Whether you like it or not Central Bank Digital Currencies (CBDCs) are the natural evolution of central banking.
Let's try to think why that's the case, what CBDCs will disrupt and who will be in charge ultimately.
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Cash and control
Central banks have a big problem. They are in control of the monetary policy in their respective countries. With that they are supposed to manage inflation and keep unemployment low.
At least that is the mandate of the Federal Reserve. But really the same concept applies everywhere.
So they can turn some knobs, adjust some parameters and by doing that help to foster economic prosperity.
The problem is that those knobs they can turn do a pretty crude job at influencing inflation and job market.
For the Federal Reserve those two knobs are controlling liquidity at the banks level and adjusting short term interest rates. That’s it.
The Federal Reserve can increase or decrease the Fed Funds rate.
When they do so they influence the risk free rate on short duration bonds. This in turns influence the risk free rates for other durations along the yield curve. And eventually riskier debt instruments adapt to this change in the risk free rate… We are already three steps removed from what the Fed actually controls and we still haven't hit anything directly related to the real economy.
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