The digital dollar can save the dollar

The digital dollar can save the dollar via freeing it from private debt.

A financial turmoil driven by mass defaults can destroy a currency.

A currency's strength aligns with the safety of debt denominated in that currency.

Currencies are as strong as their economies

Demand for a currency aligns with the safety of debt denominated in that currency. In economic downturns, economic entities increasingly default on their debt. Lenders would not be willing to store value in the assets with soaring defaults. As lenders flee financial assets, demand for the currency would also fall.

As long as currencies merely exist in debt forms, their demand will be driven by the demand to financial assets in that currency. The currency-debt relationship might impair a currency's strength in a protracted recession. Mass defaults can destroy the currency.

A reserve currency is not exempted from the destructive power a depression. If the US economy tumbles in a protracted recession, defaults might soar to unprecedented levels. Borrowers' equity would melt across record high delinquencies. While private debt issuers are on the brink, the dollar's credibility would also goes under. Demand for the dollar would substantially fall due to the run from dollar denominated liabilities. A protracted depression might thus result in the demise of the dollar as the reserve currency.

The digital dollar

The digital dollar can save the dollar via freeing it from private liability forms. Savers can safely store value at the central bank without undertaking a private borrower's default risk. Hence, the dollar demand would not be affected by the default risk of dollar denominated liabilities.

The digital dollar would preserve the dollar demand via resolving the safe asset problem. Financial institutions cannot manufacture ample private safe assets due to the collateral limitation. The tranche system produces top rated assets alongside with a larger portion of lower rated assets.

In the current practice, the digital dollar would be the liability of a central bank. The digital dollar is as safe as a government treasury due to the fact that both government and central bank are state institutions. As all savers can open an account at the central bank, supply of the digital dollar would be unconstrained. Thus, demand for safe assets would be permanently satisfied.

The digital dollar does not have to be liability

The digital dollar even does not have to be the liability of a central bank. A central bank can place the digital dollar on the asset side of its balance sheet. In practice, this enables the central bank to transfer income as a monetary tool while lending tools are apparently impotent at the zero lower bound.

Currently, a central bank incurs loss when it sends checks to citizens:

Loss (equity) $100

Reserves $100

Reporting the digital dollar on the asset side, the central bank makes profit each time it issues the digital dollar:

Digital dollar $100

Profit (equity) $100

When the central bank grants the digital dollar, it spends the profit made by the digital dollar issuance:

Profit (equity) $100

Digital dollar $100

The lending-based system is not sustainable. Borrowers' debt service capacity is already full. More debt renders the financial system fragile via resulting in higher leverages. Incentivizing borrowers via lower interest rates to pile on more debt have been producing financial crises since 1980s.

While savings stored in the digital dollar quit the financial system, the debt sourced spending will have to be restored by the income sourced spending. The digital dollar enables central banks to generate income without creating debt. While the digital dollar is off balance sheet, a central bank does not need an asset to across the dollars transferred to low and mid income groups.