Month: April 2011

Thoughts Offerings blog has an interesting piece on how QE actually does not encourage traditional bank lending via deposit creation, but instead encourages lending through security issuance. I recommend the reading, it ties a lot of things together neatly.

If we take this post a little further, given that lending via security issuance is currently frozen on the consumer debt side, those benefiting from QE are those with access to capital markets: large corporations, financial intermediaries (who take fees on issuing, buying/selling securities), and the Government, but not the consumer or small business (except as recipient of Government welfare or subsidies). As a result, domestic demand is poor, which leads companies to invest and grow their revenues abroad (BRIC in particular), bringing rampant inflation in emerging economies and taking the dollar down. This is a self-reinforcing feedback loop.

Two things follow:

1. the biggest risk to this growth is a slowdown in BRIC countries, China in particular. The reflation trade could easily morph into a vicious deflationary force as dollars are repatriated, assets sold, debts paid back, preference for safety over risk, short-term duration over long-term, returns.
2. with consumer and small business loans still going down, paradoxically encouraged by QE as the Thoughts Offerings post expose, there is a major opportunity for peer-to-peer lending and crowdfunding. This is an area where lawmakers could have a huge impact with no dollar spent, just a regulation signed. Maybe they could even win an election with this one!

Webisteme started a thread on A broader definition of currency, which prompted me to dedicate a post to the topic. My definition has certainly evolved since March 2009, so I wanted to share it here:

A currency is an attributable symbol whose meaning is common – consistently accepted, acknowledged – within a group of people, and over time.

The commonality, commonplace of a symbol is what distinguish a currency from other symbols. Currency is etymologically what runs, what is everywhere, not necessarily because it measures a flow, but  rather because its meaning is everywhere. I would argue that the existence of currency precedes in time the flow of wealth it may at some point trigger. I would also argue that a currency can but does not have to be formal, agreed upon, well-defined, it can be instead informal, emergent.

For a symbol to become currency requires either (or combination of):

• force: this is the easiest. someone forces onto others the meaning of the symbol, such as is the case of the Government legal tender laws and monetary policy.
• emergence: this is the most fascinating, because it is uncontrollable and can result in very quick social changes. An example is: having a Web site, blog, LinkedIn profile, twitter stream is a currency, if you don’t have one, it will raise strong doubts from a hiring manager.
• agreement: this is probably the hardest. A group of people decide together that something will be used as currency.

Clearly, understanding how a currency emerges, and designing for a symbol to emerge as a currency seems to me to be a potentially very powerful piece of knowledge that I feel isn’t much written about in the Internet literature.