March 9, 2020

The Future of Money: Part 4 of 4

While conventional money is likely to become more and more worthless in the future, all kinds of different valuable assets could be in for a glorious time. Bitcoin and tokenization will probably drive both of these trends.

Speaking of the next financial crisis, it seems to become a popular sport to talk about a next looming crisis. Pessimistic votes of all sorts of crash prophets have reached the mainstream.

A sober, albeit somewhat simplistic, view of the current situation on financial markets makes one understand why critical voices are increasingly being listened to. Commercial banks are permanently dependent on new reserves in the form of liquidity injections by central banks. Negative interest rates on financial products are accumulating and spreading through the financial system. Global over-indebtedness measured by the worldwide gross domestic product is also constantly reaching new highs. A growing number of people - including financial experts - are therefore asking themselves: Quo vadis financial system?

A view that is gaining in popularity is that of declaring government debt, which is the foundation of all financial market debt, irrelevant. Especially representatives of the "Modern Monetary Theory" or MMT are making such claims. This theory, which is not at all modern, but in fact very old, holds that the state does not need creditors because it can create funds in its own currency at will. As a monetary sovereign, the state is therefore not dependent on borrowing on the market in the form of government bonds. It should much rather create the money itself via the central bank incorporated into it. 

It hardly seems surprising to a level-headed political observer that MMT is growing politically. There are two main reasons for this: MMT is a blank cheque for all kinds of political projects such as "jobs", "education" or "climate protection". Fewer and fewer people are able to resist financial resources for political "necessities", after all, the ultimate aim is to enrich society.

The other reason is mainly based on an argument of justice. Today, bankers and other financial actors would enrich themselves in the process of financing of the state, so the argument goes. A few people get richer and richer at the expense of the masses. The fact that MMT wants to end the whole financial circus around interest rates and government bonds by depriving commercial banks of the opportunity to create money is, thus met with approval, especially from the political left. 

If MMT were to be implemented as its supporters see envision it, fiat money would finally live up to its name and become what it is already considered to be today: pure fiat money as the term was coined by Ludwig von Mises. As such, it would be even more dependent on a trust element than it is already today. In times of viral memes and narratives in which trust can quickly tip over, this doesn’t seem to be such a good omen.

Inflation: a constant in human history

Whether we will see things turn out this we, again only time can tell. What is certain though is that the states will keep on struggling to pay off debt. Their most clandestine option is going down the route of using inflation. This causes the least turmoil because the vast majority does not see through this humbug, let alone understand it. In a "race to the bottom", central banks are likely to duel each other over who devalues their national currency the least quickly. It ultimately becomes a question of who is the one-eyed king among the many blinds. Normal citizens going their day will be the ones losing out.

Although inflation is one of the most complex, non-linear phenomena in economics and is often depicted in a fashion that is too undifferentiated, the following impression is nonetheless likely to become ever more established in people's minds if central banks continue to use inflation to pay off debt: Fiat money, while stable in price, is increasingly worthless. As a result, the flight into real values is likely to accelerate. Today, shares in Apple or Amazon, as well as real estate, are already being held out of a monetary demand. In the case of Apple or Amazon stocks, investor are currently discovering their high marketability and are using them to park their capital, because they expect ever more people to follow suit because Apple or Amazon stocks will become relatively scarcer compared to national currencies. This pushes the prices of these assets even higher.

Digital Social Money

If national currencies lose purchasing power – often as a consequence of economic upheaval – barter circles and regional monies gain in relevance. Thanks to blockchain technology, these types of social monies could become more significant across digital communities. Similar to the way like-minded people in the field of digital communication already find together in filter bubbles, digital social money on a blockchain could become the basis for certain mutual exchange circles. 

Barter circles and social money obviously have their economic limits, and even technological progress is unlikely to make these drawbacks obselete completely. Nonetheless, it is realistic that examples of social money will increasingly be observed as a niche market. After all, the digital world shows that the long tail can be managed effectively and profitably. In the world of digital blockchain-money, this should be no different. 

Broad-based barter circles have also always failed due to economic reality, i.e. due to the inefficiency of bartering with goods or money that are of low marketability. While digital token money eliminates many of the physical friction points of conventional bartering, the challenge remains to achieve marketability and thus liquidity. Money is by definition the most marketable commodity. 

As technology advances, economists are actually asking the question: Could technological developments make money superfluous in everyday use? Computers are not only becoming faster and faster, but they can also communicate with each other better and better. Electronic high-frequency transfer creates the conditions for transferring not money, but shares and shares of other forms of marketable assets from the buyer to the seller. In this way, it is possible to avoid holding parts of the assets in money that does not yield any interest or, even worse, is continuously devalued.

Ultimately, one of the keys to such a development is the ability of computers to communicate in real-time to allow immediate verification of the creditworthiness of the respective buyer and seller, so that settlement can take place with finality.

Uberization of world trade

Another key element could be the tokenization of all types of physical assets and their representation on the blockchain. As such, this makes the goods easier to trade, technically. If assets are tokenized on the same blockchain, standardization is given too.

Possible markets for the exchange of tokenized goods would also be facilitated by artificial intelligence. Larger and larger data sets can be analyzed much more quickly by incorporating artificial intelligence. End-users would have hardly any costs to search the infinite universe of tokenized goods for advantageous barter transactions.

Tokenized assets could be aggregated into trade sequences consisting of many different trading pairs. Happening on a blockchain, trading can be atomic. Trades don’t follow what is called delivery versus payment (DVP), where the transfer of a good or security only happens after payment has been made. In what can be called a location swap, goods can be moved without having to actually move them – only claims on a corresponding asset would be exchanged. In this way, more is achieved with less. This development is ultimately a reaction to the inefficiency mentioned in the first part, which has been created by the current existence of different national currencies.

As a result, the Uberization of international trade could occur: Just as Uber does not need to own cars to transport people, the clever tokenization of assets enables the transportation of stocks and shares, but also real goods, without moving them physically. Companies across national borders merely exchange tokenized claims of different goods. This would reduce the demand for foreign currencies.

Thus, if we ever moved into a world where we buy and sell things by exchanging assets in a digital, highly efficient bartering process, money’s function as an indirect medium of exchange would lose its relevance. This would have a significant impact on the monetary policy of today's central banks. The function of money as a unit of account is unlikely to be impaired though since assets of all kinds will still have to be priced. Nor should the store of value function of money be obsolete, especially if the properties of a particular money make it worth hoarding. 

So what does the future look like?

In this analysis, we first looked at the past in order to capture dynamics of the present that are likely to continue in the future. The decisive factor was the capping of the gold anchor in 1971 – the final end of the gold standard also marked the beginning of the fiat money standard.

This marked the beginning of a devaluation battle between national currencies. National currencies increasingly became the plaything of economic and socio-political power struggles. The financial and subsequent sovereign debt crisis shook the global financial order – politicians, officials and technocrats alike subsequently agreed to ante up their interventionist’s game. The result: more cheap fiat money and stronger financial repression.

At the same time, the financial crisis also provoked the emergence of Bitcoin. A new era of private money competition was initiated. As a meta-idea, Bitcoin has proliferated within just a decade and in many places has rekindled the debate about money, its nature and its position in society. Private corporations, consortia, and central banks have taken up the ball and are now fiddling with their own new digital currencies.

One thing is certain: central bankers and state officials will not give up their monopoly on money without a fight. But the competition with private corporate currencies or decentralized cryptocurrencies will only accentuate the situation. The competition for better money is definitely on. It is currently difficult to predict who will prevail. It makes sense to always maintain an open mind, closely follow new developments and spread one's values across the various options in the best possible way. This is the only way to avoid one’s personal monetary super-GAU.


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