What would a digital bank run look like?

Today I was struck by a thought, What would a run on banks look like today? Or what would today’s “bank-run” look like?

It’s almost funny to think about. I just can’t imagine standing in line to withdraw cash from a bank. Could you? Transactions today happen at your fingertips or with a glance.

Will the next run on banks start with your smartphone?

Will it be banks? Stocks? Or perhaps digital assets?

China trade

The congressional research service just updated its views on Chinese economic policy. If you do business in China you should be reading this. The trend toward a multi-polar world is solidifying.

“At a strategic level, the Chinese government is developing alternative trade, currency, and geospatial platforms to those controlled or influenced by the United States.”

China’s Recent Trade Measures and Countermeasures: Issues for Congress

A Better Place to Distribute Wealth

When you think of solutions to wealth inequity, what comes to mind?

Maybe you think “redistribution”. Government spending, taxes, cash payments, and welfare?

The issue with redistribution is the “re” part. It’s after the fact. Ideally, wealth would be more broadly distributed in the first place so there would be no need to redistribute it.

The focus on redistribution also confounds our social safety net. It’s not designed for re-distributive policies. Re-distributive policies themselves are also quite politically charged.

More people need to receive a larger share of profits. It’s really that simple. But how could this be reasonably implemented? Whatever the solution may be, I’m guessing it will be quite creative.

Billionaire Income Tax (BAT):

A quick review of Senator Ron Wyden’s Proposal:

Senator Wyden’s proposal tweaks the tax codes in a few unique ways.

Normally taxes are only assessed on realized gains. Meaning if you own a stock, regardless of the current stock price you only pay taxes when you sell that stock for a gain. If you never sell, you never get taxed.

BAT Highlights:

Who does this tax?

Those with > $100 million gross income and/or >$1 billion of covered assets for each of the last three years. So under 1,000 people today.  

What is the tax?

Tradable covered assets, essentially publicly traded assets like stocks, will be “marked-to-market” annually and taxes will be imposed on the unrealized gains.

Non-tradable assets will record a “deferral recapture amount”, essentially an accruing interest charge of sorts that is due upon the sale of those non-tradable assets. Non-tradable assets would include real estate, art, personal businesses, etc. Basically, anything that is not liquid and marketable. The deferral recapture amount may not exceed 49%.

Commentary:

My personal view: There needs to be a broader distribution of income and wealth in our communities.

So, the actual proposal is just over 100 pages… despite this I’m skeptical there is enough language to close all the loop holes. When you have billions at stake you can afford to hire teams of lawyers, accountants, etc. to legally avoid and reduce this tax. I know. I’ve helped people reduce their taxes substantially; it gets complicated fast. The incentive to take actions to reduce this tax burden is quite high.

The approach overall seems somewhat workable.

It is legal?

I think so. I’m not a lawyer though. Wealth taxes are normally viewed as illegal under the U.S. constitution because they are a direct tax. It’s a tax levied directly on individuals and not apportionment to population. This is why we have the 16th amendment for income taxes. At least for tradable assets one could argue are facilitated through federally regulated financial markets. The deferred recapture seems legal on its face to me. Just different. Still there will be lawsuits that at minimum delay this.

Wealth taxes sound like a great way to redistribute wealth but they stumble on the implementation side. It’s too hard and too complicated to work in the long-term. Wealth taxes also fail to align interests.

I would prefer we incentivize wealth distribution at the top, before people become billionaires.

Perhaps require a minimum percentage of accounting profits for public companies be allocated to employees in cash or stock each year. Have a limit on the ratio of highest-to-lowest paid employees. Add a vesting schedule in there and we have a recipe for attracting more talent to public companies. As well as an incentive to bring more companies into the public markets where the best talent will follow.

Other views on taxes:

  • Increase funding to the IRS.
  • Reduce the tax burden on income. We should incentivize labor not penalize it.
  • Consider a value-added-tax (“VAT”) for companies over a certain size. This would tax profits at the transaction level, similar to a sales tax. VATs hit every time you have a gain/loss on providing goods or services.

Ex: Let’s say you buy a snuggie from Amazon. Amazon makes maybe $0.10 in gross profit on the transaction. A VAT of 10% would impose a $0.01 tax on the transaction.

  • Eliminate the corporate income tax. This would dramatically close the gap between for-profit and non-profit corporations. We have lots of lawyers, lets use them to make companies that better reflect what PEOPLE want from them. Perhaps that’s purely profit or purely non-profit but allowing for something in-between leans into our strengths.
  • Everyone should pay taxes. Taxes are contributions to our community. We need more people personally invested it our community’s success. I know, first everyone needs to have the means to pay taxes.
  • I expect progressive consumption taxes through a digital central bank currency to be the “ultimate” solution to our tax issues.
  • Taxes reduce spending by those you tax. They have less money. Every policy needs to keep this in mind. There is a tradeoff between government and private spending.

Digital Currency

Digital currencies are on the rise. Why? Well technology wise they are clearly superior to the status quo, People and politicians will demand it, or at least demand to have some measure of control over it. But what is “it”?

Well “it” means different things to different people. At its core it is a more sophisticated and flexible payment and reserve system. Payment and reserves. Aren’t we talking about cash here? In some aspects yes but others no. Central banks are rapidly moving into this space. Tether, bitcoin, stablecoins, etc. Lots of players in this market all competing for market share. The outcome will be something to see.

The US dollar is clearly the desired reserve currency across the world, something I am quick to point out is both an enormous strength and weakness should that change. Note we are only ~50 years removed from the gold standard of the early 1970s and looking across history we can see monetary systems have changed.

So what can you do with a digital currency? I’ll focus on Central Bank Digital Currency (“CBDC”). I do not expect significant traction with non-government authorized or regulated currency. Sure other forms of currency will exist abroad and some domestically but regulation will stifle them. Why? Well after a certain size you want to have the government backing the security and stability of these systems. Taxes need to be paid. Know-your-customer (“KYC”) laws to be followed. As a few ideas on why we might want CBDC…

-Real time payments (not a thing today).

-Inflation protection, think saving for your first house, healthcare, or education.

-Micropayments, as the current payment rails are too cumbersome and costly for this to be viable.

-Direct cash payments to people and small businesses. This is the big one for me. Today, we lack the tools to properly implement this. The Federal Reserve stabilizes asset prices, capital markets, even the Paycheck Protection Program was done under the Fed. But why should the Fed be giving grants, technically loans that nearly all will convert to grants, to companies specially to pay people? The answer is simple, those companies are the only ones that have the “payment rails” set up. It’s a travesty.

– Progressive consumption taxes can be more effectively implemented.

Can central banks actually achieve this? Perhaps.

What is the Fed saying?

Never bet against the Fed. That’s the slogan passed down from investor to investor since Paul Volcker strangled inflation in the 1980s. Never bet against the Fed. It bears repeating. 2020 saw the largest and swiftest response to an economic dislocation in American history. Was that a surprise? No. Of course not. After the 2008 crisis one doctrine of monetary policy clearly stood out. Move big and move fast. Overwhelm the market with capital and confidence. Clearly that’s how the Fed responded in March and April of 2020 to the market turmoil from COVID-19.

In the span of weeks the Fed stepped up and stepped in. Cut rates. Then came facilities for short-term funding markets; commercial paper, primary dealer, and money markets facilities. Cash equivalents need to be protected. By April the Fed announced plans for buying corporate debt in the primary and secondary markets. Surprising for some but if you had been listening to Janet Yellen and Ben Bernanke this would have been an obvious move. The retired duo championed the move in the preceding weeks and the Fed itself had spoken at large about issues in the corporate bond market well before the pandemic.

The Paycheck Protection Program or “PPP” has received a lot of discussion around saving small businesses and maybe it will. Yet the Fed is just not equipped to deal with these types of assets. Small business loans/grants? Few Central bankers will say that’s the role they should be playing. So what should we do? In an effort to expand the discussion on structural solutions to current and future problems, a few ideas will follow.