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Transcript
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SC"The US is in a better position compared to the Euro area and Japan because we were able to raise rates to 2.5 (until Powell pivoted and cut 3x), and reduce our balance sheet for awhile(which has all but been reversed in months to save the repo market). I liked the guy for most of the video, and then all of a sudden he became of face of the Fed's arrogance in the final minutes.
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BCmissed opportunity for some real scrutiny. Throw Grant Williams in next time he'd have ripped Potters throat out in 5 mins flat.
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PVGreat to hear from a central banker but interviewer asks no critical questions? Especially since a lot of the interviews on Realvision evolves around central bank responsibility, printing money etc. - why dont we get some critical questions on these topics and maybe the central banker could defend their thinking and make us all a little bit wiser!
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JMDigital cash with negative rates - crazy, unworkable idea. You probably would have street protests. IMO it would become political real quick! Again it's this same arrogance that they know best. They really know what I should do with my cash?
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SVThere is a silent revolution occurring in the backdrop that's not being mentioned here, and that is the systematic elimination of counter-party risk into decentralized ecosystems. This revolution is underpinned by blockchain / distributed ledger technology and is far greater than open/permission-less systems like Bitcoin. What I'm talking about is the Internet of Value (IoV), which is far larger, and dwarfs the abstractions of any single value ecosystem. The IoV facilitates the flow of value as easily as the Internet facilitates the flow of information (the true internet, not walled gardens). The IoV as an abstraction is a system designed to facilitate P2P transactions without an intermediary, and more notably, without everyone having to agree on the adoption of a single universal unit of account. If one considers that CBDCs are national, sovereign instruments then they should ultimately be reflective of a nation's GDP, not as a centralized issuer of a reserve currency. Similarly, crypto currencies like Bitcoin represent supra-national alternatives for world citizens in search of alternatives to mismanaged central bank policies. They both have a role in the coming Internet of Value, as do many other value ecosystems that will arise from the digitization of all human assets (equities, bonds, commodities, precious metals, property, etc.). Consider for a moment that the "far" future will be defined by a simple base layer protocol for value exchange, something akin to the Interledger Protocol (ILP). This is analogous with how TCP/IP facilitates the transfer of information through any device or network (broadband, fiber, cellular, wiFi, etc.) and is device/network agnostic. One can use TCP/IP with any email provider with the assurance that if I send an email from a Google GMail server it will arrive at an Apple email server, or Outlook or whatever. The same is true with a Layer 2 protocol like ILP. With ILP any number of participants can exchange value using micro-payments between pools of liquidity in any network. The sender can send $ and the receiver can receive it in any denomination (or combinations thereof) with little to no FX volatility / losses. If I wish to receive in ETH or Euros or Chinese CBDCs, ILP allows for that. More importantly, ILP allows for higher level abstractions (businesses) to be built on the Internet of Value in the same manner that businesses like Facebook and Google were built on TCP/IP. This is done via "connectors" that act as market makers between ecosystems to provide a service to ecosystem participants. These market makers, or connectors, maintain liquidity in each ecosystem and compete for value transfer at the lowest price with other market makers / connectors. The connectors are chosen via path finding algorithms to ensure that the losses of conversion are in the micro-basis point range. The larger point I'm making here is that it is not a zero sum game with respect to currencies and there certainly won't arise one global currency to replace them all. In fact, it is becoming increasingly clear by countries around the world that a reserve currency is inherently hegemonic, and therefore not desirable in the long run. Countries wish for monetary sovereignty as much as geographic sovereignty and no one is enjoying the weaponization of the US dollar. In the end, it won't be Libra, or the US CBDC, or Bitcoin that "wins" the value race, it will be the Internet of Value that facilitates all of the above on a level playing field so that each ecosystem accurately reflects the network effects, incentives, and monetary policies that the participants supporting said ecosystems has chosen. Competition of the likes no one has imagined. Interoperability of all assets, true P2P value transfer. What precludes me from sending some US $ to a small farmer in Bangladesh in exchange for digitized labor or farm yields? Why the intermediaries? The friction, and the parasites, will be shed over time, just like technology is disintermediating most of Wall Street, banks, etc. Central bank CBDCs will need to compete with Bitcoin, ETH, XRP, digital Yuan, etc. among other value pools (like digitized real estate) that will become extremely liquid. What need is then there for a reserve currency or further yet for centralized monetary policy. In the interim there will be a "melt up" in dollarization, but in the long run the Internet of Value will swallow up the world's value as a whole and as it should be. Prepare yourselves.
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VSIF GOVTS CONTROL CURRENCY VIA DIGITAL CURRENCY WITHIN 10 YEARS YOU'LL HAVE TYRANNY THAT WILL MAKE GENGHIS KHAN LOOK LIKE A PIKER.
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zdsome truth, but some lies too anyway, BitCoin is the future that the global money SHOULD go........
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scThe more I listen to people entrenched in the Central Bank system the more two things are apparent to me: 1) They are against BTC not because of what it can do for the world, but because of what it might do to the Central Bank's loss of control which they now yield over the people. 2) The Central Bankers really are very limited in thinking and on ideas of how to get out of the increasing negative rate problem which is growing around the world. If their solution is to turn towards digital assets in order to increase the use of negative rates, and they think this will force people to spend their hard earned money and thus force the economy upwards, they clearly are not understanding what has happened in Venezuela. Forcing people to spend money by decreasing the purchasing power in the future is exactly what astronomical inflation rates in the Venezuelan economy is going through and you don't see Venezuela improving, you only see it getting worse. Digital government controlled currency to force people to spend by decreasing rates and decreasing purchasing power is only digging the hole deeper without actually fixing the problem. How sad that this is all the solution they are contemplating.
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DLIt's infuriating listening to someone pontificating the possibility of mass theft of wealth and the total destruction of savers. I suppose savers would find a better asset to save their wealth in (PM's / BTC / ect), But that would be the next move on the chess board for these creeps. Outlaw anything not approved by the central planners. These people want nothing short of total control over our lives.
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BCWhat did Zuckerberg expect? He wanted $Libra to be based NOT ON THE DOLLAR! Backed instead by a basket of currencies. So, actually, he wants to be a BANK! Next, I suppose he'll want HIS OWN COUNTRY!
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BSPlease, no more central bankers on RVTV!
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wjbuy gold. You can always exchange that to anything.
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AWIncredibly annoying (yet important) to hear an ex central banker who either still doesn't understand his former institution is the source of all our current problems, or does understand but is living in denial. I knew everything about him as soon as he mentioned that a government should have control of its nation's money. He's not sure why people value BTC. Just unreal.
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JSBurn it down! Long BTC, Short Bankers
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VVWe pay income tax for what we earn, we pay goods and services tax for what we buy, we pay land rates, utilities rates etc for the privilege of living in our own homes. We live under the impression that what is left of our earnings is ours to invest, save or do with what we want. And now Central Bankers want to rob us of the savings and wealth we have left. Negative interest rates in my opinion is morally wrong and the long term impact on society is being underestimated.
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RMWhat most of us want is a transparent free market to efficiently allocate resources and constrain government back door taxation through debt money printing by central banks to support it. But government cannot control their spending and therefore can never allow their fiat currencies to be replaced. That is why the US went off the gold standard and why crypto currency, though gaining in, popularity will never be allowed by governments to supplant their fiat currencies.
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KWThey are terrified of Libra because if it is successful they can kiss their idea of negative rates goodbye
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JSThis was a very dissapointing interview. There were so many opportunities for the interviewer to poke and challenge the Simon Potter. If this is really how the CBs think, it is quite obvious that they are seriously underestimated both the utility value and the impact of Bitcoin in the long run. Making national fiat money digital won't do much to improve them, except that it will pave the way for an total surveillance state. As another commenter wrote, a digital dollar will come, but it will have to compete with Bitcoin, and the stats of each currency's strength don't like good for the USD (digital or not).
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TCThis is the answer to all those on YouTube (Gold and Crypto) etc acting like the currrent monetry system is as good as done for. The main takeaway is 'Central banks are far from ready to give up control, power and their wealth creation engine. Making the case the CB are protecting us and that we need them to organise us is amazing. The change to a Crypto monetry system can only happen if the public majority want it - then it can't be stopped. But first the public needs a little more understanding and education wrt the current system and how it makes them poorer and stops them from getting ahead
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MPI really appreciate this interview and I think all bitcoiners ought to be delighted if this is truly the CB's view on Bitcoin - very complacent!
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RMInteresting to hear but totally predictable babble from a former central banker, one of the in-crowd of central bank monetary policies that has been the handmaiden of unconstrained government debt. For at least 20 years, the US, EU, Japanese and Chinese central banks have printed money to save the market from normal, healthy business down cycles to preserve the status quo. They can't abide a rocking boat when Congress and particularly the President is up for re-election. Potential market efficiency has been so undermined by central planning of interest rates and money creation that that economic growth is now anemic and becoming more anemic as time goes by. The capital markets are deformed that they cannot even withstand the Fed raising interest rate to the extent that treasury 10 year hit a little more than a historically measly 3% last December. In the past we have had better growth with the 10 yr at greater than 5%. But those were much more robust economic times. And, with the Trump $1 trillion tax cut with no spending cut, we now have another $1 trillion of deficit to cover which has forced the Treasury to recently issue more debt and the Fed to spew money more than $100 billion into the Repo market to purchase the government bonds because even the systematically significant financial institutions were overwhelmed and could not bid for them. What pickle. The central banks are trapped like heroin addicts who need more and more drug to keep things going with less and less effect. Mr. Potter is clearly a very smart guy so I imagine he understands the dynamic. He just can't admit it publicly. If he does, he will thrown out of the insiders club like the irreverent David Stockman. So I can't really blame Mr. Potter too much for not having those type of guts. He is only human. Not sure i would do any better if I were in his shoes.
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UG"Facebook would have for their international currency wouldn't necessarily match the goals that you would have for societies as a whole, because Facebook is a private sector" Oh, right. FED is not a private entity? Does the FED always aim for the goals of the societies "as a whole"? Ludicrous
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ASDo you think he could've commented/talked about the current repo situation or the 'non QE?' I really would've been interested in this.
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OCProof that central bankers have no clue
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FAA guy who continues to understand how the economy and monetary policy has affected/damaged global economies. Continued delusional expectations that haven't work globally in 30 years and in the US for the past decade.
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DTThis is a really good interview. Potter explains his position very cogently and gives interesting insights. I don't agree with all of them, but (i) that is what makes markets and (ii) I think this is the sort of dissonant interview which is, and should very much remain, one of RV's raisons d'être.
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HKWas a good interview. People don't always have to present a viewpoint which is aligned to the audience, this guest presents his in a clear manner and gives some insight into the way c.bankers think about these issues. That is the value derived from this interview.
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YCMy opinion is that if Simon was still in his position, we may not have the September Repo chaos. Btw, is Pozsar in your guest list yet?
SIMON POTTER: Bitcoin is, as we said at the start, it's a slightly different class to the Facebook Libra. Remember as I said, it's a decentralized system. It doesn't have any central authority. It's growing in a way not related to any government. There are a number of people who are attracted to an asset class like that, because there's no government involved. That means particularly because the supply of Bitcoin is limited, it is likely to have some value as an alternative asset class.
ROBERTO PERLI: Hi, I'm Roberto Perli, and I'm one of the founding partners of Cornerstone Macro, together with Nancy Lazar and Andrew Laperriere. I'm also the head of global policy for the firm.
Today, I'm here with Simon Potter to talk about cryptocurrencies and the attitude of central banks or governments in general towards this new asset class. Simon is currently a senior fellow at the Peterson Institute for International Economics and formerly until last spring, Simon was the head of the markets group for the Federal Reserve Bank of New York and the manager of the system, open market portfolio of the Federal Reserve, which is the portfolio of the Federal Reserve, which at its peak was about 4.5 trillion, not billion, trillion with a T, so pretty large, pretty respectable size.
Simon, thank you very much for joining us, much appreciated. We're going to talk about digital currency, cryptocurrencies. Let's start with the very basics, so for the people that are not very well versed with this, what is a cryptocurrency?
SIMON POTTER: Let's think about the US dollar that all of us have. That's a piece of paper we can exchange between each other and no one has to be involved in that. We could have a bank account and that bank account, someone has to check the we're the rightful owner of that. A cryptocurrency is somewhere in between that bank account and that piece of paper. The most common cryptocurrency people know about is Bitcoin.
Bitcoin solved for a difficult problem. If I have a bank account and someone's checking whether I spent the money, there's one record of that, and so you can see. If I want to pay for a burger, and I use my bank account, they deduct it from that. How could you decentralize that process so it looks a little bit like cash but there is a record that's available not just between the two of us, but for everyone to see? Bitcoin solved that problem to prevent double spending and produce this quite elegant way of maintaining trust in a monetary system without a central authority having a rule.
ROBERTO PERLI: Sounds like a very good thing. It sounds like it's serving a good purpose. Yet, regulators seem to be a little bit weary of this of this new idea. Can you give us an idea what [indiscernible]?
SIMON POTTER: I think part of it was that one of the reasons that we want a national currency and we want the government to have control and regulators is to monitor and prevent certain types of behavior. When Bitcoin started out, it was very much associated with behavior that was on the fringes and not legal. There was a concern that the main use of Bitcoin would be to facilitate that behavior.
There are people who say that cash does that as well, so cash has some big pluses. There's some minuses because it allows certain types of behavior like that. Bitcoin had that feature and people were worried because it had this advantage over cash. I have to be next to you to send you cash. For Bitcoin, I just have to be able to connect to the internet to do a transaction. That could happen anywhere in the world and regulators were concerned it would facilitate this bad behavior across borders.
ROBERTO PERLI: Yeah. That's one of the concerns. We talked, you talked about Bitcoin, which is, I think just one of the several thousands, I think of various different currencies that are out there. Now, one currency in particular that got a lot of attention recently, just this past summer, was Libra. Facebook came up, make a very high profile announcement that they're planning an international, this new digital currency. Yet, I would say the reaction on the part of Federal Reserve, Congress, other central banks, other governmental authorities around the world was probably not what Facebook was hoping for, was very, I would say hostile. Why is that? Why are regulators so concerned?
SIMON POTTER: I think there's the crypto aspect and the Facebook aspect. Let's just focus on the crypto aspect, but there's clearly issues with Facebook and the large tech firms and there was some reaction to the fact it's a large tech firm pushing that. Facebook has, say 2.4 billion users, and they have already a network in place that would facilitate a medium of transaction like Libra. That medium of transaction is not a national currency. It's a Facebook currency.
If you believe that there are important advantages to governments and to the government's control a national currency for people who live in those countries, there was this concern that the goals that Facebook would have for their international currency wouldn't necessarily match the goals that you would have for societies as a whole, because Facebook is a private sector and they will be interested in making money. Facebook did point out that the inclusion will be greater because of all the people who didn't receive good financial services who are on their network, and they could do peer to peer transactions. I do think there is a role for something like Facebook's Libra currency in terms of the social value that it might add, but some aspects of the design suggested it wasn't going to be as efficient as that.
ROBERTO PERLI: It seems to be that perhaps precisely because of the association with Facebook, Libra faces fairly uphill battle. Do you think it will come to fruition in the near term?
SIMON POTTER: I think it's unlikely the version was promoted in the summer, that we'll see that version of Libra. That was what's called a stable coin. That's different to Bitcoin. A stable coin take some other asset to back the currency. The assets that they were going to take for Facebook were a basket of currencies. That was a feature that I think diluted a little bit the goal there, which was to use this large network effect on the Facebook platform, and as we were discussing earlier, would have been easier to back that just with the US dollar.
ROBERTO PERLI: Now, there are crypto currencies and then central banks or governments have come up with their own versions, if you want to call it that way. It's called central bank digital currencies or national currencies. Can you tell us a little bit the difference between the two? How do public authorities think about this digital culture? What would they like to introduce rather than Libra or Bitcoin?
SIMON POTTER: We're all used to digital currency. We have credit cards, we have bank accounts. There is a digital record. One thing we don't have as citizens is a direct account, say with the Federal Reserve. There's a lot of belief from the Federal Reserve that that is not the most efficient way of organizing the financial system. What they want to keep in place is this two-tier system, where we bank with a private bank, who then has a digital account with the Fed.
What we've seen over the last few years is growing acceptance of different types of institutions having accounts with the Fed or with say, a central bank in another country. It could be a FinTech company. It could be something called a narrow bank that we saw an application for in in the US, where the bank keeps an account at the Fed, but all it does is hold Federal Reserve assets, reserves. That would be one way to have a national digital currency.
Another way, and this is something which I do think we'll see is for central banks like the Fed to issue a token. A token is like paper currency, but instead of existing in a physical form, it's going to exist in a digital form and use some of the proof of who owns it and prevent double spending that is behind Bitcoin and the other private cryptocurrencies.
ROBERTO PERLI: You talked about a regulator's desire to keep this so-called two-tiered banking system. Basically, it sounds like regulators have that set on keeping this intermediated financial system. They don't want a direct consumer, or a business having direct access to Central Bank cash. It is an important point that and probably is not something that people generally understand very well. Can you explain why? Why is that?
SIMON POTTER: The banks in the US provide a lot of services. People might not realize it, but they provide a lot of services. They provide loans, they provide risk transfer, for insurance companies provide other products, they help with mergers. They give advice over a whole range of things. They do that off a base of deposits from households and firms.
That's a set of skills that central banks don't have. If central banks were the only bank around, they'd have to learn that set of skills, there's no reason to think that the public sector will be as efficient as the private sector in producing that range of financial services. Clearly, there's some issue with how efficiently financial services have been produced in the US over the last few years, but that's the role of regulation the private sector.
I don't think many of us we want to be in the situation that the Chinese people fell wherein for many years, there was one bank which was the central bank, the People's Bank and you've had no other choice. It was the People's Bank job to allocate capital, do the risk transfer, advise on mergers, things like that. I don't think we would want that in the United States or in those countries.
ROBERTO PERLI: Yeah, I agree, actually. It's a situation where the central bank says, look, I'm good at doing certain things, but I don't have the skills to do everything that private banks do. There is a comparative advantage for private banks to continue to do what they're doing, so we should preserve--
SIMON POTTER: I don't give it as an absolute as well, comparative, yes.
ROBERTO PERLI: Yeah. Okay, so talking about central banks again, one argument that you hear frequently as to why central banks would want their own version of a digital currency is, well, we live in a world where interest rates have lowed and unfortunately, we cannot cut rates all that much. If only we could cut rate very deep into negative territory, that would solve all the world's problems. Unfortunately, we cannot cap rates too deep into negative territory because there is cash out, there's dollar bills and people who don't want to pay negative interest, all they have to do just hold cash and they pay zero.
Too deep negative rates don't work and so the idea would be well, what if we eliminate cash as we know it, and instead we substitute it with the digital currencies, then we can force everybody to pay as negative interest rates as we want and the world would be a much better place? I say this tongue in cheek but has this attitude changed recently or what do you think.
SIMON POTTER: Clearly, one of the attractions behind a digital currency for people who studied the theory of monetary policy was if you had a digital currency and you remove physical cash, then you could, and this is just a theory now, you could set very negative nominal rates. As you pointed out, if you have physical cash, people will stop using digital accounts and just use cash to transact. That would not be an efficient place to be, they would store value in cash.
But if you didn't have cash, they will be forced-- and I'm using forced here, to hold this currency, which was losing value each day on purpose. In the models, people don't get upset with that. In fact, what they do is they spend a lot of money today, which gets you out of the slump that you've been in. We haven't tested this yet, because you would have to rewrite the whole financial system.
Think of a world where we had minus 5% rates and you want to issue some debt with a coupon. Then that coupon, as the person who borrowed the money going to the lender to collect the coupon, that's an upside down world. Another version of it. We all like to pay our taxes as late as possible. In this world, you'll be paid.
I'd like to pay taxes for the next five years idea. There's something wacky about that world, more importantly, I think taking away cash, which has a lot of virtues, and even in this digital world we're talking about will still need cash because of power outages or because of cyber-attacks, that would be a very costly thing to do for society.
ROBERTO PERLI: Yeah. It seems to me that this idea is basically, I would say, anti-democratic, a central bank, even a non-elected official pushing, forcing citizens to--
SIMON POTTER: I wouldn't like to be walking down the street at 2 p.m. on a FOMC day and I've got my digital wallet, and I'm walking. It has $100 and then at two or one, it has slightly less than that but under the theory, that would be a better, more efficient world to be in.
ROBERTO PERLI: Hopefully, central banks realize that the theory is one thing, probably an impractical solution and they're not pushing potion actively for that anymore, I would say.
SIMON POTTER: Unaware of anything people who are senior at Central Bank's pushing actively for that. There are many papers which are elegant, which shows some of the great benefits of this, those papers do not tend to have a financial system in them. We don't know how disruptive it would be. Mildly negative rates, which the euro area and Japan have used, they might have some benefits in that case. I don't believe mildly negative rates have that much benefit in the US.
ROBERTO PERLI: Right, we can all agree with that. Then also, I think the idea of negative rates came up originally say, hey you, we push rates negative for a short period of times, just a few months, maybe a year tops, and we solve the problems and we're back to normal but in Europe, it's been, what, five years? More than five years, and there is no end in sight. I think the problem has changed a little bit. I think the appetite for central bank for negative rates has diminished considerably.
SIMON POTTER: I believe that's correct. Yes.
ROBERTO PERLI: Back to our digital cryptocurrency, let's talk a little bit about the global view on geopolitical implications of this. Suppose there is a