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Central Banker Sees the Future of Money in Bitcoin

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Want to know what central bankers will do in the next few years? There's a Bank of England website page you need to read. But you might need a suspension of disbelief to absorb its conclusions.

In 2008, as the financial crisis really began to bite and the U.S. started its slide into recession, the Federal Reserve provided a handy playbook on the maneuvers it would use to try and rescue the economy. Ben Bernanke's 2002 speech "Deflation: Making Sure `It' Doesn't Happen Here," told you everything you needed to know about zero interest rates and quantitative easing, and how they would save the world.

Fast forward to today. Some of the cleverest people in finance are warning about another recession. Pumping $5 trillion of easy money into the world still hasn't averted the threat of deflation as the global economy fails to respond to stimulus in the way that the textbooks say it should. And Andy Haldane at the Bank of England has written a speech that may turn out to be a roadmap to the next adventures in monetary policy.

"How Low Can You Go?" was the question Haldane, the U.K. central bank's chief economist, posed last week to a chamber of commerce meeting in Northern Ireland. He then took almost 7,000 words to explore the current puzzle facing policymakers (zero interest rates cause more problems than the literature expected), examine what's special about the current situation (emerging markets have become way more important), dismiss a couple of proposed solutions (more quantitative easing becomes a fiscal issue, while changing inflation objectives destroys confidence in the targets), and suggest some radical proposals of his own (abolish paper currency and adopt some form of Bitcoin).

The current state of global monetary policy is truly extraordinary. Haldane reckons 40 percent of the world has interest rates of less than 1 percent, two-thirds are below 3 percent, leaving 80 percent at below 5 percent -- not to mention the nations that have introduced negative rates:

Source: Bank of England

That's a problem, Haldane argues. The closer borrowing costs are to zero, the less space there is to cut them when the economy needs a boost. Trying to move below what's called the Zero Level Bound, meantime, hits the obstacle that you can't charge people for owning paper currency. And because recessions come along every three to 10 years, central banks need ammunition to counter those slumps.

QuickTake Less Than Zero

Doubling inflation targets to 4 percent from 2 percent (as my colleague Clive Crook has recommended for the Fed) would be one way to gain elbow room. But Haldane says that risks trashing hard-won central bank credibility even if targets reflect the economic backdrop rather than some arbitrary benchmark:

"Consciously de-anchoring the boat, with a promise to re-anchor some distance north, runs the risk of a voyage into the monetary unknown. Once un-moored and de-anchored, the course of inflation expectations is much harder to fathom." 

If a higher inflation target isn't the answer, maybe making quantitative easing an everyday policy tool rather than an emergency measure might help. Haldane said that economic models suggest QE worth 1 percent of gross domestic product will likely boost GDP by 0.3 percent on a 12-month horizon, although the state of the economic environment makes those predictions less than reliable.

Permanent QE, though, turns bond-buying into an instrument of fiscal policy, Haldane said, which in turn means "monetary policy credibility heads down the most slippery of slopes." So while QE is a feature of the current landscape, it can't last forever (or beyond the next economic upturn even).

Haldane has a compelling explanation for why the Fed, which investors previously assumed set policy almost exclusively for its domestic economy rather than the rest of the world, kept rates unchanged last week in what seemed like an acknowledgment that its policy borders extend beyond its geographical borders.

Emerging market economies contribute about 60 percent of world economic output on a purchasing power parity basis, up from 40 percent in the late 1990s; they're responsible for about 40 percent of world trade, up from 25 percent; and they issue 13 percent of the world's bonds, up from 7 percent, and 14 percent of all equities, up from 8 percent. With those increasingly important economies faltering, it's harder for the Fed to escape the liquidity trap of zero rates and start heading back to more normal borrowing costs. So unless they recover, don't expect the Fed to move. (He also suggested that the next move in U.K. rates might need to be down, not up, which won't have won him any credit with his boss, Mark Carney.)

With higher inflation targets, perpetual QE and a Fed rate increase out of the way, it's Haldane's proposed solution to the Zero Lower Bound that's the most intriguing part of his speech:

"What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential.  On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network. One interesting solution, then, would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form. Although the hurdles to implementation are high, so too is the potential prize if the ZLB constraint could be slackened." 

Haldane isn't the first senior person to propose abolishing paper currencies, or to embrace the blockchain technology underlying Bitcoin. But his enthusiasm for the prospect of what he calls central banking's "own great technological leap forward" is infectious. And his status as a potential future Bank of England governor means investors, traders and economists should all pay attention to his vision of what the future of central banking might and might not include. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net