IN THE FED’S OWN WORDS: Your Own Fed COVID Account Coming Soon, Then Digital Currency

In what remains the most undercovered financial topic of the year, if not century, we remind readers that starting about a year ago, central banks around the world launched an unprecedented if stealthy attempt to overhaul the entire monetary architecture of fiat money by implementing digital dollars, a transformation to a cashless society which in recent months has also received the tacit support of Congress, which is actively drafting bills to send “digital dollars” to the unbanked.

Zero Hedge

As ZH just laid out that is precisely why I am making sure I am giving the most undercovered and unprecedented and stealthy move by central banks in the past century plenty of open coverage for my patrons. Last month, I wrote about the Fed’s moves in consort with congress to, for the first time in history, open individual personal Federal Reserve bank accounts for each taxpayer.

The Fed would like to directly stimulate the consumer economy with QE without having to go through government programs as it does now. These programs are complex, inefficient and slow. If the everyone has a bank account with the Fed, conceivably, the Fed can just give an order to create X hundreds of billions and distribute it into each account.

The Fed wants to create individual accounts for each taxpayer, rather than deposit money into accounts at its member banks so that a it can make sure there is no individual with multiple accounts and multiple banks getting far more than his or her fair share of the stimulus dole. So, it wants direct management of the data.

This would be a new power and a potent one for the Fed, which should also help out with this emerging Fed social concern now that we are not just in a COVID world but also a BLM world:

Former Minneapolis Fed president Kocherlakota writing an op-ed … said the Fed “should have a third mandate on racial inquality” [sic.], the stage is now set for the Fed to specifically release funds for those who have “suffered from inequality”, and once the time comes when the narrative allows to deploy reparations or direct funding to minorities, the Fed will be ready.

Zero Hedge

As soon as you think about the latest news of the Fed creating bank accounts for everyone, you can understand exactly what Kocherlakota is saying about the Fed being ready to help with reparations through direct funding.

The more the Fed has direct access to all citizens, the more it can help socially engineer everything. That will enable the world described by Agustín Guillermo Carstens in his recent statement as head of the Bank for International Settlements. Carstens said central banks should be doing more to help combat global warming and income disparity.

Apparently, central bankers feel they could help us more if they could participate more directly in social engineering and not just financial engineering. We’ve all seen what a wonderful job they’ve done with financial engineering, the only area in which they are supposed to be smart. So, this should come out well.

In a major study released from its Geneva headquarters, BIS general manager Agustín Carstens argued the financial stability mandates at the heart of central bank operations around the world meant they needed to be involved in mitigating the financial risks posed by climate change … as climate rescuers of last resort.

ABC

(Overstuffed bankster Carstens began his CB career with the Bank of Mexico, one of the world’s savant central banks for sure, where he helped invent new ways to vaporize pesos and make their value disappear.)

With central bankers rising to the roles of the last-resort saviors of the earth, they clearly need more direct access to your bank account. There are just too many things that a central bankster needs to control these days — climate change, racism reparations, and the more certain creation of inflation to help devalue your financial assets for you.

It seems central bankers are itching to take over the reins of fiscal control now that their monetary control is becoming impotent. As DoubleLine Capital recently wrote, regarding the central bank digital currencies I’ve been writing to you about,

CBDCs also appear to be an effective mechanism for bypassing the taxation, debt issuance and spending prerogatives of government to implement a quasi-fiscal policy. Imagine, for example, the ease of enacting Modern Monetary Theory via CBDCs. With CBDCs, the central banks would possess the necessary plumbing to directly deliver a digital currency to individuals’ bank accounts, ready to be spent via debit cards.

Zero Hedge

Thank God we have central bankers looking out for us. However, to save the world, they need more control, such as the power of government itself.

Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets, or the government to use its balance sheet to substitute for other fiscal decisions.

Not just more pressure, but more pressure because of more ability. Then the government gets lazy just as it has for years with financial policy, where it has let banks manage the economy, and lets the banks run fiscal policy for the economy, too. And who would you rather trust for determining fiscal policy of the government, your elected officials (not an attractive choice) or your friendly central bankster. With choices like those, who needs an enema?

As DoubleLine goes on,

With a flick of the digital switch, CBDCs can enable policymakers [central banksters] to meet, or cave in to, those demands – at the risk of igniting an inflation conflagration, abandoning what little still survives of sovereign fiscal discipline and who knows what else. I hope the leaders of the world’s central banks will approach this new financial technology with extreme caution, guarding against its overuse or outright abuse. It’s hard to be optimistic. Soon our monetary Pandoras will possess their own box full of new powers, perhaps too enticing to resist.

Such new powers surely entice the newly impotent.

Fed impotence is a fact

Perhaps the Fed is realizing it has become impotent, as I’ve stated all year, so central banks are looking for new ways to add relevance … and potency to their tool box.

The Federal Reserve has said for some time that it didn’t want to become impotent with its policy rate stuck at zero. Now we know their plan of action to avoid this outcome.

On Wednesday, the Fed rolled out of the final details of its new strategy, promising to allow inflation to overshoot its 2% target and setting a relatively strict criteria for the next interest-rate hike.

MarketWatch

That is hardly a plan to avoid impotence. That is exactly where they already are impotent. The Fed hasn’t been able to get inflation up for a decade (by the measure it uses). However, if it could pump money directly into the hands of the masses, there would be no limit to how much it can directly drive inflation up.

Bankers like a little inflation because you’re more likely to take out a loan now if you know the price of saving to buy something is that you’ll pay more down the road. Inhibiting you from waiting for tomorrow on a purchase you can make today helps drive the economy forward by pulling tomorrow’s earnings into the present via bank loans.

Moreover …

Low inflation can cause inflation expectations to drift down, pulling inflation lower. This pulls interest rates toward zero, giving central banks less room to support the economy in a future downturn.

… also giving all the Federal Reserve System’s member banks less ability to make money off of loans.

“We have seen this dynamic play out in other economies around the world, and we are determined to avoid it here in the United States,” Fed Chairman Jerome Powell said earlier this year.

They wouldn’t want you to struggle along without the motivator of inflation to keep you consuming faster than you can really afford, but here’s the rub for the Fed:

The COVID-19 pandemic will make the Fed’s goal of achieving higher inflation harder as wages are not expected to rise. “They will be quite lucky to hit the inflation target, let alone overshoot it in the next three years,” Harris said. “The Fed had more credibility a decade ago to hit the 2% inflation target,” Harris said. “Now the whole world is in a prove-it-to-me mode,” he added. “The fact that there was no major move in financial markets … on Thursday as a result of the Fed’s new strategy [to keep inflation above 2%] is a bit of a disappointment for Powell,” Posen said.

You see, it turns out that, once you are down to zero interest and it’s not doing much, announcing you are going to hold interest at zero for years longer doesn’t impress anyone. You’re just saying you’re going to keep doing more of the same thing that isn’t working, which has zero stimulus effect. Impotence on interest policy = impotence on inflation policy as a way of “stimulating” consumers to consume now with tomorrows money via loans. (Everyone knows the Fed doesn’t really don’t want to go to negative interest, so they have reached the limit of their effectiveness on interest policy, one of their biggest tools.)

“They are discovering, like the Bank of Japan and the ECB before it, that if the economy is going against you and you’ve undershot your inflation targets for years, even well-intentioned talk isn’t going to matter.… I think the Fed is trying to say ‘we definitely want to try to avoid getting into a situation where we feel more permanently impotent.’”

It’s hard to get inflation going when people are unemployed, which is supposed to be a naturally deflationary environment in which prices adjust down to what unemployed people can afford. However, if the Fed could get direct access to your bank account to put money in it (with government permission or without?), it could drive inflation wherever it wants … and be impotent no more. (And who is going to object to free money?)

Investors should understand that this is a marked change from the monetary policy of the past in which the Fed could pursue its dual mandate without being hindered by fiscal policy. Fiscal policy is now officially taking the wheel.

The Felder Report

The Fed now wants to take the wheel back. So, it wants to grab fiscal policy away from the government and into its own hands. This is the vehicle for doing that.

Powell Speaks

In its article quoted above ZH seems to jump zealously to the conclusion that the money created in these new Fed accounts will be in the form of the CBDCs I’ve been writing to you about. Ultimately, that is true, but I think ZH may be skipping ahead a step to think it automatically means CBDCs.

Initially, I think the electronic funds the Fed deposits will be nothing more than the same digitally created fiat money the Fed has been decreeing into existence for decades. The Fed will create money by creating a deposit in your Fed account, which you can then use just like you use bank accounts now by writing checks, withdrawing cash or using a debit card.

Opening a Fed bank account doesn’t mean you will be asked to convert to digital currency. That is what will make acceptance of the bank accounts easy. Once you are familiar with those, acceptance of the CBDCs will be easier because eventually they’ll switch to that, and then you’ll have to start using their cashless cash if you want to keep benefiting from the free money. You take the bait, you get the hook.

I think there may even be another step that comes before giving you Fed checks you can use or debit cards. I think the Fed may not allow any of those means of using the money and may simply create money in your account, which you can then transfer to your bank account of choice (among its many member banks). Then you can withdraw the money as physical cash, write checks on it or use the money by debit — all the same stuff you usually do, making acceptance friction free.

I think separating the issuance of new Fed bank accounts from the launch into CBDCs makes the most sense of Powell’s words:

Fed Chair Jerome Powell spoke at a panel focusing on Cross-Border payments hosted by the IMF during its annual meeting, in which he said that the central bank hasn’t made a decision to issue a digital currency, citing the need for further work and “extensive” public consultation with stakeholders before doing so.

“It’s more important for the United States to get it right than to be first,” adding that “we are committed to carefully and thoughtfully evaluating the potential costs and benefits of a central bank digital currency for the U.S. economy and payments system. We have not made a decision to issue a CBDC.”

MarketWatch

They are going to do it, but they are not going to be first. I’ve been taking the path of presenting the plan of action and the ultimate goals just through the words of central bankers, so I’m going to stay with that, and I think it makes more sense.

Aside from Powell, this guy affirms my own view about how things will proceed:

#Ripple CTO @JoelKatz says there is a need for a neutral, jurisdictionless Digital Asset that will serve as a bridge for #CBDCs and other types of #Stablecoins

David said #XRP can be the hub & backbone that provides the fast international settlement piecehttps://t.co/FxDoa8tPJX

— XRPcryptowolf (@XRPcryptowolf) October 20, 2020

Of course, he’s pitching his own crypto, and that’s not what I’m talking about either; but he’s right about the role of the dollar and the slow advent of a Federal Reserve digital currency.

The ZH article runs ahead of the story (but not wrong in direction):

And while one would be temped to interpret Powell’s statement as one of skepticism that Digital Dollars are coming, we believe this is misplaced with Powell emphasizing that “80% of central banks around the world are exploring the idea.”

I think Powell is stating exactly the Fed’s intent. He’s not skeptical that a Fed CBDC is coming. He’s just saying the Fed isn’t going to rush in with that plan. That aligns with everything I have been able to present about CBDCs in the Fed’s own words to other central banksters and in the words of other CBs. It is not skepticism but caution and willingness to let others run the beta versions because the Fed has the confidence of the dollar backing its belief that it doesn’t have to be first to be foremost.

They may be wrong in that because it’s a bit like IBM thinking it didn’t need to rush in with personal computers but could wait and see, based on its prestige, how the new market played out and then come in with something stable after the bugs were worked out. We all know that pride caused IBM to become the corporate world’s biggest dinosaur. But we also all know that is how BIG often thinks. So, I don’t doubt that will be Fed’s approach, exactly as it continually says it will be.

Cashless society, phase one

Phase one is not going to be cashless at all, but it lays a foundation the global cashless society will need. While the Fed is not rushing to move to CBDCs, it is working on developing one, as you’ve seen in previous Patron Posts. In the meantime, it would like to phase us into that with eager hearts by providing a service to the Federal government in getting those stimulus checks out immediately in the near future.

So, the new digital accounts are phase one. Who doesn’t like free money that they can immediately turn into physical cash by transferring it to their local bank?

It seems unlikely to me that the Fed would actually cut its member banks out of the process. After all, those banks own the Fed, so that would make no sense. That’s why I think it is much more likely the Fed will issue Fed accounts that it can deposit money into directly, and then you can transfer that into your regular existing bank account.

You might even be able to transfer it into your credit-union account. Though the Fed has no interest in credit unions, since the have no ownership in the Federal Reserve System, it might allow such transfers just to make sure the acceptance of new Fed bank accounts is complete.

After all, who is going to turn down free Fed funds so long as they can immediately move the money to the bank/CU of their choice and start spending it anonymously as cash as soon as they wish or just save it for the darker times ahead or use it for Christmas purchases on the debit card?

The main reason cited by Powell: “reaching consumers who have been traditionally underserved by financial institutions”

Exactly. For now, anyway, the overt reason is to make it easy and swift for the Fed and feds to get money into the hands of consumers/citizens in order to stimulate the economy and get inflation going higher as the Fed professes it wants to do.

Though the Fed has claimed (not to my satisfaction) it couldn’t figure out why QE was not able to create general price inflation, it looks like they’ve finally figured out what I’ve been writing since the beginning of my blog: New money doesn’t create general inflation if it doesn’t enter the general economy. It just gets circulated around Wall Street in buying up stocks and bonds, creating asset inflation for those already well off enough to play in those markets.

With your new Fed bank account, the government won’t write any checks, saving the government a processing nightmare and huge expense. It can all happen with one computer entry at the Fed that will then bounce down automatically through all the pins and bells to all the right accounts as the Fed’s mainframe computers do all the work. You’ll literally have the stimulus money in seconds, just as you’ll see the Fed describing below.

This could easily begin as soon as this year. The technology isn’t hard. The Fed and congress and the Prez. just need an agreed-upon action plan, and Powell said in this conference that other governments/central banks also need an agreed approach since dollars are used globally. What is less clear is whether the government would have to fund this money with debt issuances somehow or if the Fed would just create it out of thin air without the government’s involvement.

Powell is describing regime change, and it is another reason, I’ve been saying for the first time in all my years of writing we now actually will have to remain alert for the possibilities of hyperinflation if the Fed loses control of its new plan. Not everything the Fed does goes as planned. It doesn’t mean hyperinflation will happen, but there was almost no possibility of hyperinflation up until now.

I’ve long resisted that notion that gold bugs have liked to pedal … because the time and circumstance were not right no matter how much money the Fed created through QE. This time is different because this time is mass money too the masses, not to the few.

Once money starts going directly into consumer hands, we can experience hyperinflation if either the Fed creates too much new money or the money it creates in the right amount suddenly comes up against a shortage of goods so we have too much money chasing too few goods. Those are the two metrics to keep your eye on. I’m not saying it will happen. I’m explaining why it easily can now that the Fed is in the direct-to-consumer money-printing business, which is already happening without these new Fed bank accounts, but which the Fed will be able to do so much easier and faster with those accounts.

After suggesting a rapid move to CBDCs, even ZH seems to back down to a more gradual phased approach:

That said, while CBDCs are clearly coming, we expect a period of at least several years before their arrival, absent another major financial crisis, of course: “We have not made a decision to issue a CBDC and we think that there’s a great deal of work to be done”, Powell said.

They’re working on it.

The Fed needs these direct accounts to make sure no one with a hundred bank accounts scattered among multiple banks gets 100x the stimulus money. That would mean that 99 other people don’t get their share of the approved total stimulus. That would mean lots of outcries and rage. The Fed need needs a clean roll out. It’s credibility is at stake, and credibility is the only thing backing its money and giving its money value. Its credibility is everything, which is why it also doesn’t want to be first.

The Fed also wants direct accounts because it needs to control the economy. We all know central planners do not like to trust entire economies to millions of interconnected individuals to sort out on their own organically. They are always convinced their masterminding of the economy will be more efficient than such uncontrolled chaos. Bankers believe the last person who should be trusted with managing your money is you.

FedNow not quite now

The new program (and it is a vast program not just bank accounts) that will encompass these bank accounts is called “FedNow.” The primary concern stated by the Fed for creating these new bank accounts for each person at the Federal Reserve is that the Fed, as the US government’s banker, was tasked with the responsibility of processing “160 million economic impact payments to households and small businesses authorized by the CARES Act to help recipients cope with the financial effects of the pandemic.”

As you know, it took months for the Fed to carry that out. Many payments went by direct deposit (Automatic Clearing House/ACH payments), but many went by check and even mailed debit cards. In the process, the Fed had to get people to go online at the IRS and enter bank account information for the ACH payments and had to re-mail checks that went to wrong addresses, etc.

Here is the Federal Reserve’s own statement by the Cleveland Fed about why the Fed is creating the new system (ostensibly anyway):

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.

Cleveland Fed, September 23, 2020

While the Fed presents the program as an answer to the Covidcrisis troubles it had with processing stimulus payments quickly (slowing down the effects of stimulus), the next part of the paper reflects that plans for a new system 1) began before COVID, so FedNow is not a response to COVID; 2) ARE a phased plan that starts with the easiest stuff first (possibly meaning also the part that COVID has now made most palatable); and 3) are still a ways off (at least for total fulfillment):

While COVID-19 has affected many parts of the payments system, it has not slowed down our work on FedNow. Our goal is to bring FedNow to market as soon as practicably possible. The target release date remains 2023 or 2024, but we will announce a more specific time frame once additional work is completed. In order to get the service up and running as soon as possible, we are taking a phased approach to its features. We will begin with the most important features and introduce enhancements quickly and iteratively thereafter.

The most important feature for the government and for citizens (and the easiest to sell) is to get those stimulus checks out much faster. That’s also really important to the Fed because getting people’s money to them in seconds, not months, will save the Fed the massive headache it had with the first round of stimulus payments.

Of course, there are the non-ostensible reasons for this grand scheme, too, once CBDCs are rolled in during a later phase — more direct Fed control of the economy, particularly to create inflation by pumping the juice directly to the masses; less anonymity between you and your government, hence easier verification of every dollar you make for taxation; greater ease in getting taxes owed to the government by direct seizure; greater ability to track criminal activity and freeze their funds; greater monetary efficiency for the Fed, its banks, the government and the masses … and possibly (just a guess) to allow the Fed to create money in the system without the government even taking out the debt that has always gone along with new money creation, which would avoid creating effective negative interest rates that can happen regardless of the Fed’s interest target just from issuing so many government bonds.

(The Fed cannot without a law change directly create money into the government’s account; no reason, under law, I think, that it can’t create money directly into yours, just as it does into its member bank reserve accounts.)

This will also make it possible to give universal basic income to each individual by direct payment without the high risk of people having numerous accounts at different banks and getting income in all accounts. All because the government’s banker becomes your banker. So many good things!

No doubt COVID became a driving factor (the expediting need) and, at the same time, an easy selling point to congress (with which the Fed is now working on this) and the public, so Fed bank accounts are the phase-one focus right now.

This has already been a work in progress:

To inform the design and to determine which features to include at the start, we have been engaging extensively with stakeholders through focus groups, industry meetings, and the establishment of a stakeholder-wide FedNow community, and through the more formal public comment process. We are working to finalize a technology strategy that will create a flexible infrastructure, one that is scalable and can evolve with the times.

Clearly, however, the FedNow bank accounts are about much more than just bank accounts. It’s a payment system for the entire nation — banks, merchants, all other businesses, and consumers:

In addition to offering secure instant payments, an important goal of FedNow is to establish a nationwide reach for the service so that this new type of payment is broadly accessible to consumers and businesses alike. The Federal Reserve’s payments services have a broad reach, with connections to and customer relationships with more than 10,000 diverse financial institutions across the country. This existing reach will help support a nationwide infrastructure for FedNow instant payments. We are also working closely with private-sector payment providers to explore the best approach to achieve wide accessibility.

While COVID has become a driving force, setting up and maintaining all these accounts is complex, so it may not happen in time for COVID, but COVID happened in time to get the government to buy in to the program because it wants quick stimulus, too.

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, has the potential to solve some of the challenges the government faced when distributing pandemic relief payments. Of course, creating such a directory and ensuring it is kept up-to-date is complex, and several challenges, including data privacy considerations, account information maintenance demands, and business case considerations, would have to be solved. The Federal Reserve understands the potential value of such a service, and has been exploring these issues as it evaluates the features to eventually include in FedNow.

While phase one is likely just getting personal bank accounts set up so the Fed can issue stimulus payments a whole lot faster and with a whole lot less headache for the federal government’s banker, the Cleveland paper clearly reveals the direct intention later on to make this system the new CBDC system for the United States. Here they become quite overt about the grand scheme, albeit noting the idea is in flux with different versions being bandied about:

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).

I.e., COVID was the accelerant for, not the cause of CBDCs.

[Phase one] 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. [Phase two] Other proposals would create a new payments instrument, 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. Depending on how these currencies are designed, central banks could support them 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.

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….

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. 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….

Clearly, it will be much easier to roll out the Federal Reserve personal bank account than the CBDC. The bank accounts can begin well before the Fed has everyone’s data, and the free government money will be incentive for everyone to sign up, providing what data is needed to create an account.

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.

Though CBDCs are not ready to roll out, the bank accounts will almost certainly be phase one with the CBDC arriving later.

I hope my remarks today give you some sense of the payments work that has been going on at the Federal Reserve during the pandemic. The pandemic has triggered notable short-term changes to payments system patterns, practices, and usage.

I hope mine have, too.