The increase in expenditures produced by this change then would lead to increased employment and income growth, higher assets values and a virtuous, reinforcing circle. However, with short-term interest rates close to zero already and problems in the housing market, this standard rebalancing channel is not working as well as we would like. This discussion, I hope, has underscored two important truths. First, while deleveraging had to take place following the excesses of the boom period, both the extent of deleveraging on the part of those with high debts, and the degree of precautionary savings by those with low  1  4  Defined here as credit market debt to net worth. BIS central bankers’ speeches  debts, depend on many factors, some of which can be influenced by the policy choices we make. Second, the amount of deleveraging and precautionary savings depends on the availability of credit and the health of the financial system and upon the degree to which income is sustained during this deleveraging process. Note that if income growth is sufficiently weak, households may struggle to achieve desired increases in savings and reductions in leverage, which appears to have been the situation of late. Policy responses in this environment So what should be done? What should economic policy do to secure the recovery and provide a sustainable environment for long-term growth? Clearly, monetary policy will continue to have an important role. But other, complementary, policy initiatives will also be important.
A subset of those digital assets, known as stablecoins, could over time be used by consumers and businesses as money, if they serve as a safe means of payment, a store of value, and a unit of account.2 Some jurisdictions are considering bringing these kinds of instruments into the regulatory framework by requiring their issuers to become banks or other licensed entities.3 This could enhance the ability to safely integrate them into the payments system. It could also expand access to central bank accounts and services to new entrants, allowing the stablecoins to be backed by the most liquid and stable of assets: central bank reserves. Traditional commercial banks are also forming consortiums and partnering with digital innovation firms to increase their offerings of liabilities associated with digital activities, which might entail offering deposits to stablecoin issuers or even direct issuance of stablecoins. Many are also investing in distributed ledger activities that could transform their businesses. Preliminary analysis of the May 2022 Senior Financial Officer Survey suggests that most U.S. Global Systemically Important Banks (GSIBs) expect growth and development in these areas to be a medium or high priority over the next couple of years, and banks continue to explore these areas to see how they fit into their business strategies.4 Central banks are also innovating. Many are implementing new forms of payments or experimenting with central bank digital currencies (CBDCs) to prepare for the future.