Posts tagged ‘currency’

Le quantitative easing

by David Birch

[Dave Birch] In John Cooley’s book Currency Wars, he says at one point that there is a grey area actual counterfeiting and the deliberate over-issue of fiat currency. The quantitative easing policy of the British government is likely to be reduce (by inflation) the value of the pound Sterling far more effectively than Hitler’s plans to bring Britain to its knee through counterfeiting in the Second World War:

Operation Bernhard was the name of a secret German plan devised during the Second World War to destabilise the British economy by flooding the country with forged Bank of England £5, £10, £20, and £50 notes. It is the largest counterfeiting operation in history.

[From Operation Bernhard - Wikipedia, the free encyclopedia]

As an aside, one of my sons went on a school trip to Germany earlier in the year and actually visiting the scene of this attempt to sabotage Sterling, the Sachsenhausen concentration camp. If you are at all interested in this story, there’s an excellent film about it, The Counterfeiters.

Now, think what the electronic version of Operation Bernhard might look like in the future. Not creating counterfeits, but creating clones. While it’s fashionable to talk about cyberwar, surely the most effective way to destroy a 21st century society is to destroy its money.

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The crazy cost of cash

by David Birch

[Dave Birch] I interviewed Professor Leo van Hove from the Free University of Brussles (VUB) for a podcast today. He’s starting work on a project trying to obtain a systematic and accurate estimate for the social cost of cash in the European Union. As always, his depth of knowledge and informed assessment of the situation were second to none. He set me thinking, again, about the dynamics around cash. It’s crazy to carry on using it. The high social costs, the market-distorting cross-subsidies and sheer inconvenience mean that it ought to be vanishing, even though it’s actually gaining market in share in the U.K. I found some figures from the Bank of Portugal in European Card Review for something I was writing for the Digital Money Forum blog. Portugal has the highest ATM penetration in Europe, which is one of the reasons why cash is very expensive there, as these figures show. The only payment instruments that pay their own way in that market are direct debits and credit cards. All other payment instruments lose money and cash costs about 25 times as much as it brings in. In other words, there is a massive cross-subsidy to cash from other parts of the banking business, which loses about €1.77 every time someone deposits cash in a bank branch (or withdraws it). No wonder it seems inexpensive to the retailers, who bear none of this cost. The big picture is that payments cost 0.77% of Portugal’s GDP (against the 0.5% average for Europe as a whole) and revenues only bring in about two-thirds of the costs. Isn’t there an old saying about holes and digging? When is cash going to be priced correctly?

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In reserve

by David Birch

[Dave Birch] As is clear from the agenda for the Digital Money Forum from its earliest days, I’ve been interested in the subject of alternative currencies for a very long time. In fact, since the days of the Mondex project, when we (Consult Hyperion) were approached by people who wanted to store their own currencies on the cards. I always thought this was a really interesting idea, but no-one else did, and nothing much happened. After a while, I began to realise the ‘alternative’ currency spectrum covered a pretty wide range of topics, concepts, ideas and concerns. The recent discussion on my “Good as Gold” post shows that one of the principal categories — local currency — means different things to different people. My concept of a local currency is a currency that is highly valued highly by members of a community but hardly valued by others. The historic example of wampum in the United States illustrates this neatly.

How would you trade local monies between groups, then? Well, presumably some reserve currencies would spring up (to fill the same role in relation to local currencies as the beaver pelts did to the wampum in the “Super Powers” post) and I imagine it would be inevitable that there would be some that would become privileged, in the sense that some would attract an exchange premium for “irrational” reasons (a belief in long-term stability that could not be proven by spreadsheets, that kind of thing). Having a privileged reserve currency is a very powerful position.

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Super powers

by David Birch

[Dave Birch] A superpower is bogged down in a distant guerrilla war. The superpower must resupply its army, victorious for a generation, thousands of miles away from home and it’s become a very costly endeavour indeed. Support for the war at home is tentative, and is dividing both the people and the political leadership. The guerrillas are supported by the superpower’s greatest enemy, a nation that is providing both financial and military assistance. The war drags on and the casualties mount. Generals are disgraced. The rebels continue to gain momentum, even though they are occasionally beaten. Afghanistan? No. Vietnam? No, this is historian Kenneth Davis’ marvelous description of British North America in 1782.

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Good as gold

by David Birch

[Dave Birch] Suppose that one of the longer-term results of the current economic crisis is that people begin to lose faith in government money (ie, national fiat currency) and start to search for alternatives. Then what (and who) will be best placed to provide the alternative? What I mean by this is that if a combination of technological advance and dissatisfaction with economic arrangement reinforce each other, then we may find ourselves not only replacing the medium of exchange (ie, notes and coins) but also the store of value that it animates (ie, Sterling). One of the principal categories of alternative currency, that has been attracting a lot of attention recently, is local currency. I’ve offer looked at the subject of local currencies and had the general opinion that there is something going on there that will at some point be interesting, but it’s been difficult to identify any specific areas where they can intersect with the payments mainstream.

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Copying cash

by David Birch

[Dave Birch] I’m a big fan of podcasts, and listen to quite a variety. One that I enjoy is Skepticality. I’ve just been listening to the recent episode about the American TV show “Numb3rs“. I don’t know if you’ve seen it, but it’s a not-terribly-interesting drama about an FBI agent who solves crimes with the help of his Mathematics Professor brother. Anyway, on the podcast a couple of the producers (?) of the show were discussing making the show and they made a comment in passing that I couldn’t help but note. They said that they had been researching a show about counterfeiting and during the course of the research they had copied a $20 bill on a photocopier to see how well it came out. Shortly thereafter they got a phone call from the US Treasury. The photocopier was online, and phones home when someone tries to copy money! And the Treasury guys weren’t very happy to hear about the proposed plotline, about the FBI investigating some counterfeiters because, as all money nerds know, it’s the Secret Service (a branch of the Treasury until 2002, when it was moved to Homeland Security) who take care of that.

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New money

by David Birch

[Dave Birch] National currencies are (like nations) a relatively recent invention. And fiat national currencies are an even more recent invention. We tend to see them as a physical law, much like the speed of light, but in reality current monetary arrangements are of human making. And they are transient: money didn’t use to work this way, and there’s no obvious reason for it work this way in the future. So what are the alternatives?

There are a few people out there beginning to wonder if the Totnes Pound (or, more likely in my opinion, the Tesco Pound) mightn’t be a good alternative for the weekly shop and a better long-term hedge than Sterling (which dropped like a stone after a recent speech by the Governor of the Bank of England — not because of any change in the real economy, but because of a speech). There seem to be proto-alternative currencies popping up all over the place at the moment, so there are a few people out there who are doing more than just moan about the fiat currency:

An East Sussex town is introducing its own currency in an effort to encourage shoppers to support the local economy.

[From BBC NEWS | England | Sussex | Lewes launches its own currency]

Personally, I’m unconvinced about these “think global, act local” currency initiatives, but they do deserve study.

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E pluribus pluribus

by David Birch

Will there be a world currency, a universal currency? is the “universal credit” beloved of science fiction writers even remotely plausible when some people think that a single currency for Europe is unworkable (and when some people — eg, me — think that a single currency for the UK is economically sub-optimal). In science fiction, the assumption appears to be that some kind of universal single currency represent not only progress but an implicit goal in itself.

Why? Perhaps it’s because creative people (eg, science fiction authors) don’t really think about money because it’ is just (as Bruce Sterling pointed out to me in a podcast I made with him) boring. Maybe it’s something more though. I have a vague memory, which may well be wrong, that the author Brian Aldiss in his Billion Year Spree, a history of science fiction that I can’t find online to search an can’t be bothered to go and look for in my loft, said that it’s because science fiction and heroic fantasy are written for teenage boys and the one commodity that they do not have is money. This may well be part of the explanation, but it seems to me just a likely that it’s because many people don’t really understand what money is or how it works, so speculating on where it might go is outside their envelope. I’m the other way round: I find it hard to imagine time travel (if it does get invented in the future, where are they?) but easy to imagine Google issuing its own currency.

When I was pottering around the World Bank bookshop in Washington I came across The Future of Money by Benjamin Cohen of University of California, Santa Barbara. One of the key questions that the book addresses is whether the dynamic of monetary evolution is a tendency to the one currency because the minimisation of global transaction costs is driving factor or an explosion of currencies because new technology minimises transaction costs in other ways? He concludes that “the power of scale economies notwithstanding, monetary geography is set to become more, not less, complex” and he compares the future to the “heterogenous, multiform mosaic that existed prior to the era of territorial money”. Setting to one side the fact that he knows fantastically more about the topic than I do, I disagree slightly with his conclusion here. As a technologist, I suspect that there will be more different kinds of money, not just more currencies, than ever before. At the end of the transition to e-money, the marginal cost of introducing another currency will be approximately zero. So we will be in the “let a thousand flowers bloom” mode and might reasonably expect a rash of experimentation. At the end of this period, who knows whether dollar bills or Bill’s dollars (an old joke, beloved of us e-cash types) will be more successful?

There are a couple of other things I disagree with him about. One is the issue of anonymity: Cohen says that one of factors that may make it difficult for e-money to substitute for physical notes and coins (”p-money”) is that e-money cannot reproduce the anonymity of p-money but I think that technology can offer more than he thinks in that area. The other is geography, which I’ll go into below.

What might the far future really look like? It’s hard to say, except that it won’t be like the past. There won’t, probably, be widespread barter for example despite the ability of networks to reduce the associated transaction costs. As Nick Szabo says

mental transaction costs are a problem even if there are no commodities like fish with storage costs. A world of pure barter has O(N^2) prices for N commodities, and the mental transaction costs in such a world are correspondingly much higher than a world with a single currency and O(N) prices. So even a market with no transport or storage costs for any commodity whatsoever, but with sufficiently high mental transaction costs, will converge on a single currency.

[From Unenumerated: Logical emergence of money from barter]

Hold on. Doesn’t Nick’s argument here extend from the trading of salted cod in Newfoundland to the trading of Xenodollars in Frankfurt? Won’t mental transaction costs take over once financial transaction costs have fallen to a particular level? I’m not to sure about this: as Hayek pointed out a generation ago, people who lived in “border areas” in days of old seemed perfectly capable of understanding multiple monies (and surely we are all on the border now: the border between the physical world and cyberspace) so there’s no reason to think that they couldn’t do again. More importantly, however, the exchange of medieval moolah took place without mobile phones and 24/7 F/X markets.

If I’ve already told my mobile phone that I want to collect U.S. dollars because I’m going to go on holiday to New York as well as World of Warcraft gold pieces because I feel like a relaxing weekend of Orc slaughter, then my mental transaction cost subsequently falls to zero. My mobile phone is perfectly capable of negotiating with yours…

  • Have you got any WoW gold?
  • No, will you take British Airways miles?
  • Yes, but as they are worthless junk (*) it will be at a 95% discount
  • Alright, fair enough, here you go…

Cohen’s cogent analysis of direction forced me to reassess some of my own fairly superficial thoughts on the topic, with the result that I firmed up on one axis of the projection. I think his view of geography is wrong: perhaps in the future, all money will be local, it just that local will mean something different in the connected world. Reed’s Law readies will all be local to someone, so perhaps community currency might be the best description. Whether the community is Totnes or World of Warcraft won’t matter, but the shared desire to minimise transactions costs for “us” at the possible expense of transactions costs from “them”, will. Since the overwhelming majority of retail transactions are local, most people’s transactions most of the time will be in their local currency with minimal transaction costs. A small number of transactions will be in “foreign” currencies (ie, someone else’s local currency).

There’s another refinement to this vision. Going back to Nick Szabo again, these currencies may not be money in the conventional sense at all but what might be termed “near money”. Cohen refers to the cross-elasticity of demand between currencies but if the cost of using near money is low enough (because of new technology) then just as tally sticks switched from being a mechanism for deferred payment into a temporary store of value and then a means of exchange, so technology might go down the same path again but with some more modern implementation. Back to Nick again:

Commodity prices now reflect more the value of commodities as stores of value and hedges or media of exchange, i.e. their values as money substitutes or hedges, than they reflect demand for their industrial consumption.

[From Unenumerated: The "hoarding" and "speculation" in commodities]

So what does this mean? Nick goes on to develop a bigger context:

Speaking perhaps a bit metaphorically, we are witnessing the rise of new and privately issued fractional reserve currencies. They need not and effectively cannot legally be called “money” by their “issuers”, nor can they effectively be used directly in most contracts for payments. But they can be used indirectly to hedge payment terms or investments denominated in flawed, that is in inflating or otherwise unstable, government currencies in which normal contracts and instruments are generally denominated. The results are synthetic “currencies” that, in their economic behavior, may be almost indistinguishable from a tradtional commodity-backed and privately issued fractional reserve currency.

[From Unenumerated: Commodity derivatives: the new currencies]

To paraphrase Cohen’s conclusions, a new era of monetary competition will mean that monetary policy will become even less effective than it is now and governments will need new kinds of fiscal policy to “manage” the economy. My conclusions are that the long-term outcome will surely be that technology is not used to develop replicants — electronic means of exchange that simulate, as perfectly as possible, physical means of exchange — but to develop new means of exchange that are better for society as a whole. Thus e-money as a vehicle for synthetic currencies that could be used directly in contracts as payments ought to be the science fiction writers’ new monetary paradigm. No more “that will be ten galactic credits, thank you”, more “you owe me a return trip to Uranus and a kilogram of platinum for delivery in 12 months”. Well, that’s what my payments autodroid bot (ie, mobile phone) and your payments autodroid bot will agree between themselves anyway.

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

[posted with ecto]

China To Begin Taxing Profits From Virtual Currencies

by Joshua Klein

This may be a aside, but it’s a critical one - when one of the world’s largest nation states recognizes virtual currencies as “real” and legitimate enough to tax, there has been a significant power shift. This goes beyond simple precedence, but into the Friedman-esque interconnectedness and post-singularity chaos in economic systems that we’re seeing the current economic crisis blamed on. What do you guys think?

As per

“The Wall Street Journal reports that the Chinese government will collect a 20% personal income tax on any profits obtained through the redistribution of virtual currency. The legislation is intended to curtail speculation in virtual markets, which can be quite profitable.

Quoting: ‘The announcement, which was distributed to local tax bureaus, specifically takes aim at those who buy virtual currency from gamers and surfers and sell it to others at a mark-up. Taxation officials are granted the right to determine the original price of online virtual currency if the individual fails to provide proof of an original price, it says. The policy would cover China’s legions of online gamers, who can use online virtual currency to buy better equipment and new powers for their online warriors. But it also affects millions of others who use virtual currencies on instant-messaging services and Web portals.’”

More here:

- Josh

Turtling all the way down to 5 key questions

by Nicolas Nova

Reading all the content we have produced so far in the train, I am quite amazed by the richness of the material we have. It’s a bit messy but that’s how collaboration is generally made of. Given the schedule we have, I think it’s important to shoot the questionnaire to secondary authors pretty soon. I am not sure whether we should wait for other refinements of issues. The most urgent is to agree on 5 key questions and shoot them over to the others. After browsing the material, we can for instance propose the following 5 key issues:

  • Driver for change: what factors, according to you, may change the way we exchange, buy, trade objects and services?
  • An ecosystem of currencies: what are the alternative currencies or exchange systems you foresee in the next 10 years? Think about experimental forms of exchange, the role of technologies.
  • What are the economic aspects of this? How do disparate groups exchange goods and services without a stabilized and intergroup fungible currency?
  • How different social scales will be impacted by this? How nation-states/communities/families/man/woman/kids will change?
  • What do you hope/desire for the future?

I tried to clean up and remove some elements (like the
global currency
which is unlikely, or the absence of currency) and went straight to the point in terms of the most important questions that came out from our discussion this week. The question may have to be reformulated but I do think they give a clear overview of what we talked about. The last bit (about people’s desire) is important IMO as it aims at grasping secondary authors’ personal impressions. I hope we can get a wide range of insights here. That being said, I wonder about the openness of the question. It’s clearly more valuable to get some open answers but it will require more work on the part of the contacts.