Can Digital Cash Make Inflation Worse?

  • Date: 23-May-2021
  • Source: Asharq AL-awsat
  • Sector:Economy
  • Country:Middle East
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Can Digital Cash Make Inflation Worse?

Inflation is coming. Or wait, it’s already here. Bond investors are looking at the 4.2% annual rate that US consumer prices jumped to in April and wondering if it’s all because of depressed levels from last year. Could it be that the Federal Reserve is wrong about higher prices being transitory?

In that case, the Fed and other central banks may have to rethink, among other things, their space-race-type competition to offer digital cash.

It’s a project best undertaken after price pressures have eased, and the vast pools of excess liquidity to fill the gaping economic hole left by the pandemic have dried. A premature contest to introduce a digital yuan, digital euro, FedCoin or BritCoin could see them emerge as widely accepted substitutes, not only for physical cash but for bank reserves. Tackling inflation could then get harder.

To see why, consider the typical response to unexpected inflation from a monetary authority that has done a lot of quantitative easing. It has to taper its bloated balance sheet by selling some government and corporate bonds to the banking sector, draining the excess reserves they’re keeping with the central bank. Less liquid lenders would, in turn, sell loan assets. Tighter monetary conditions would