Our aim at Daily Fintech is to be a decentralized think tank where we get a diversity of opinions from around the world.
One person whose thinking I have long admired is David Siegel. Even when I disagree with him, I always learn a lot, so we thought that the Daily Fintech community would benefit from listening in to our dialogue, with a specific focus on the controversial subject of Facebook Libra.
DS. Fiat is a better product than cryptocurrencies for money. Cryptocurrencies are not money. Gold is not money. Austrian economists (most crypto founders, Nick Szabo, Joe Lubin, etc.) are wrong – gold is a poor unit of account.
BL. Agreed, Bitcoin is a poor unit of account and medium of exchange but a strong albeit volatile store of value. Austrian economists who buy this argument and who bought Bitcoin have become wealthy.
DS. They really have. The irritating thing is that they once read a book by Hayek and now think they are right about everything! But if the supply of money is fixed (or nearly fixed), then prices MUST be volatile. Imagine paying for your Amazon purchases with Amazon stock – as the investor demand for the stock goes up, price of stock goes up, so prices of products must go down. Vendors don’t want to be speculators. How many shares of Apple stock would you like to receive for your house? It probably depends on the day and maybe the hour of the transaction. Anything with a fixed supply is a poor unit of account that can’t scale. There are formal arguments for (and against) this around the web. I am hoping to have a video debate between two important thinkers that will help, but I haven’t been able to do it. Scott Sumner makes the argument best, I think. Here it is in parable form.
BL.Agreed, Bitcoin price is too volatile to be a good medium of exchange.
DS. Yes, and that won’t change later, if bitcoin gets used by millions of people. As money, bitcoin has no chance. Fiat already has distribution and scale, that is huge, huge, huge.
BL. Agreed. Bitcoin is a small % of the gold market and gold is small compared to Fiat currencies.
DS. I think Bitcoin should take a large share of the gold market, but the gold delusion is very strong and hundreds of years old, so I imagine gold will hang on for decades or more, even though bitcoin and other things are better suited to be long-term stores of value.
DS. Fiat is poorly managed. It’s not a disaster, it’s not “about to melt down,” it’s also not a scam, and banks do NOT print money out of thin air. Many misunderstandings. But … it’s far from optimal. We can improve it by changing monetary policy.
BL. It IS a disaster and melting down in some places such as Venezuela. With ECB and Fed exporting inflation to weak currency countries this contagion will probably spread. The ECB and Fed export inflation because they want more inflation in their countries, which are more prone to deflation as they import cheap goods and services from the developing world. Those developing world. countries are more prone to inflation and more money supply from ECB and Fed tends to create inflation.
DS. Oh dear, well if you think Venezuela and the Fed export inflation then you don’t understand money. You can divide countries into three groups:
1) Those whose governments simply use the printing press to pay their bills, creating hyperinflation. This is theft. In my view, any government with long-run inflation over 6 percent is stealing from its citizens, and there are about 60 of those. This isn’t about money, Bernard, it’s about bad governance. Those same countries are also doing terrible things to their citizens while enriching bureaucrats. Check the freedom of speech and human rights in those same countries where you say “fiat is melting down.”
2) Those few countries whose governments are trying to hit an inflation target, typically 2 percent. Did you notice the Fed recently dropped interest rates for the third time this year? That’s their (clumsy) effort to bring inflation up to 2 percent. The US, UK, EU, Australia, and Israel are all currently hitting their 2-percent targets. This is almost the right goal, they simply often don’t achieve it. A better goal would be to hit a nominal-GDP target or a nominal-wage target. I have an essay on how they can achieve it if they really want to.
3) Countries that don’t really understand monetary policy, like Japan, and are screwing their citizens through low inflation and other wacky monetary shenanigans. I do think too many countries have dollarized, but you can understand why they have. This just increases the burden on the Fed and makes the system more fragile. It would be the same if everyone adopted bitcoin – it would be worse.
DS. If, by “export inflation” you mean that the Fed targets 2 percent inflation, I would call that a good thing. You don’t want zero inflation, for reasons I have outlined in my Short Primer on Money. There is a “Goldilocks” amount of inflation that stimulates growth, and growth is good.
DS. Central Bank Digital Currency must be the future. I can’t imagine we don’t have it globally by 2050. So now it’s just about how to make the transition.
BL. Agree, we will see more CBDC, which will be a more efficient Fiat currency ie easier to transmit but with same monetary policy (whether one thinks that is good or bad).
DS. Libra (the concept) is a fantastic way to make the transition. It doesn’t rely on governments doing anything, and it builds the future infrastructure we need, as David Marcus recently pointed out.
BL. Maybe. It is still only a White Paper and hitting a lot of resistance from Governments.
DS. Libra is live open-source code now. People are writing apps for it. Libra as envisioned has some issues, but nothing that can’t be fixed.
BL. Disagree. Government resistance is not a minor bump in the road it is a brick wall.
DS. It could be. Though you could imagine Libra/Calibra jumping through enough hoops and watering down so that it launches, but it might not.
DS. Libra’s Move language is probably about as good as we will have for a long time. The basic architecture of the system is very sound.
BL. Agree, Move looks good, but developers will only adopt if Libra/Calibra get traction.
DS. Libra would have scale, and that’s 90 percent of the ballgame. Imagine a startup with a new currency, imagine they have the world’s best monetary policy. Who cares? How will they acquire customers? It won’t matter until at least 20 million people are using it. Scale matters a lot.
BL. Agree but that is why Governments resist it.
DS. I think governments resist it for purely political reasons. Politicians are trying hard to look like they are protecting the public. Forget that they always put themselves first and do not, in fact, protect the public. Their #1 goal is to get re-elected, not to protect the public. Governments have been resisting financial innovation for a long time, with worse results for citizens. Forget Libra and forget crypto-anything – governments are responsible for a very shaky banking system, rotting infrastructure, $3 trillion successfully laundered each year easily, and generally holding innovation back. Except for Estonia, of course.
BL. What about Calibra?
DS. Calibra makes a ton of sense for Facebook. You can make two assumptions about Calibra: that they will keep their word in the white paper, or that they intend it to become a surveillance and intelligence tool for Facebook. I believe the former, though I can’t deny that the latter is also a reasonable assumption.
BL. I think it will be a surveillance and intelligence tool for Facebook – that is what their track record says.
DS. Fair. In addition, I expect the FBI will want a “back door” to Calibra, so they can surveil American citizens about their “suspicious activity.” This is bad.
BL. Agreed, if Libra gets regulatory approval this will be this reason.
DS. Will other wallets be allowed? This brings us to the “cash model” of circulation and the “e-money model,” which I explain in all my talks. This is a big deal.
BL. I think Calibra will allow other coins but Libra may also be loosely coupled. At least that is what FB should do.
DS. In the cash model, Libra are treated as cash. You have to go through AML compliance at the exchanges, but then you can send it to anyone with any compatible wallet. No one knows where it goes until returning back to an exchange for more compliance. This has its own issues, because the person who cashes back in for fiat will have to answer questions about the prior history of those Libra. Have I mentioned that AML laws are completely ineffective and simply serve as a tax on financial transactions?
BL. Agree re AML. Despite being ineffective, Governments will demand it so the on-ramp has to be regulated.
DS. In the e-money model, the service providers (like PayPal, Mastercard) must watch for “suspicious activity” in the ecosystem and report it to the completely ineffective FATF. This is a tool for the surveillance state. I imagine this is exactly what we’ll see with the new Chinese coin.
DS. Both of those models have issues because AML laws don’t work. Are we really going to have them as the foundation of our financial system for the rest of this century?
BL. Yes, I think so.
DS. Well, it’s too bad, Bernard, because it’s only the people of planet Earth who suffer. But which model – cash or e-money – is very important. If Libra is “approved” under the e-money model, then it won’t be open-source any longer, it won’t give us the infrastructure we need, and it won’t be widely adopted, it’ll just be Facebook’s version of AliPay.
BL. What about CBDC?
DS. Governments will take years to get digital cash rolling, they will definitely screw it up, and politicians will have to “look tough on crime” by insisting on full AML across all systems, to help them get re-elected. So we will have CBDC some day, but it will be a political football.
BL. Like Libra, CBDC is still only at announce/white paper stage, so who knows how long it will take?
DS. We’re going to see in China over the next months, that should be interesting.
DS. One thing I want to get across is that with better monetary policy, and I advocate Nominal GDP Level Targeting, there will be no more recessions. This is hard to see, but it’s a big deal. I explain it in my Open Letter to the Fed. A fixed-supply coin like bitcoin or a gold coin can’t do that. It won’t be counter-cyclic. It will exacerbate recessions, rather than act like a spring to dampen them. There are many reasons to have well-managed fiat currency as our everyday unit of account and exchange, but the fiat systems we have today are far from ideal. I simply say that because they have scale and because we might be able to influence policy without threatening the entire system, that is the way to go. Starting from scratch is too hard.
DS. So here’s my conclusion:
Libra – and anything like it that has a chance at scale out of the gate – is exactly what we need to make the transition to digital money. There will be issues as Libra scales up. An example is currency adoption by people in countries with weak money. To me, this is a huge plus – it will force countries to deal with the fact that they can’t keep stealing from their citizens and must reform their central banks. It won’t be easy, but that pain is very real right now and should be addressed.
BL. Agree that FB has the needed scale and that is what worries Governments and that is why I think Libra will not get beyond the White Paper stage.
DS. Even if we eventually don’t have Libra and just have digital dollars, the conversation around Libra will have been an important transition tool to get there, as it lets private-sector participants hack and work on infrastructure now.
If Libra is limited to dollars only, then Libra can become the de-facto digital US dollar. That would be pretty cool, but the government would never stand for it. Let’s see them up their game and compete.
I think chances of Libra launching are now roughly 50 percent.
Will they ever launch a mixed-reserve version as their white paper envisions? I give that a chance of maybe 30 percent now.
The fantastic thing about Libra is that it is pointing out the deficiencies in our financial system, and the unfantastic thing is that everyone believes the financial system is fine. No one is willing to admit that the emperor has no clothes.
So yes, in a rational world, Libra (and anything else like it, for example a retail IMF SDR), should go ahead. Unfortunately, we don’t live in a rational world.
This is just the tip of the iceberg. I could write a book on the topic if the economics would make it worthwhile. I have written about much of this at digitalmoneybook.com. I also have a blog about digital money at www.permissionlessfinance.com.
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