The future of money is less money

This is a piece I originally posted 2 years ago as a comment on

The money we use is Government money or levered Government money (bank credit). Government money is backed by legitimate force. The question is: what do this money become when force becomes not only illegitimate, but ineffective?

I think that we may have or be closed to have reached the limit in using legitimate force (Government) to back our money.

There are several reasons for this evolution: dwindling returns on the use of force in driving the success of large organizations, gridlocked political processes, environmental limits, difficulty to monetize the growing immaterial economy, and many more.

If so, the current monetary system used is likely to continue to deflate, as debts are paid or defaulted on, with regular bursts of inflation by fiscal/monetary authorities but with decreasing marginal returns.

The good news is: we are bound to continue to grow, to pursue Happiness, and we will need systems to continue our growth. But more likely around “soft power” systems, where reputation plays an increasing role.

In other words, the future of money is less money and more not so random acts of kindness. In other words, we can deflate in monetary terms, but inflate in terms of social currency.

There is a lot for bankers to do here. Banks are not going to go away. As trusted intermediaries, they will likely play an increasing role in providing us with convenient, actionable and reliable access to data about other people and organizations, not just the money we owe or are owed.

This evolution will take time. Money is here to stay, but over time, it may decrease in relative importance to social currency. It’s time for banks – big and small – to leverage their assets and position themselves in this space.

And a bit more on why there may be less money in the future:

Most of the money we use is already bank-issued checking money in the unit of account of fiat money. Deposits are IOUs of the bank, regulated by the Govt. The demand for most of the checking money we use is not driven by fiat but by the fact that some people want to get in debt and then have to find the money to pay it back. So banks have already put their weight here.

What I am saying above is that there is a shift in people’s willingness to borrow on the basis of secured IOUs, that is secured by the use of legitimate force to liquidate their assets should they not be able/willing to pay back. Most checking money in the US are backed by mortgages (60% I think), which means that ultimately most dollars are backed by the right of a Sheriff to come to your house, throw your stuff on the street, change the locks and tell you “sorry just doing my job”, then auction off your house.

Having such potential violence backing our everyday’s transactions is not a necessity, and one could argue that it may be counter productive.

Now, people may not be willing to borrow and pay with checking money backed by legitimate violence, but they may still be willing to pay with unsecured IOUs backed by their own productive/creative capacity. So if I’m a programmer, I’m willing to pay with $ backed by my programming skills. Of course, these will not have the same liquidity as $ backed by secured IOUs, but may go a long way in some cases (see [1]). In this model, Banks could play the role of IOU routers in the network of participants, not issuing IOUs of their own and discounting people’s, but merely helping the IOUs flow.

At the extreme, why even give unsecured IOUs, why not just publish for everyone to see that you receive goods/services of a certain $ value on the Web, without any explicit contract to reciprocate, only a social pressure to. Over time, those who reciprocate would certainly receive more goods/services than those who don’t. In this model, banks could play the role of trusted repository of reputation data about participants, making sure your reputation is correctly accounted for and not tarnished/spammed.

In conclusion credit money is just reputation turned into commodity through the use of legitimate force. There is a limit to it though and just as we have experienced a resurgence in commodities as store of value, we may see a resurgence of peer credit as medium of exchange.

IMO, none of this will replace fiat money or bank money, but we will expand the spectrum of possibilities beyond what is currently available.

[1] Liquidity in Credit Networks: A Little Trust Goes a Long Way

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