The Apocalypse Scenario, Part I

CBDC: The Hindenburg omen for the society

From Tuomas Malinen’s Forecasting Newsletter.

Issues discussed:¹

• The grip of central banks on our economies is likely to tighten.

• Central bank digital currencies (CBDC’s) are a means for financial enslavement.

• The implications of CBDC's are dire for banks, corporations and consumers.

A few days ago, I accidentally met a friend of mine, an associate professor, who was going to consult our new Prime Minister, Petteri Orpo, on certain matters. While we where talking, he asked about my absolute worst case scenario for the next few years. Well, I gave a short, five bullet point summary of how I see things progressing in the ‘Apocalypse scenario’.

I’ve been doing scenario forecasting, as a part of the small team at GnS Economics, for over 10 years. Rather strangely, my life has been such that it has fostered the development of my thinking towards catastrophic scenarios. This actually started with the sudden death of my father when I was just two months old. My general way of thinking is also “narratorial” rather than “completing”. This means that I have a tendency to view the world through stories rather than through pictures to be completed, which is the way people usually view the world (my ex-wife has a doctorate in Psychology; so my personality has been tested, rather extensively ;)). One could say that my brain has been wired to build scenarios, especially the “apocalyptic” ones.

As I am the CEO of our company, GnS Economics, this has affected the structure of our forecasting, where scenarios are the work horse. At the same time, I have discovered that generally people have difficulties understanding scenario forecasting. If, for example, just one, usually the most clickbaity scenario is presented in the media and even when a low likelihood (e.g. 20%) has been attached to it, many have viewed it as the forecast from us, even though it has just been one (usually the worst) of the three forecasts we tend to construct for each situation. Most recently, this misunderstanding has occurred with my worst-case scenarios (see, e.g., this, this and this) for the Russo-Ukrainian war.

My original worst-case scenario was that Russia will mount a crushing winter-offensive against Ukrainian forces possibly dividing the country in half. This never, fortunately, occurred. The consensus (most likely) scenario was that Russia will just hold the eastern and south-eastern territories, as it now has (the ‘good’ scenario would have been Ukraine taking back their lost territories, but the likelihood of this occurring was miniscule already in October).

My absolute worst case scenarios almost never reach the reports of GnS Economics, because they are highly speculative and often rather apocalyptic. However, I consider them to serve a very important benchmarks in mapping the realms of our world. History shows that sometimes truly horrible scenarios manifest, and thus they need to be mapped.

On that note, I have come to the conclusion that it’s time to present my current Apocalyptic scenario, which I have been constructing for little over a year, to my subscribers. This is speculative and should not, at this point, be taken as nothing more than a sketch of the worst-case scenario currently imaginable. The reason, why I consider that now is a good time to present it, is because there are some hints that parts of it may be coming a reality. This will be the first entry in a series.

Central banks taking over the world?

We have been very critical towards the actions of central banks since 2013. At that point it had became clear that the massive meddling of central banks in our economies and financial markets were creating something monstrous. In June 2013, we wrote:

It is possible that the banking sector and the world economy were  saved by using too strong methods in 2008. As a consequence of this, it is also possible that the world economy is more like a zombie economy, where unprofitable banks and companies are kept alive with easy money and rescue packages from the governments. This kind of an environment is extremely sensitive to shocks or market disturbances, and this is a reason to be worried although there is no reason to panic, yet.

So we, correctly, saw that the role of central banks was changing and growing beyond their original role and what was probably good for the economy. In December 2019, we mapped the scenarios of the world economy through the global economic crisis, which at that time looked inevitable (we naturally had no knowledge of  Corona at the time of writing). There we envisaged the ‘Global bailout’ scenario:

At the heart of this catastrophe would be the harnessing of the money-creation power of the central banks to finance a massive growth in government spending. This would be the “bailout for all”.  

As we noted in Q-Review 4/2018, the size of the global risk-asset universe is currently somewhere north of $400 trillion dollars. For the bailout to succeed, central banks would need to absorb at least one quarter, if not half of this pool. This would mean a gargantuan increase in their balance sheets, which currently stand at over $20 trillion, with central banks effectively seizing control of global capital markets. It would be the end of capitalism as we presently understand it.

This would be the ‘dystopian’ response of authorities to the economic collapse which, at that time, we assumed to consist of four phases during 2020-2023:

1. Crash of the asset markets.

2. Failure of the European banking sector.

3. Failing zombie companies.

4. Collapse of China.

The Coronavirus, lockdowns and bailouts naturally changed our scenarios rather drastically, but they did not remove the threats of the above four developments, but just changed their forecasted timelines. We did expect the European banking crisis to emerge in late 2020 or 2021, but that never manifested. This was our single biggest forecasting failure.

A year later, we warned, for the first time, on the threat of central bank digital currencies, or CBDC’s. In December 2020, we wrote:

Notably, a much more problematic situation emerges when we notice that with CBDCs a central bank will become a competitor of the commercial banks. Thus, the central bank would function in the role of national banking supervisor, the ‘lender of last resort’ and also as a competitor in the commercial banking sector. It is clear that these obvious conflicts of interest could quite readily lead to the further corruption of any such central banking system.

In a banking crisis it is the responsibility of a central bank to 1) provide emergency liquidity support (money, and lots of it) to the banking sector, and 2) organize and oversee the restructuring of the banking sector. It is plain that when a central bank is also a competitor of the ailing commercial banks, the situation would become completely untenable. In a banking crisis, deposits would flee to the safety of the central bank, aggravating the crisis. Moreover, why would a central bank support its competitors? It could easily announce the closure of all unstable banks and the transfer of deposits to the central bank, with the tacit approval of apprehensive politicians. In the worst case, the whole banking sector would be nationalized.

This would effectively raise the central banks to dominate the monetary and financial realm of a country. Next, I go through the implications of it for consumers and corporations, including banks.

CBDC: A tool for domination

In a banking crisis, there would likely come a point, where depositors would seek the safety of the central bank, if a CBDC was offered (see our post for a description of the CBDC structure). This would, most likely, escalate the runs on commercial banks. There are several ways how a central bank could respond to this.