for the masses, as I pointed out in past Patron Posts, is what changes the whole deflation-inflation scenario. But what if that inflation goes spectacularly out of control, as I also noted finally became a real POSSIBILITY this year (which it never was before)?

In my last Patron Post, I noted some Delfationistas (like myself) had turned bearish on the dollar’s value and were now suggesting (as I did earlier this year in another Patron Post) that hyperinflation was now a possibility.

As then, I am not saying it is a certainty, but this year and next are the first years since I started writing this blog that I think it is something to beware of as a possibility, should we enter a situation where too many dollars are chasing to few goods. (I don’t think the Fed thinks it is a certainty either, but it sees it as a real risk with the move to giving money directly to the masses. This is a novelty with which they have no prior experience outside of moves through the government that were limited by the government’s willingness to take on the debt needed to get that money in its own reserves in order to move it to the masses.)

When all the new money the Fed was flooding off the press was going to banks and staying in financial realms, that monetary expansion had little to no ability to create inflation; but now that the government is doling out the dollars directly to the masses (helicopter money) and even more so as the Fed is thinking of jumping into the game directly, hyperinflation — not of financial assets this time but general prices — finally becomes a POSSIBILITY. (Again, I’m not saying it will happen; that depends on how far they go with giving all the new money to the masses and what kinds of shortages of goods (and services) develop due to the Coronacrisis as well as what restraints the government may add to the proposed legislation.)

Economist Steven Roach sees a double-dip recession and has joined the fray against the dollar:

Economist Stephen Roach warns next year will be brutal for the dollar.


Roach makes the following points:

  • The formerly “crazed idea” of a dollar collapse is confirmed by “both the saving and current account dynamic in a much more dramatic fashion than even I was looking for.”
  • International monetary imbalance with the rest of the world suffered a record deterioration in the second quarter.
  • The net-national savings rate recorded a record decline in the second quarter, going back into negative territory for the first time since the global financial crisis.
  • Roach sees the dollar collapsing in 2021 when he sees 50% likelihood of a second dip into recession.

With all the Fed and federal programs, more of the new money is getting into the general public’s hands. That’s the bottom line for those changing dynamics Roach listed.

On his last point, I didn’t realize we ever came out of the first dip! Technically, I suppose economists will argue that we jumped right out during reopening because we returned to economic growth. However, we will see that overall GDP remains in a slump below where it was before the Covidcrisis because the new growth was not enough to offset the huge plunge. It’s partial recovery, not full recovery; but don’t expect those who officially declare recessions to pay any attention to such nuances. I guess that is what makes it a double-dip recession (singular) versus two separate back-to-back recessions. Mere technicalities.

Back to the main point: pressure is building against the dollar, even as the Fed considers launching its foray into CBDCs with a new digital dollar to be given to consumers directly. Hence, this month’s move to declare a move to greater inflation is intentional while the Coronacrisis gives the Fed cover.

Therefore, let me suggest, again, the Fed should probably call its new CBDC the “corona,” rather than the dollar, in honor of the virus that helped it launch and with respect toward other major currencies known as the “crown” or the “krone/kroner,” etc.

In another Patron Post to come out shortly, I’ll summarize other central bank cashless advances and stimulus policy changes since my last Patron Post.