CBDC Govcoins – Has The Economist unveiled the endogenous engine of capitalism?

Not quite. More like 101=404. Classical effort = Error not found. Missing as ever : The Money.

“Economic action cannot, at least in capitalist society, be explained without taking account of money, and practically all economic propositions are relative to the modus operandi of a given monetary system,”

Joseph Schumpeter 1939 The Economist special report 2021

The 2009 financial crash never seriously disrupted the status quo of finance, or anything else. Compare such political impotence with the transformative power of technology. Ten Years After it is the unchained digital dragon that is seriously disrupting capitalisation. Especially the creation of capital via credit. As The Economist reports:

“Technological change is upending finance. Bitcoin has gone from being an obsession of anarchists to a $1trn asset class that many fund managers insist belongs in any balanced portfolio. Swarms of digital day-traders have become a force on Wall Street. PayPal has 392m users, a sign that America is catching up with China’s digital-payments giants. Yet, as our special report explains, the least noticed disruption on the frontier between technology and finance may end up as the most revolutionary: the creation of government digital currencies, which typically aim to let people deposit funds directly with a central bank, bypassing conventional lenders.”


“The least noticed”. By the mainstream. Fiat critics, goldbugs, money reformers , fin techies and crypto disintermediators have been talking about little else for the last ten years.

Notice the “least noticed” got to do with money. The Economist explains:

These “govcoins” are a new incarnation of money. They promise to make finance work better but also to shift power from individuals to the state, alter geopolitics and change how capital is allocated. They are to be treated with optimism, and humility.

As chronicled in this blog, the post 2009 reality has been nudging the monetary establishment into a re-think. Faced with stagnating growth, inflation and interest hovering near zero one is in fear of losing control. Theoretically and practically.


Many interesting articles have been written about the various Central Bank Digital Currencies (CBDCs) being devised and implemented, assessing their relative merits and chances of disrupting finance and monetary geopolitics.

The Economist’s recently published Special Report goes further and digs deeper.

Digital Ruptures

One is taking this seriously. Almost alarmed the leader concludes:

New money, new problems

Such a vast spectrum of opportunities and dangers is daunting. It is revealing that China’s autocrats, who value control above all else, are limiting the size of the e-yuan and clamping down on private platforms such as Ant. Open societies should also proceed cautiously by, say, capping digital-currency accounts.

Governments and financial firms need to prepare for a long-term shift in how money works, as momentous as the leap to metallic coins or payment cards. That means beefing up privacy laws, reforming how central banks are run and preparing retail banks for a more peripheral role. State digital currencies are the next great experiment in finance, and they promise to be a lot more consequential than the humble ATM.


Reading the whole special report is highly recommended. But the leader is a good short read – at source or scroll to bottom

Or keep reading my commentary focused on the savings&loans doctrine obscuring the “repellent” facts of credit money creation.

As suggested when posting about crypto saving capitalism, the ongoing digital disruption of finance is likely to pose questions about money – whence it came and where it went, for instance.

Especially that infamous debt or credit money academia calls endogenous. There is a lot of it, as in 90%+ of all money. But officially it’s not quite real. It’s not issued by central banks. It starts as private credit but mysteriously morphs into public cash.

This is how The Economist explains it:

The private bits of the monetary system are the banks. They provide banking services by collecting deposits and making loans. By holding only a portion of these deposits and lending the rest, banks create money: the original deposits remain ready to be called on in full, but there are now new deposits from the proceeds of the loans. All deposits can be used as money to make payments. But the new money is created by the mere stroke of bankers’ pens. “The process by which banks make money is so simple that the mind is repelled,” wrote J.K. Galbraith in 1975. “Where something so important is involved only a deeper mystery seems decent.” …

Most money is created by banks. In America the quantity of broad money stayed the same as a share of gdp for 100 years (though the pandemic spurred a dash for cash). Some 90% of it is in private bank deposits. In other economies the share is higher: 91% in the euro area, 93% in Japan and 97% in Britain

This system has flaws. Because loans are long-term illiquid assets, whereas deposits are short-term liquid liabilities, banks need a lender-of-last-resort in a crisis. This creates other concerns because it fosters moral hazard through greater risk-taking. Regulators may try to curb this through prudential oversight, but this has not always worked.


Here is Joseph Schumpeter’s version of the unorthodox explanation of the mystery:

“It is much more realistic to say that the banks “create credit,” that is, that they create deposits in their act of lending, than to say that they lend the deposits that have been entrusted to them. And the reason for insisting on this is that depositors should not be invested with the insignia of a role which they do not play. The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the “supply of credit” which they do not have.

The theory of “credit creation” not only recognizes patent facts without obscuring them by artificial constructions; it also brings out the peculiar mechanism of saving and investment that is characteristic of full-fledged capitalist society and the true role of banks in capitalist evolution. With less qualification than has to be added in most cases, this theory therefore constitutes definite advance in analysis.

degruyter.com – J. A. Schumpeter Bank Credit and the “Creation” of Deposits 2016

Now let’s deconstruct The Economist’s narrative in some detail.

“… banks … provide banking services by collecting deposits and making loans.

Only recently The Economist felt nudged by recent research to re-consider the orthodox dogma. But not seriously. In this special report one starts firmly framed into the savings make loans picture. One just can’t let go of the cuddly fairy tale of thrift. The reality of “loans create deposits” remains repellent. Or just extraordinarily difficult? Schumpeter again:

‘It proved extraordinarily difficult for economists to recognize that bank loans and bank investments do create deposits.’ 

Joseph Schumpeter 1939 The Economist 2021

Note how the Economist is holding on to those fractional savings :

“By holding only a portion of these deposits and lending the rest, banks create money: …”

“Lending the rest”?

Victoria Chick, LSE, Positive Money
Why don't Eonomists understand money?
Extraordinarily Difficult Regression Therapy

Lets re-read this sentence:

“By holding only a portion of these deposits and lending the rest, banks create money : the original deposits remain ready to be called on in full …”


101=404 ? Within the same sentence one appears to have lost one’s fractional portion?

“… but there are now new deposits from the proceeds of the loans.”

Ah that’s ok then? So now credit-money adds to “reserves”? Multiplyers loitering? Would this be a case of loans creating deposits?

“All deposits can be used as money to make payments.”

All? As in 100%? Well done. One has got there in the end. Finally unreal endogenous credit money is coming out of the morphing machine as real cash! 100%.

Ex Ex Nihilo ?

So how was that done exactly?

“But the new money is created by the mere stroke of bankers’ pens. “The process by which banks make money is so simple that the mind is repelled,” wrote J.K. Galbraith in 1975. “Where something so important is involved only a deeper mystery seems decent.”

The Economist special report 2021
Ex Valorem!

Hallo Ex Nihilo! Mind you, “ex nihilo” reads like another bit of alchemist fog to veil the real story. Which is the one of the valuation. Of collateral, and crucially, systemically, of expected future earnings. One is booking a value. Nix ex nihilo. More like: “ex valorem”.

Systematically turning valuations of the future into money may well turn out to be the veiled endogenous engine of capitalism. Such focus on money chimes with this archetypal capitalist formula used by CasP to express capitalisation:

Capital as Power

Considering how many economists started off imagining a “science of money”, the production and allocation of new money has been waiting to be taken into account for a long time. “Taking credit into account” in one’s modelling certainly helps if one aims to model the real economy. Curiously conceived as the bartering of utils, even though one only ever has prices. The value on the other side of the price equation has long gone missing into the untraceability of utils or abstract labour.

Green Hetero Eco Nomics

Interestingly, ecological economics could be the route to fill the value vacancy with the real numbers of ecophysics?

But this is way off mainstream. And rather theoretical. Let’s return to special report. Firmly framed into the savings&loans picture The Economist does find it difficult to reverse the narrative into it’s counter-intuitive opposite : loans create savings!

Nonetheless one has faced up to the repellent simplicity of key-stroking new money into existence. Here is Ben Bernanke reminding us that this process is the same for any bank, commercial or central:

Having unveiled the mystery of keystrokes making money one might wonder how much of this credit money is issued? Is The Economist ready to cross over to the 15-20% who are aware of the significance of the 97%?

Most money is created by banks. In America the quantity of broad money stayed the same as a share of GDP for 100 years (though the pandemic spurred a dash for cash). Some 90% of it is in private bank deposits. In other economies the share is higher: 91% in the euro area, 93% in Japan and 97% in Britain.

So we got to the 97%.

That’s rather a lot. Even once one has got the hang of this, to realise that if all debts were repaid there would be virtually no money left can still make one a bit dizzy.

Extraordinarily Difficult Commodity

And how about a quick pointer to how all that credit money may affect say, inflation? Let alone the real economy? Boom and bust?

A Pseudonym Exercise in Enantiodromia

Analyst Kit Winder recently shared his monetary re-think on credit money and inflation. The re-think was prompted by by George Goodman’s 1982 “Paper Money”, one “… of the best books on money, finance and economics I have ever read!” writes Kit Winder :

It’s a book written at the peak of the American inflation in the early 1980s, detailing how it came to pass that Americans were “no longer saving and were borrowing as much as they could” and were talking, almost obsessively, “about prices, about things – real estate, houses, especially houses… The unarticulated theme of those conversations was this: How do I get out of the currency and into something that will hold its value, or increase? The assumption, quite correctly, was that to hold dollars was to lose.” …

My favourite insight was on the transmission effect of higher oil prices on the world economy and inflation, and the extraordinary extremity of it all.

For oil-producing nations (OPEC), if oil goes from $10 per barrel to $20 as it did (and some more!) during the formation of OPEC in 1974, it makes basically more money than it could ever know what to do with. With production of 30 million barrels per day, OPEC’s revenues have grown by $109.5 billion per year. …

The wealth creation to nations which had been mostly farming peoples until the 1960s was extraordinary. And with the rest of the $100 billion, they didn’t buy – they banked. With oil prices rising, money is created and sent to the oil-producing nations. Having bought just about everything imaginable, they reached the bottom of their shopping list, and started banking the rest. When $100 billion starts getting deposited in US, European or newly formed national banks in the Middle East, it has a knock-on effect. It creates the ability to lend.

If a US bank has a reserve ratio of 10%, then this $100 billion allows for a full trillion ($1,000 billion) worth of lending. That’s how truly new money is created – not in the central banks but at the commercial ones, who lend a hundred pounds on reserves of a tenner, creating debt on your account and credit on theirs with a flick of the pen, or a tap of the keyboard. But who to? With that much money to lend, Smith says you run out of quality creditors pretty quickly – the world only needs so much. So banks, simply to do something with this tsunami of money into their balance sheets, started lending to less and less creditworthy borrowers.

This two-fold effect of flooding the system with more debt, and of a lower quality, creates inflation and also heightens the risk of a banking crisis. That’s how rising oil prices lead to inflation – not just through input costs for businesses, but also by increasing bank reserves, therefore increasing lending, therefore increasing the amount of money in circulation.

I’d never thought about it like that, but it makes perfect sense.” …

97% Micro

In the special report The Economist prefers not to indulge in theoretical implications . Better go for the practical problems:

This system has flaws. Because loans are long-term illiquid assets, whereas deposits are short-term liquid liabilities, banks need a lender-of-last-resort in a crisis. This creates other concerns because it fosters moral hazard through greater risk-taking. Regulators may try to curb this through prudential oversight, but this has not always worked.

economist.com/special-report 2021 a-future-with-fewer-banks

This smells as stale as an antique audit from the old Wicksellian book of monetary mutterings and continues to get nowhere new. For a more substantial economic analysis from a quantum physicist try this :

“As described theoretically in textbooks such as Mankiw’s, fractional reserve banking apportions most of the job of creating money from the sovereign to the private banking system, but the central bank is still firmly in control .”   … “The problem with fractional reserve banking … is not (just that) … credit money is … (as Soddy warned) … free to grow exponentially until , the gap between the virtual and the real reaches breaking point… (but that) … it turns out not to be a true description of the financial system. …

Bizarrely, the fact … that bank loans and bank investments do create deposits was only formally acknowledged by central banks quite recently . Indeed , as economist Richard Werner remarks , ‘ The topic of bank credit creation has been a virtual taboo…’ and the BoE … created a considerable stir … when it broke this taboo by noting that ‘The reality of how money is created today differs from the description found in some economics textbooks … the central bank does not fix the amount of money in circulation , nor is central bank money “ multiplied up ” into more loans and deposits.’

(This) also explains why money seems to dry up in a recession … as … the money … disappears when the debts are repaid … (and) unless new loans are constantly created to replace these funds , the money supply will shrink , further exacerbating a downturn. Of course one might ask why … the topic of money … was largely ‘ written out of the script of modern macro – economics ’ . One reason , suggested by Werner , is ‘ the predominance of the hypothetico – deductive research methodology in economics … In other words , economists are not letting empirical facts get in the way of a good theory .

Another explanation is that the mechanistic worldview … views systems as being built up in an ordered fashion from individual parts …(so) it makes sense to see the central bank as a central control unit for the financial system. …(H)owever , the parts are better viewed as making up a coherent whole , whose function is characterized by feedback loops , so there is no single central node .

The most obvious reason for omitting the pivotal role of banks , though , was because economists wanted to keep money out of the equation . Only by doing so could they maintain the pretence that the economy is some kind of barter system based on rational exchange .

David Orrell-Quantum Economics-excerpt-2
Not Found: Money in Economics

It’s perhaps not just that some economists wanted to keep money out of the equation. It’s also about no one being able to get it in there?

No Debt to Barter

The Economist aptly calls CBDCs Govcoin, rather than Britcoin, Fedcoin or Eucoin. Govcoins by any name are even more overtly political than cryptocoins. With the digital dragon unleashed, just possibly the topic of money creation may become unavoidable. But it is challenging.

 The Trojan Horse of Crypto

Thousands of years of metallism meant even big brain M Keynes got a headache from his visit to Mesopotamia. And then there is the widely believed “Barter Myth of Origin”. As N Dodd points out, out of the five myths of the origin of money, this is the one with zero evidence. In his Debt bestseller David Graeber spends more than a 100 pages debunking this myth. But like most debunked tales and formulas the barter tale survives in economic textbooks, apparentlty for didactic reasons? Just like IS/LM?

The “Metallist” origin of money, used as a medium of exchange, is based on the presumed low efficiency of barter. However, barter is usually ill-defined and archaeological evidence about it is inconclusive. Moreover, the transaction costs associated with barter seem to have been exaggerated by metallists. Indeed, the introduction of a unit of account reduces the complexity of the relative prices system usually associated with barter. Similarly, in-kind transactions have timing constraints which are often labeled as “the double coincidence of wants”; with a system of debt and credit, delayed exchange, that is lending, is possible. Such adaptability of barter is confirmed by the study of Mesopotamian and ancient Egyptian palatial economies. They provide evidence that non-monetary transactions have persisted during millennia, challenging the metallist vision about the origin of money.

Serge Svizzero, Clement Tisdell. Barter and the Origin of Money 2019

Mainstream Macro is like a natural history museum of didactic exhibits. In the vast Victorian entrance hall the prime dinosaurian exhibit is an installation entitled “The Birth of Money by Barter”.

As it happens barter may have it’s part to play in The Economist’s preferred universe of “Free Trade”. Historically barter’s origins are best understood as “civilising” the mutual raiding (and raping) of tribes into a ritualised exchange of goods (and genes). Socio-culturally bartering enacts the dynamics of deal-making ignored by economic orthodoxy. Even though such power-play between more or lessequal exchangers is as obviously important in business as it is in international trade. Important ultimately as price making. Prices made not by supply and demand. But by power.

100% Macro

Out of a combination of memorising, mediating and mobilising, money ends up meaning power.

Money is a “claim on society” that potentially empowers any and all currency users, albeit on a stratified spectrum from humble purchasing power to the mighty power of money as capital. Money means concentrated power from its historic inception as sovereign currency. Money as capital means a new sort of potentially de-centralised power with the logic of capital overriding even the capital owning capitalist’s personal preferences. Rather than a composition, capital is a mono functional accounting system of : “More!” Capital is neither uniquely stolen, saved or accumulated surplus, nor any particular thing or means of production. Rather it’s the recurrently re-calculated bottom line of a narrative of credit, debt, interest and monetarisation resulting in capitalisation.

Capital Logic

Such are my artist’s impressions from my travels through the libraries. Way off mainstream.

As the to mainstrem’s non-theory of money as neutral it gets even more interesting in a semi psycho-pathological way in that whilst in theory money has been neutered, in practice money is construed as a commodity, albeit a rather peculiar one, hence having to be controlled by central banks. Which lately have informed economists that control is hard to do when one issues less than 10% of the money supply.

Such are the “impossible” facts which have wrung Wicksell wrong and flattened the Phillips curve into a fraying Free Trade flag trickling patiently sticky price tags on to a moth eaten IS/LM museum poster…

The result of money-neutral economics is that in those moments when money obviously seems to be messing up the economy, like in a re-valuation crash, mainstream economists have to explain why this is none of their business as one is dealing here with unpredictably exogenous shocks.

Anyway, mainstream economics doesn’t really do Macro. It’s 97% Micro. Micro is their big thing. Not sure what Micro is actually all about? Is it Betriebswirtschaft? As a nano business entrepreneur I for once absolutely agree with mega business billionnaire Bill Gates: “Economists don’t actually understand macroeconomics”.

That may have to do with the fact that the equilibriating mainstream has no money to put in its Macro. The zombie skeleton of offical Macro theory is as embarrassing as the third synthesis. Not that the edifices to be synthesised are worth the effort in the first place. But as any clergy might say: this is the only liturgy we know. There is no alternative. As VV Chari said to Paul Romer :

“Burning down the edifice, and saying we’ll figure out what we’ll build on its foundations later, just does not seem like a constructive way to proceed”

economictimes.indiatimes.com – world-banks-chief-economist-romer-says-macroeconomics-in-trouble

That’s why economists disagree. Even within the dominant equilibrium paradigm. Not as in variant interpretations of the paradigmatic theory. There is no such theory. Instead they disagree according to “economically exogenous” preferences. Like aesthetic, cultural or political preferences. Otherwise known as personal biases.

The pseudo synthesized neo- and new Keynesian cannon of dumbed down formulas is disintegrating and disaggregating into the classical vacuum of tautological operationalism. Systemic irrelevance has accumulated into the institutionalised fabric of a monopoly incumbent. But the fabric is made of phlogiston. It is the emperor’s old new clothes. I am happy for my daughter to study economics. But I am not paying for DSGE. I figure she’d be better off reading real Classics than learn a zombie coding language?

The Heteros’ moment should be coming but are the Ur- and Post Keynesians ready for disaggregated diversity?

Or will quantum credit modellers and ecological economists out-maths them in a doughnut shaped turn to value ?

Wiedergeburt der Politischen Oekonomie?

Just follow the money …

articles and references on Digital Money News

see also on GaiaMoney >

  1. alternative, complimentary, eco, energy, ideal, next currencies – Terra
  2. DeGrowth auf deutsch
  3. digital commercial currencies 
  4. Geldforschung
  5. inequality (+monetary)
  6. monetary EU
  7. monetary reform
  8. sovereign central bank digital currencies CBDC
  9. Wiedergeburt der politischen Oekonomie?


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