Odd Lots - Benoît Cœuré On Central Bank Digital Currencies And The Future Of Monetary Policy

Episode Date: October 22, 2020

Central banks around the world are increasingly launching pilot projects to explore the possibility of issuing digital currencies. But how would they work and what would they accomplish? On this episode, we speak with Benoît Cœuré, the head of the BIS Innovation Hub and a former member of the ECB Executive Board. We discuss CBDCs as well as the future of monetary policy more broadly.See omnystudio.com/listener for privacy information.

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. And welcome to another episode of the Oddlots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, we like to talk about money, don't we? And you know what I realized the other day?

There's, well, we've spoken a lot about different types of money. So we've done cash. We've done historical forms of money. We've done a ton on Bitcoin, Ethereum, cryptocurrencies. We've even talked about that time you developed your own cryptocurrency. But there's one type of money that we haven't actually done an episode on yet. Tell me more. So there is a type of money that sort of straddles the world of digital currencies and traditional forms of money, I think, and that is the central bank digital currency, or CBDC, for short. Oh, yeah, no, this is an interesting area because, yes, alongside the sort of emergence of private, independent digital currencies. We have seen central banks all around the world do some

efforts towards implementing their own or creating their own piloting projects of essentially having, yeah, digital versions of cash, I guess, I guess you would say. And I think China is fairly far along with its endeavors. But I don't think any of them have really taken off yet, but definitely an area that I think a lot of people are pretty interested in for a lot of different policy. Yeah, that's the thing is you wouldn't necessarily expect this to be the case, but a lot of the digital currency exploration that's going on right now is very closely tied to monetary policy. And I have to confess, before we start, I have never entirely understood the concept of central bank digital currencies. I've never quite understood

what the problem central banks are trying to solve is. And I've never quite understood how they will function alongside traditional cash and bank reserves and things like that. But I'm happy to say, I think we have the perfect person to discuss all of this today and to get into a lot of those themes. We're going to be talking with Benoit Coray, who was, of course, on the board of the ECB from 2011 to 2019. and he's now head of the Bank for International Settlements Innovation Hub, and that group recently published a report on CBDCs, part of a sort of task force that involved a bunch of central banks exploring this topic. So I think it's going to be a good conversation,

and hopefully it answers some of the questions that I at least and probably a lot of other people have had about central bank digital currencies for some time. Yeah, no, I'm really excited because I'm with you in that. I, too, have had numerous questions about what purpose they serve, what the central banks see as the reason for launching them. So hopefully we can get a lot of questions answered. And also, hopefully, you know, maybe we could squeeze in a few questions about just the economy and monetary policy as well, because, of course, Benoit, having served at the ECB for so long,

hopefully we get some thoughts about the state of the world today, which is, of course, still an extraordinary time. Yeah, and I think weirdly there might be some natural overlap between digital currencies and what's going on right now in the global economy. So without further ado, Benoit-Couré, thank you so much for coming on Opots. Welcome. Thank you very much for having me. So in the intro, Joe and I both just admitted to not necessarily understanding digital currencies from central banks, maybe just to begin with, you could sort of explain the concept. And maybe one thing that's always confused me is if we were to see something like a digital dollar or a digital

euro, how would that differ to, for instance, me holding a euro or a dollar in a traditional electronic bank account? What is it that makes that digital money different to, you know, align in my bank. So yeah, I mean, these are excellent questions because you may wonder, I mean, we're living in a world which is already massively dematerialized. Most of money, I mean, more than 90%, 95% of money is already digital. So might wonder, why all of a sudden are we discussing digital currency? And so we're here to discuss central bank digital currency, right?

CBDC. And so let me focus on the CBDC. That is the definition of CBDC. It's money that is issued by the central bank, meaning it's a liability of the central bank. It's not the liability of a commercial bank or any other player. It is digital. So it's not physical like banknotes. And it's not issued to banks as part of monetary policy as we know it, which is as bank reserves, right? So bank reserves is, if you think about it, it's money that banks have on their account with the central bank. It is digital, so it is central bank, digital currency. And it has been existing for decades. So here we're talking of any liability of the central bank, which is digital, but not issued to commercial banks as part of the implementation of monetary policy,

which means two things. Either it is digital and issued directly to citizens. So it's a the digital equivalent of a banknote, and that would be entirely new. Or it is issued to commercial banks, but not as a deposit on an account, but as a token, for instance. Which gives the answer to your initial question. So what's the question we are trying to answer? What's the problem statement? Well, there are two problem statements. The first one is what happens if cash disappears, if our citizens don't want to use banknotes.

anymore? And are we happy if the only way they have to pay for their expenses, consumption, is to use commercial money, money issued by banks to draw from their bank accounts, or do we want to keep providing them with central bank money, which today doesn't exist in a digital form? So that's the first question. And the second question is what happens if at the core of the system, banks or financial market infrastructures would need central bank money. to settle the transactions in a way that is not an account at the central bank. And that could be a token, for instance. So imagine a future, maybe a nearer future,

where some financial market infrastructures would be transacting, exchanging tokens on DLTs, right? If you want to keep settling these transactions in central bank money, then you need a way to either connect the DLT with the traditional payment infrastructure or to issue a central bank token to the DLT. And that's what we call wholesale CBDC. So there are two answers. Either it's wholesale CBDC because the technology underlying financial infrastructures is changing or it's retail CBDC because in some places at least cash may be disappearing.

So these are two separate questions at both ends of the financial system, at the front end and at the back end. First of all, that was very helpful, just sort of overview of what? what you're doing or what the vision is. I guess one way that I sort of think about it or hear what you're saying is rather than seeing the analogy as, okay, here's money. If I have it in a bank, it's a liability of a bank. If I have it in some sort of payment app like PayPal or Venmo, that dollar or that euro is a liability of PayPal or Venmo. This is more like cash, something that I hold in the wallet and something that's a direct liability of the central bank.

So that part makes sense to me. What is the fundamental advantage, however, of doing this? So we have cash that currently exists. We have online money or sort of bank liability money, as you described it. What from a policy standpoint would, in your view, the creation and widespread adoption of a digital euro or a digital dollar or a digital pound. What are the advantages that you see for governments and central banks to actually launch them? So my answer, and that might be surprising coming from a central banker,

but my answer would be that it's not even a policy discussion, it is a political discussion. Because the key question here is, are we satisfied if all money used by citizens for their daily transactions is commercial money? That is, are we satisfied if the whole functioning, the daily functioning of the economy is at the end of conversation between citizens and banks, right? Or do we want the central bank as a public institution to be part of it? And what's very important here and also for the rest of our discussion is that the answer might be different in different places. That is, in some places, citizens may trust, and in many places, I guess, citizens would trust the central bank better than Visa, Master. card or Facebook or Citibank, right? In other places or in other corners of society, that might not be the case.

And you will find many people who trust Citibank more better than their central bank. And you find people who trust Bitcoin more better than the dollar or the euro. And so the conclusion here is that we have to let people decide for themselves which kind of money they want to use, provided that they are well informed on the risks, on what on the implications. But the emerging consensus is that a substantial fraction of society will ask to keep that contact with the central bank, which is the ability to use a direct liability on a public institution under parliamentary supervision as part of a political system. And if we want to keep that kind of access, then we need to do CBDC.

So that's really interesting because you've framed more direct contact between people and the central bank through CBDCs as an advantage or something desirable. But I know one of the criticisms of digital money is that there is a concern that you're in effect reducing the role of commercial banks in the economy and that might have unintended consequences for the transmission of monetary policy or the way the financial system actually works. Some people have talked about the potential to increase bank runs, for instance, if people have a central bank. issued alternative that's seen as a safe place to park their money, they might fly out of bank deposits and go into digital money. How are you thinking about that particular issue? How are you

thinking about how CBDC might impact the financial system as it exists today? So that's a very important point, Tracy, and that's also why I'm saying that we need an ecosystem, right? And contrary to what people sometimes fear, or think there is no intention by central banks to have a monopoly on all kinds of money. The economy is operated with commercial money today. When you buy a beer in a bar, it's very, very likely that you're going to pay either

with a credit card or with your telephone, and that will be eventually coming from your bank account. And it's commercial money. That's not a claim on the central bank. And we're going to keep it like that. So we'll keep an ecosystem, where you will have different means of payments, different forms of money, and most of it will be commercial.

The question is, do we want to keep Central Bank money at the heart of the system to make it stable? And one of the key considerations that we have in thinking about this future ecosystem is exactly what you mentioned, which is we don't want CBDC to kill banks, right? We don't want to go to the extreme of a system where all economic players would use CBDC, and banks would at best be kinds of conduits

who would buy assets or extend credits and fund on capital markets, you know, narrow banks or a system of sovereign money, it's sometimes called, or Switzerland had a vote, as you may remember, on something called Fogel, which was rejected. So that's something that most people don't want, and that's something that regulators and central bankers don't want,

because they see a value in the existence of commercial banks as institutions who take risk, who transform credit, would take maturity risk and credit risk, and we do all kind of financial intermediation in the economy. We don't want to kill that system. And so there is an active discussion on how to mitigate the kind of risks you're highlighting, Tracy, which is that CBDC would take over bank deposits and would make banks more vulnerable.

And there are different answers. We can go into the details if you wish. And one of the important discussions we'll have in the coming month and years is what's the best answer if we don't want this to happen. I want to take it from the other angle. I mean, one of the nice things about cash as we know it, if I pay for something in a bar, if I go out and meet up with friends and want to split a check somewhere or anything else is that it's anonymous. Person A or somewhat anonymous, person A can pay something to person B. without person C knowing about it. There are all kinds of reasons why people prize privacy.

I'm curious if in your vision of a CBDC, A, would two people be able to make a transaction without some third party entity having a sort of centralized knowledge about who just made that transaction? And I'm curious, in your conversations around with regulators and central bankers, I'm sure you talk to a lot of different groups, law enforcement agencies about their concerns, FinCEN, you think about know your customer anti-money laundering laws. And I'm curious whether in your conversations and consultations, you've also talked to privacy groups about their concern.

So, yeah, I mean, we've been doing that in particular when last year there was a related discussion, not on CBDC, but on stable coins, right? starting from Libra, right? And there has been an active discussion in policy circles on how to regulate stable coins. And the FSB just came with a report on that with guidelines on stable con regulation. And privacy is also a key issue. And by the way, something we found out is that financial regulators don't often talk to privacy regulators or to privacy groups. And so that's a – it might sound like.

a kind of an ancillary discussion, but it's actually very important that this kind of technical innovation forces us to also to rethink the way we do regulation and to connect silos, right, which until recently weren't connected at all. And so we are talking now with privacy regulators and with privacy groups. And that's an instance of choices that have to be made by society and through a political process. Because on the one hand, you have, have a demand, you have demand for privacy, which is there and which is absolutely legitimate and which is already in some places like Europe very much enshrined and hardwired into law with GDPR in particular. But on the other hand, you also have regulation and laws against

money laundering, against the financing of terrorism, etc., which are equally important, right? And so any CBDC architecture will have to strike a balance between these two aspirations. And the exact way we turn the dial, in my view, should be a political discussion. Because I don't see how central bankers or bank supervisors could decide on that kind of things. It has to be a political discussion. And again, there are ways to reconcile. So, for instance, I'm just giving an example. So I'm not saying that's a way to go, but just to illustrate, you could imagine a system where

CBDC would be distributed by banks, right? So the front end would be banks. You would keep talking to your bank. You wouldn't go directly to the Fed or the HKMA or the ECB. You would get your CBDC from your bank, just as you get your bank knows from your ATM. So exactly the same as today. Banks would buy a given quantity of CBDC from the central bank

using their bank reserves, just as they buy bank knows today. and see the central bank could regulate the amount of CBDC for monetary policy purposes, but the central bank would not know exactly to which CBDC has been distributed. And that would be subject to AML and CFT and generally no customer diligence and know your client rules, just as any transaction today. So that's a possible way that would reconcile different aspects. I'm June Grosso, inviting you to join me for the Bloomberg Law Podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world.

Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets. From corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really. mean. We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast.

You mentioned Libra briefly, which is Facebook's attempt at a stable coin. And this sort of reminds me of another big discussion when it comes to CBDC. And I guess part of it is that if you're going to launch digital money, even if you're a central bank, you're going to have to have some sort of payment system that goes along with it. And so central banks are going to have to decide whether to build and run their own payment systems or maybe to team up. with companies in the private sector who can do that for them. I'm curious, private corporations like Facebook are pretty good at technology. How do central banks compete against companies like that, like a Facebook, or how do they work together with them for the payment system? So we shouldn't be competing against Facebook because we are not in the same line of business, right? we're absolutely not in the same line of business.

And in a sense, if I may take a step back, that's exactly why you mentioned the report which was issued by seven central banks together with the BIS, and that's a working group I was co-chairing with Sir John Conley from the Bank of England. It started exactly with the consideration that we central bankers have to come back to first principles. And too often the discussion on digital money,

digital currency, started from the wrong place, like started from the technological end of the discussion. Are we going to do CBDC using blockchain? And if it's a blockchain, is it going to be Corder or hyperledger or whatever else? Which is an important discussion in due time, that it's not the right place to start from.

We want to start from first principles. And as a central banker, I would say our job is twofold, is to ensure price stability or monetize stability, meaning that you should have the ways and means to implement your monetary policy, whichever monetary policy you've decided as a monetary policy committee. That's the first thing. And CBDC should not hamper that.

And if it can help, it's even better. We can discuss it later. And the second thing is financial stability. And an essential part of financial stability is the existence of core payment systems at the heart of the financial infrastructure, financial institutions which connect jurisdictions and which allow real-time settlement in central bank money, right? And so the key role of the central banks really is at the heart of the system to provide stability. And we don't want to take over.

And there are many, many things, most things that we wouldn't do well and we're not going to do. So to give an obvious example, if CBDC comes as a token, most likely it's going to be handled in wallets, right? So you would have a wallet on your phone, say, with CBDC, with Central Bank tokens in it. That's not something Central Bank should be doing. It's very obvious to all of us that wallets are something for the private sector to do, right? And so there is room for everyone. There is room for everyone. The key thing is any form of commercial money has to be regulated, right?

And there might be financial stability considerations, which would lead us to impose some requirements. like settlement in central bank money. But apart from that, we need the private sector to innovate. All that innovation will come from the private sector. I'm not aware that central bankers are particularly good at finding new technologies. That's not what we do. Can I ask a question? I mean, you mentioned stable coins.

We talked about Libra. And I think that there is a sort of spectrum of what we see in the stable coin space from sort of extremely projects that attempt to be very legitimate. Facebook is Facebook, Libra is probably one of them, to others that are probably a little dicier. What is the regulatory case for the existence of stable coins? Because central bankers, regulators have been pretty permissive, it seems, of them for a while. And I'm curious why, from your perspective, they're beneficial and why sort of people should be able to use a currency on a distributed ledger somewhere that is ultimately backed up by a sort of licensed

bank system? Well, I wouldn't really see stable coins as currencies. So it's a little bit of a misnomer. I would see stable coins as new payment systems, which are very well, very integrated, back-to-end, closed-loop payment systems. So it's a little bit different from the kind of innovation that we've seen until recently

in the payment world which was really at the front end, right? It was about, you know, providing you with a better interface, providing you with an interface on your smartphone and so on and so forth. And all of a sudden, we see payment architectures

which are entirely private, which are encompassing and go and include the back end. That is the pipelines that will bring money from one place to another. which wasn't the case so far. And that might be okay. That might be okay.

If it's well regulated, if consumers or investors are protected and know the risk they are taking, that might be okay to have that kind of payment systems. I don't see, I don't really see that as a currency. I see that as a new means of payment, which can be convenient, but which also raises risks. And these risks have been highlighted last year in the G7 report on stable coins. and recently by the FSB. And the risks come from the fact that these new projects are global.

Libra is an obvious example. And so there are risks to the, for instance, to the functioning of the international monetary system which are entirely new, which you didn't have with earlier forms of cryptocurrency. Like what happens if you have a major stable coin

which is being issued and you start to see substitution with local currency in some smaller jurisdiction. That would be a concern for that jurisdiction, would be a concern for the IMF, would be a concern for the World Bank, and that's something that we want to discuss.

So you see new risks coming, right? But there is no reason why, a priori, stable coins should be rejected. And let me just as a, just for the record mentioned that there are other forms of stablecoin, which hardly anyone speaks about, which are wholesale stable coins, right? imagine a coin that would be issued by a large commercial bank to settle transaction within a few

small group of clients and that would be 100% backed by central bank money. That's a stable coin. It's much less of a discussion because it's not going to reach billions of people but only a handful of commercial banks. So that's pretty easy to understand and to regulate, but it's also coming. My understanding is that one of the big debates about digital money, from central banks is whether it would strengthen the transmission of monetary policy. So on the one hand, if you have CBDC, central banks can directly influence interest rates on digital money and they

basically control it. But on the other hand, you're, as we discussed, potentially setting up a competitor to bank deposits and we're not exactly sure whether or not that might change the sensitivity of the demand for that type of money to interest rates. I'd be curious to get your views on this. How do you see CBDC interacting with monetary policy? That's a really good question. It's a little bit the elephant in the room. It's a really good question. It's a really good question that most central banks are working hard to not to answer. And take the report we've been discussing. We kind of allude to that, but we are very early on upfront. We say we're not going to to discuss it, right?

And there is a simple reason to that, which is that monetary policy is a different mandate and it's very national, it's very domestic, and it's being decided in different places, like monetary policy committees. And so central banks don't want to mix up the two discussions because if CBDC comes, and the way they will use it for monetary to do monetary policy is something that they want to decide for themselves. And so the case for international cooperation today is not on the monetary policy side, it's on the payment side, because we want the payment architecture to work smoothly and it is global, right? And this is why you already see, and you're going to see a lot more international coordination on CBDC and on digital money generally, because payments are the backbone of the international financial architecture.

And so you won't go to see coordination for the system to be stable. While monetary policy is a sovereign matter is decided locally, people and governors want to talk to their and to report to their parliaments, right, to U.S. Congress, to the European Parliament, etc. That's not something they want to discuss in the open air and internationally. So that was a little bit of a sociological or political detour to explain to you why we're not discussing it. Now, of course, it is an issue. Of course, it is an issue that central banks will have to decide for themselves. And I really see a key question coming for each and every central bank to decide, which is, do you want to do CBDC for monetary policy reasons?

Or do you want to make it as neutral as possible on the way or with respect to the way you implement your monetary policy? And that's a decision to take early on because it impacts. your architecture. It impacts the way you're going to do CBDC, right? If you want CBDC to be accessed by your broad range of economic players, and if you want to be able to control both the quantity and the price of that particular form of money, which is what monetary policy is about, then it's different from deciding that you're going to issue a given amount of CBDC, and then you don't want to know where it's going, for instance. And so there is a potential to be a potential to use CBDC in a kind of a tailor-made way, right, in a kind of very, very granular way to bring

money to particular places, to pump money down the last mile, as my colleague, I was in Carstance, as one said. That's something that today Central Bank very much want to see, money being pumped down the last mile and reaching all players, all corners of society. But if you want to do CBDC to do that, then you probably have to design your CBDC in a different way. And central banks have not decided yet, really. So we're a little bit at the crossroads there. And different central banks may take different decisions.

And so my personal take, which doesn't commit anyone, and I'm not even doing monetary policy because I'm at the BIS, so it's really my personal view, is that it is worth reflecting on that. Because we've kind of at the end of a cycle where monetary policy, we've made monetary policy implementation incredibly sophisticated since the great financial crisis. And again, now through the coronavirus crisis. But most of it, if not all of it, it goes through capital markets, right? So we have very different, sophisticated ways, complex ways to influence on capital on financial market expectations and on pumping money in and in and on a pumping money in an analysis.

out of capital markets. But at some point, that's hitting a limit. Because there are places in the economy which money just cannot reach, it also might create political issues. Because incredibly, incredibly societies see monetary policy as being a conversation between central banks and capital market participants.

And they feel excluded from that conversation. So that was my last word at the ECB last year, in my last speech, in my last meeting at the ECB, the conclusion was that if, If monetary policy remains a conversation between central banks and capital markets, then we shouldn't be surprised if people don't trust us, right? And that's a little bit what we've seen. And CBDC can be a way to reconnect central banks with people if it's done well. But some central banks might want to go there, some don't want to go there, and that's fine.

They're all different. I mean, this might be a good moment to sort of seg a little bit to some of the bigger policy questions that the world faces right now. But it seems to me like a point that you've made, which I find really interesting in a few of your answers, is like a lot of these are just political questions and political questions have to be made to some extent outside of the central bank. But I guess one of them is, do we want monetary authorities to have the ability to more easily put buying power in the hands of normal people, not just function through capital markets? And it sounds like the sort of CBDC conversation that the world is having is sort of a parallel potential conversation to this question of, do we want to expand the tools that central banks have to get people money? Yeah, I would agree with that. And I mean, the fact that there are political dimensions, so it doesn't imply that central banks should defer to politicians, right? CBDC is about the future of money.

It's about the future of monetary policy. It's about the future of payments. And so central banks should be on top of that discussion, which they are now. But I guess what we're both saying is there are dimensions, there are some trade-offs where you need to get a sense of the preferences of society. You need to take the pulse of society. And that's why in all places CBDC will require extensive consultations, which is the way the, for instance, the Riggs Bank in Stockholm has taken,

which is the way the ECB now is taking, you need to consult a lot. That's not something that you want to do under closed door in a central bank somewhere. That's something where there are many dimensions which need engagement with society at large. So I know there's been some discussion on potentially tiering interest rates when it comes to CBDC, and maybe even allowing the central bank to impose negative rates on digital money that they issue, that probably says more about where we are in terms of unconventional monetary policy as a whole than it does necessarily about CBDC. But maybe that should be a cue to broaden the conversation and talk a little bit about

what's going on in the world at the moment. I think when you were at the ECB, there was a question. an assumption that monetary policy would eventually get back to normal, but it seems increasingly likely now that low interest rates and asset purchase programs, things like that, are here to stay. Do you think we're ever going to get back to the days of boring central banking where we would never be talking about negative interest rates when it comes to CBDC? Yeah, well, that's true. It's true. I'm now old enough that I remember the days where interest rates were positive.

Like, these were the good old days. And the, the corona, the corona crisis, the corona shock has disrupted everything. So I think it's fair to

it's fair to say that there is no prospect, there is no short-term prospect of monetary policy normalization anytime soon because of the amount, the extraordinary amount of uncertainty

that we have, which comes from outside the economy, which comes from the, from the cycle of lockdowns and waves, et cetera. So as long as we'll have these kind of waves and uncertainty on lockdowns, the economy will be in a state of very high fragility,

because expectations will, because there is no way that businesses or consumers can form expectations about the future. So that kind of compresses the time horizon of both businesses and consumers. in a way that makes it very, very difficult to plan for the long term, which is what central banks should be doing, if you think of the kind of assignment of roles in the economic policymaking world, you would expect central bankers to care for the long term, while politicians are kind of prisoners of short-term incentives and constraints

and political cycles and the like. And you would like central bankers to think for the future. But today, They can't because it's just too uncertain. So it's very difficult to kind of make plans about the future of monetary policy. And I think the only kind of sensible conclusion is that central banks need maximum flexibility to cope with all kind of outcomes. So they need to keep all their options open. So, I mean, because of this sort of extraordinary moment, and you mentioned it, I think, in one of your first answers,

were in an era in which there's sort of a perception, but probably also a reality that there really is only so much, so many tools at the central bank's disposal right now. We have more people talking about, okay, we need more aggressive fiscal policy across the developed world, even the IMF has said as such. A, do you believe that that is the case, that there is a argument for fiscal authorities to do more. But more importantly, do you think, sort of going forward, and even as this crisis hopefully sort of fades into the rearview mirror, do you think it's worth a sort of broader rethink about a more permanent role for fiscal policy in terms of macro stabilization such that

we're not entirely dependent on central banks to balance the economy every time, you know, things go bad? It's a pity that you would need a global pandemics to have that discussion, right? I mean, it has started a little bit before, but it does feel as though the pandemic has accelerated the discussion, if nothing more. Yeah, I mean, I think the discussion, I mean, it looks different in different places. Now, I think in the U.S., you have a very decent tradition of stabilization policies, both on the monetary side and on the fiscal side, and of a good complementarity between monetary policy and fiscal policy. And the economy is flexible and resilient and strong enough that you can stay in that mode, right,

because the economy always comes back. And so you're not stuck in a state of the world where you would have to do very active monetary policy and very active fiscal policy at the same time because the economy comes back, right? It's more difficult in Europe for different reasons. One reason being that we've never been able, so I say we as a European right now, we've never been able to find the right fiscal framework. And so fiscal policy has never been very helpful in helping the ECB manage the cycle. And it's becoming more helpful now.

And you've discussed it with my former colleague, Victor Constantio. And I agree with a lot of what he told you that is now happening. And it's a very good development. But the other reason is that the economy is in Europe is not nearly as flexible than in the US. So if you're in that kind of extraordinary situation where you need to turn the dial and have a very active monetary policy and fiscal policy at the same time because the economy is not responding, you don't know how much time it will come to go back to normal, right, because the economy is not flexible enough to do it by itself. So that's a different situation, which also. calls for a little bit of caution, right? Because you can be stuck there in that kind of,

in that kind of state of the world for much longer. And so far so good. I mean, what fiscal authorities and monetary authorities have done so far is exactly what you were suggesting and what we want to see. That is good complementarity between monetary policy and fiscal policy. Even in emerging markets, economies, by the way, you are now seeing some, I mean,

many emerging market economies, Doing QE and the government is issuing more domestic debt. I mean, domestic currency denominated debt, which the central bank can partly buy. And that's a way to kind of strengthen the complementarity between monetary policy and fiscal policy. And that has given them much more policy space. So you're seeing that happening in different places. The question is what happens if that is a situation that can last for many years. Because then public debt will be building up.

private debt will be building up as well, some of it will be transferred onto the balance sheet of the government, and at some point, whatever the efforts of the central bank, the debt will be so high that you will need some kind of rescheduling or restructuring. And so if the situation with the virus stays as it is for another few years, which of course nobody hopes, what today looks like good cooperation between monetary policy and fiscal policy and respectful of everyone's mandate, right?

Not harmful to the independence of central banks. That's something that could become much more difficult to sustain because you will have to start discussions on some ways to share the fiscal burden. And these discussions can be politically very difficult and very harmful. And it's already starting in the developing world. I mean, there is an active discussion on debt restructuring and debt debt initiatives in the developing world. If we stay there for a few more years, that will gradually come to the developed world. And that will come with huge political difficulties. So I guess the only conclusion is that you want a vaccine to be found very quickly.

That's a conclusion. I think we can all agree with that. Definitely. We all agree with that. Hi, I'm PJ Vote. my podcast search engine has a new two-part series for you. Of all the new technologies coming out of AI, the most transformative one might be driverless cars. They're already on the road in 10 American cities, and they're quickly coming to more.

We tell the story of how we got here. The secret team at Google that spent 15 years building what might be the safest vehicle on the road, and we cover the fights brewing in blue cities, where unions and politicians are working to keep those cars off the streets. Listen to search engine wherever you get your podcasts. You mentioned the interview we did with your former colleague, Vitor Constancio. And one of the things that came up quite a bit in that conversation was inflation or the lack thereof. Rather than ask you the same question that we asked Vittor, which is do central banks understand inflation?

I want to ask a slightly different one, which is why do you think that consumers or the average person's perception of inflation seems to, to differ from what central banks are looking at. And I think there's a stat out there that, according to a European Commission survey, households thought annual inflation was something like 9% between 2004 and 2015, whereas we all know, having this conversation now, that inflation was actually below the 2% target

and quite far below it. So where do you think that discrepancy is actually coming from? Well, it comes from the, the, The way statisticians and central bankers look at inflation is very, it's from a southern feet, right? It's a bird's eye view on everything that's going on in the economy across social groups, across age groups, across different places. And so it totally kind of ignores the diversity of consumption habits.

And also the fact that you buy different goods and services at different frequencies over time. So, individuals are biased towards overweighing goods and services that they buy very often, like obviously, I mean, food and dairy and transports and refueling your car and that kind of things, while and the price of smartphones might be collapsing. I mean, that's not something you buy very often. So when people ask you, come and ask you about inflation, you're not going to think about that. So there are huge cognitive biases, which, which, are just normal, and central banks have not really made the effort to kind of translate

their concepts into concepts that people can relate to. And I think that's a big challenge for the future. That central banks are absolutely right to look at the economy in the aggregate at an aggregate level. But when they formulate their policies and their targets are in terms of inflation, they've got to translate it in a way that people can understand. And we're of doing that. You know, without getting too much into specific actions being taken by major central banks right now, you know, I want to just talk a little bit more about this sort of intellectual landscape. And we see this movement towards policies or frameworks that seek to avoid past mistakes.

And the Fed is engaging or announced the new framework of average inflation targeting, combined with a sort of more robust forward guidance. You've done a lot of work on these types of things in your career. Do you see this as evolution, average inflation targeting to avoid premature hikes in the future? And do you think there's more that central banks can do with sort of state contingent forward guidance, very clear levels that they set before which they would consider hiking raids? Or do you think the sort of current, or are they sort of, I guess, at the state of the art, so to speak, in terms of what can be done with this tool? Yeah, look, I don't want to comment on specific decisions by specific central banks.

I mean, you can put very sophisticated words and concepts on that. I think at the end of the day, a lot of what is being done today in different places amounts to just making sure that you will have maximum flexibility to cope with, economic uncertainty. And as you said, kind of tilting the discussion so that you're on the right side of the discussion and you prefer, you don't want to take the risk of having even lower inflation, given that you're at or close to the lower bound in terms of your interest rates and given the harmful consequences of deflation for the economy. So you want to be, in terms of risk management, right, you want to be on the right side of that risk. if you're going to take a chance,

that will be the chance of a higher inflation, because then you know what to do. That's how I understand what they're all saying, right? And then you can put very fancy concepts on it, which is fine. But as long as you, as the outcome is that you keep a lot of flexibility and you are on the side of caution

in terms of not allowing deflation to happen, I think that's fine. And I don't think the exact framework matters too much. All right. Well, Benoit, I really enjoyed that conversation, and I feel like I actually have a, let's say, the start of a good understanding of central bank digital currencies. You did a really good job of framing the discussion. So thank you so much. Okay, very good. So I hope now you know why we are doing it. Definitely more than before. Thanks. That was great. Thank you.

So I found that conversation very, very interesting. And one thing that I did appreciate was Benoit's framing of a lot of these issues or debates, not as technological problems, but as political problems or political issues that need to be decided by governments. Yes. To me, that was like the big takeaway, too. So there is obviously the technological side that's interesting. There are some exciting things that can theoretically follow from the technological innovations, whether it's advances in payments, the ability for people to engage in finance outside of just sort of interface with commercial banks. But it does feel like these are all sort of, the big questions are still have to be fought over politically, how any country actually wants to

set these up and the parameters of digital currency. Yeah, and I think that's another thing that came through from the conversation. The idea that not every CBDC is going to look the same, and countries might have different things or different problems that they're actually looking to solve when they issue these. And for instance, you brought up the discussion about privacy. There might be certain countries in the world, you know, I don't know, Cayman Islands, Bermuda, places like that, where anonymity of central bank digital money could work and could even be valued, but that might not necessarily be the case in other parts of the world. Yeah, I mean, I think this is the question of anonymity is super important because, look,

that is a really important aspect of cash, right? Like people like cash for that reason, but cash is going away. It's being used less and less because, A, you know, we have our phones and there's all kinds of sort of digital money infrastructure out in the wild, but also just on the internet, there is no way to spend cash. And so the question is, if there's a, if we, if we transport sort of the concept of cash to the internet and such that I can pay you for something directly without us having to use a commercial bank, do I get to keep what is a pretty fundamental characteristic of cash, which is that privacy? And if not, I think that's like,

potentially sort of a loss and a worrisome thing for sort of civil liberties and rights, if that goes away. You know, one thing that never ceases to amaze me, and I was thinking about during that conversation, is just how many different types of money there actually are. And people say money, but of course, you know, there's so many variations. There's the sort of commercial back-end money that Benoit was talking about a lot. There's obviously cash. And, I don't know. Like, I don't know what I'm trying to say, but it's just remarkable.

You know what I think is, what I was think about is interesting is that like, when people think of money, like when they think of like a dollar or a euro, I think the first thing that usually comes to mind is the physical version. Right. But I realize what I've like sort of like come to appreciate over the years is the physical version is like the weird freak show thing that doesn't really fit into anything else. So we tend to, they're not the same. and, you know, like, the physical money, the cash that we have like at our pocket, that's like this like narrow slice of the money system.

It doesn't even really make sense. Most money is credit, but it's not. It's a direct liability of the central bank, but that's also strange because what does it mean to be a liability? All the other forms of money, whether it's the money that I have in bank, whether it's the money that I have in Fenmo, whether it's the money that banks have held at the central bank, at the Federal Reserve, that all sort of like, fits into like this sort of like nice sort of like framework of like credit money that is essentially the core of the system. And so the money that most people think of is like the weird exception and not the rule at all. Yeah. I think when you think about it that way, the discussions around CBDC make a lot more sense. Like why central banks would be trying to solve the problem basically

of cash being such a weird thing and serving such a unique role. unique, albeit changing role in society. You know, the other thing is, like, we talked about privacy. I mean, there are some people who really see the privacy aspects of cash to be a super negative. I mean, like, who is it that Ken Rogoff? I mean, he wrote a book, basically, about how awful cash is, how it facilitates crime and tax evasion and corruption, other stuff.

So while there are some people who are like, okay, online digital currencies may solve the problem of anonymous payments on the internet in the world without cash. But other people say, like, this is really exciting because we can get rid of cash. And then there's no more anonymous payments anymore. And then we can go against all these ills like drug dealing and money laundering and stuff like that. So some people see this as a huge opportunity to fix what they see as one of the major flaws of money right now. I mean, other people argue also that there are less harmful forms of digital cash already in existence, such as gift cards issued by Visa and Mastercard, things like that.

Okay, well, clearly there's a lot to unpack when it comes to the very nature of money, and we will, of course, keep talking about it on Allotts. It's a perennial favorite of ours, but for now, shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Weizenthal.

Follow me at the stalwart. And follow our guest Benoit Courier on Twitter. He's at B. Courier. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy at Francesca Today. And check out all of our podcasts under the handle at podcast. Thanks for listening.

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