What Comes Next?

Why This Financial Crisis Paves The Way For Central Bank Digital Currencies (CBDCs)

For better or worse, US financial policy and the value of the dollar influences the entire world. As the US financial system enters a crisis the rest of the world is likely to follow. So it’s worth paying attention to the US banking crisis and what policies are likely to come out of it.

At the moment the US Government is only backstopping systemically important banks. Preventing only the largest banks from failing for political capital, to prevent contagion, or to prevent some other systemic issue. (ie: they’ll take action when they have something to gain or because there’s no other choice) ex: Silicon Valley Bank deposits have been 100% guaranteed by the US Government to prevent systemic job loss from the many small businesses that banked at SVB.

Aside from systemically important banks, the government will otherwise only insure deposits below $250,000.

Ok, so what does that mean, why does it matter, and how does that get us to a central bank digital currency?

Current US financial policy combined with the recent round of bank runs and closures creates incentives for large depositors to move funds to large banks that the government is likely to bailout if needed.

Why? Because depositors don’t want to guess whether or not a regional bank is systemically important. Why take the risk? Instead, they’ll move funds to a large institution that is more likely to be well capitalized or at the very least, too big to fail.

Now take a step back and think about larger depositors in terms of demographics - they represent the middle and upper classes of society as well as most businesses. Anyone or any business that has cash positions larger than $250,000.

So small banks start losing capital from the middle, upper, and business classes and then cannot make sizable, lower risk loans to them. Ie: they’re only able to lend & do business with the segment of the population that is least financially secure and the highest risk business.

Small banks are unlikely to survive these conditions and consequentially, more bank closures, less banks, and more depositors at larger banks.

As a few large banks gain more market share of the national deposits they become incentivized to take bigger lending risks with their too big to fail status. Ie: if they believe the government will come and rescue them, a moral hazard is created. The banks are incentivized to take high risk high reward bets because the taxpayer is on hand to bail them out. Governments hate moral hazards though and will sometimes send a message to the market that the taxpayer is still in charge. Example: when Lehman Brothers was allowed to fail.

So given that rapidly evolving environment, what’s a depositor looking for low risk options supposed to do? And what’s a government to do to de-risk the financial system?

Ultimately, this process (if taken to it’s logical conclusion) will force depositors (many of whom don't want to take any risk with their money) to look for low risk alternatives.

The current depositor choices are: high risk regional banks, too big to fail banks that are likely to consolidate power, become more risky over time and create moral hazards, or a direct line to the Fed.

A direct line to the Fed for individuals and businesses that want zero risk savings not held in a fractional reserve financial institution. Right now that means going direct to the government to store savings in treasury bills or other low risk dollar denominated assets.

And the federal government is happy to supply direct access as a way to de-risk the financial ecosystem and have greater control over the supply of money.

This is where the CBDC comes into play.

Janet Yellen talking about CBDCs

The central bank digital currency is the perfect vector to make a direct banking connection between depositor and the Fed a reality by providing individuals and businesses direct access to central banks, bypassing the risks of private banking.

If the current financial crisis deepens, watch for this to become a government talking point and watch for sentiment around it to rise.

In a future issue, I’ll write about why it’s bad for the government to control programable money. But for now, it’s enough to understand that the current crisis is forming the ideal circumstances for governments around the world to build support for state controlled programmable money.

Geoarbitrage as a Service

Baseflow

As more people embrace location-independent lifestyles, many will experiment with the full range of what that can mean. The natural evolution of this process will lead many location independent workers to explore geoarbitrage.

Geoarbitrage is the idea that a person can find greater value by relocating from one location to another. As an example, a remote worker might decide to move from an expensive and crowded city to a low cost, less populated rural community. Or they might decide that they want to relocate somewhere close to family, friends, activities, and ideological communities more aligned with their own.

The bottom line: as remote workers experiment with the ability to live and work form anywhere many of them will decide to relocate as a way to extract more value from the places they choose to live. Taken to an extreme that can mean relocating to other countries, gaining resident status, and in some cases, becoming permanent citizens of more than one country.

It's a complicated process and traditionally has been something mostly reserved for ultra high net worth individuals. But with the growth of the location independent social class, new services like Baseflow.io are emerging to make assessing and taking advantage of geoarbitrage much easier.

Baseflow is a company creating a productized marketplace to connect interested remote workers and digital nomads with the tools, services, and programs that enable them to relocate with ease. Current offerings help individuals establish residency and citizenship in Portugal, Antigua and Barbuda, and soon Spain and the UAE.

The company is young and still experimenting with the onboarding new users and adding access to countries that appeal to a wide demographic. But they represent a new frontier of what it means to be location independent.

As the world gets farther away from thinking of Covid as a pandemic, away from lockdowns, and towards a steady state where remote work is a permanent fixture of life, geoarbitrage will continue to become a topic of mainstream conversation. And as it does, we can expect more services like Baseflow to emerge to serve this growing location-independent class of people.

This is just one of many examples of unique service offerings that will appeal to this group of people.

Rapid Fire

• Chinese Gold Demand Continued To Surge In February | ZeroHedge - Are you buying gold now?

• From Bank Runs to Credit Crunch, The Financial Future Looks Bleak - “if banks were suddenly forced to liquidate their bond and loan portfolios, the losses would erase between 77 percent and 91 percent of their combined capital cushion. It follows that large numbers of banks are terrifyingly fragile.”

• Screaming Bank Run in a Crowded Twitter - “Social media has changed the state of play in the financial world. For better or worse, I believe the speed and volume at which information now travels creates faster answers for people looking for them.”

• Singapore Snatches Back World’s Best Airport - What’s your favorite airport?

• Kaiseki - Arthur Hayes on the current financial situation and what it might mean looking ahead.

• SVB Employees Blame Remote Work For Bank Failure - This is too stupid for words but I thought I’d share it anyway.

• The Largest US Bank Failures In Modern History - Silicon Valley Bank is very close to number 1.

Extras

Ways to “do remote work better”