Visa just announced a new iPhone application. I have registered one of my Visa cards, but have yet to receive offers. Here are some screenshots.
“I didn’t have time to write a short letter, so I wrote a long one instead.” – Mark Twain
[warning: controversial topic ahead. If you disagree with me, best is probably to agree to disagree or simply to ignore this post. Have a nice day! I do enjoy a good discussion though.]
To understand my views on gold, you have to understand my views on wealth. To me, wealth is what sustains and expands life. This is a biophysical perspective. I relates to my views that life is a process that is able to limit the effect of the 2nd law of thermodynamics within certain boundaries and that God is who is able to reverse it.
To me gold is not wealth. I don’t know any living matter that is able to directly draw energy from it. Can’t eat it, can’t warm yourself from it. Rather, the only value of gold is social: ownership of gold implies that you are able to satisfy your life needs such as food, shelter, health, and instead can focus on other needs such as recognition from others. If you can own something that isn’t wealth (but simply beautiful and scarce), it can only mean you are wealthy. Although I don’t have historical facts to back this up, I suspect gold was the currency of kings and salt the currency of folks, so historically and possibly to this day, if you want to be perceived as socially closer to the king, you want to own gold.
So gold has social value: it’s value is derived from the fact that others value it. Maybe that’s why Soros called it the ultimate bubble. Even though it is not wealth, it can be exchanged for wealth. It is not wealth, but it represents wealth, and representing wealth is what money does. Of course, Gold has several interesting characteristics as a metal that were historically helpful in this role: it’s scarce and hard to fake, and it’s easy to authenticate.
The problem with gold is that it is scarce, so if a group of people don’t have gold and want to trade to their mutual benefit, they either can’t trade, or have to borrow gold from someone who does own it. This implies that in a society in which taxes must be paid in gold, the result is certainly the enslaving of a class of people by others (note that government-issued money that must be used to pay taxes is just a variation on that, with the added caveat that governments are not constrained by the supply of gold, but by their ability to enforce increasing taxes).
People do not want their productive and creative capacity to be limited by the amount of gold in the ground, nor do they want it to be limited by what the elite or the majority think is a good amount. People want to be only limited by their own imagination and their ability to turn ideas into reality. The major role of government should be to provide the platform to make this a possibility for everyone.
True freedom would be the ability to issue your own IOUs and through the magic of computer networks and security, to turn it into “gold”, so you can buy things and pay with your own creative capacity. Technology is readily available: cryptography can provide the same anti-counterfeiting, anonymity and ease of authentication that gold provides. What is missing is social acceptance, the networks that provide the good enough liquidity for these IOUs to function as money. Research shows that a little trust goes a long way.
I think network money will prove much more valuable than gold to represent wealth. It only requires a few admired “kings” to decide to own network money rather than gold, and the rest of the people will follow. Gold will certainly continue to play a role in this world, likely an increasing role as a currency, but I don’t buy the fact that soon we’ll be back to a fully backed gold reserve standard with gold at $5000/oz+. This is why I don’t invest in gold no matter how high prices are going. I invest my money in wealth and I invest my time in building network money, focusing on social aspects first, not technology first.
I am on a quest to find the ultimate digital-only gift. Not your 70% coupon, virtual gift card, farmville gifts. Something with the potential to make people say: “Wow! I wanted this more than a 13-inch solid state MacBook Air. How did you know?”.
Here are the criteria, that I thought are relevant:
- Unique: either something personalized to the recipient, and/or something that would be based on external data like time, temperature, so it would effectively be different all the time.
- Rival. One owner only at any given time. I would want my digital gift to be rival: if the recipient owns it, the giver does not have it anymore. This could work like this: you get a secret code or URL to access it, which becomes invalid, and a new URL is generated for you to access next time, or gift it so someone else.
- Re-giftable. This is useful since you may get something you don’t like. It’s also very fun.
- Economically hard to reproduce. This means it may be the result of a CPU-intensive process that could take several years to complete on a regular PC. Storage-intensive: this would make it unpractical to try to copy. The same goal can be achieved by making the gift very specific to the recipient.
- some public and social elements: ability to share some aspects of it with the public or specific friends. Starting with the ability to prove ownership of it, for instance by displaying the name of the current owner, or a digital signature. It may be possible to take snapshots of the gift and share them with friends, or perhaps share the experience of the gift with friends if one wants, but only as long as the gift is owned by the person inviting others.
So far, I haven’t found anything matching these criteria. So, let me know your thoughts.
Some ideas that get close: Bitcoin money, DNA analysis service (23andme), digital fashion for virtual worlds.
While I’m very interested in the future of money, I’m even more interested in the future of money now: the very practical things that we can do with the banking and monetary system as it is today.
I have come to realize that the ideas I believe about the future of money, in particular making money more meaningful, are very well understood by small community banks and credit unions. They have incredible assets, one of which is the human-sized organization, which allows you to quickly talk directly to the decision-maker. What they lack are simply the resources of the large banks and the sense of urgency of startups, but I know they are open to partnerships to workaround these issues.
Below is my corrected Google translation of a recent post by JCPhilippe, who is Managing Director of the Credit Agricole in the region of Pyrénées Gascogne in France on how the bank he manages is becoming a good bank.
As part of a week on “socially responsible savings”, we organized a symposium on 3 November. Distinguished guests, Father Bernard Devert,President and founder of Habitat Humanism , François De Witt,founder of Finansol , and Pierre Scherek, Director General of Ideam convinced us of the usefulness of their actions and this form of savings, still limited in use in France. Socially responsible savings consists in selecting financial investments by adding meaning and socially responsible as a requirement in addition to performance.
We fully support this approach. When I say this, I understand it is difficult to believe a banker is telling the truth. If he speaks of social responsibility, ethics, faithfulness to pledges, and sustainable development, how can we not think that he is only doing so to better profit? The mega-banks have left such a strong mark in people’s mind for their subprime profits, losses, their traders and their bonuses, that it is easy to forget the local bank dedicated to a particular geographical area, which serves, people of modest means, small businesses , artisans, shopkeepers, farmers. The headlines make us forget that finance and banking are first and foremost here to help with daily life. So when a banker says: “I want to be useful!”, Who can believe him? Who can believe that a bank, a banker can have be well-intentioned?
A Pyrenees Gascogne, we believe in the good and useful bank, local solidarity, local cooperations. This idea of a good bank can be seen in everything we do. When we say that advisers are not paid on the products they sell, it’s true, or that we advise our customers products that suit them, it’s true. And because we want a good bank that we have developed a consulting business in how to save energy. And when we provide help to non-profit in our area, it’s because we believe their action is vital to the social fabric.
So if we offer our customers financial products around solidarity and socially responsible investing ( here on the site talking about heritage ), it’s because Pyrenees Gascogne invests itself in these products, it’s because these products are purchased by our employees employee for their own savings, it’s because we believe in the value of these investments for ourselves. We do not follow fashion, we are not trying to conquer a market, we try instead to share a belief with our customers.
I am increasingly convinced that of of the key levers to make companies more virtuous, more accountable to the future is to channel savings into those companies that subscribe to the principles of sustainable development, and integrate this philosophy in their decision and accounting. It is more useful to invest in such investments than to give a little to non-profits, (although each donation is helpful) because that way, they have means to improve their ambitions. We can put more solidarity in the economy and the formula of Phocion “private virtues become public morals” is truer than ever. Of course, we must still dare to believe and decide to build!
I’ve been arguing recently like others that QE2 isn’t really creating new banking money. Yesterday Ben Bernanke was interviewed and said the following (video skip to 19:00 mark) (h/t Pragmatic Capitalist):
What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed. Now the question is what happens the economy starts to grow quickly and it’s time to pull back the monetary policy accommodation. There are several tools that we have…: [he goes on to describe the use of short-term interest rate on reserves].
I generally agree with Ben Bernanke but with a small distinction: while QE isn’t creating money, it’s artificially maintaining an illusion that there is money, than there would otherwise be. Specifically, it’s forcing savers to invest in places that we would not otherwise invest because they are not really increasing real wealth productivity.
I view banks not as creator of money, but as intermediaries that lend credit to money so it becomes more easily acceptable: they liquify money rather than create it. The only reason we need banks is that we do not have an alternative decentralized infrastructure to efficiently liquify money created by the private or public sector. Efficiency here is measured in how low discounting cost of liquifying money is.
As Hyman Minsky said, “creating money is easy, the hard part is getting it accepted”. In other words, a private party – say a private business like a farm – can create money simply by issuing vouchers for their products/services, as is the case when a farm issues vouchers as part of a Community Supported Agriculture program. They don’t need anyone to create these vouchers, they only need confidence they can do good on their promise. The problem is that these vouchers are not easily acceptable because the cost of evaluating the ability of the farm to do good on their promise, and actually deliver the goods/services is high. Banks merely reduce that cost buy swapping these vouchers with assets that are more creditworthy, specifically claims on their own balance sheet. These claims are more easily accepted because 1) there are claims on a diversified portfolio of assets 2) because regulated banks promise to convert these claims in Federal reserve notes on demand.
The past 10 years have provided great empirical evidence that banks and the Fed are not necessary to create money: the shadow banking system created a ton of money by taking promises from the private sector, liquifying them by turning them into tradable assets via mortgage-backed securities, assigning good rating to them, so they would become acceptable in transactions, effectively turning them into money. These should have evaporated.
What the Fed is merely doing is artificially propping up the value of these debt-based assets to levels that they would otherwise not have. But they are not creating new money, they are just trying to keep the level of money in the economy at least constant or increasing.
Of course, this isn’t without issues. The main problem I see is that these actions are distorting capital allocation decisions. They give incentives for capital holders to allocate capital to assets that they would otherwise not invest in.
Real money should only be created when wealth productivity increases: for instance a farmer becomes more efficient and sustainable at growing healthy food that naturally heals people. Conversely, it should be destroyed when we realize that the wealth productivity increase were fake, for instance a farmer using petrochemicals to artificially prop up production of food that’s causing cancers and destroying land.
What can you and I do?
If you are a short-term speculator, it is important to understand that you can’t fight the Fed. You have to go with their illusion-making but be extremely aware that “debts that can’t be paid, won’t”, which means that at some point, the illusion will drop, likely in a dramatic way.
It’s better to be an investor, which means focusing on investments that represent real wealth for you, your family and your community. These are different for each of us, but to me they start with healthy food, safe housing, access to health and energy, and building relationships with other likeminded “investors” in your neighborhood and in the world. For instance, consider investing in a local farmer, equipping your house with solar or wind energy or investing in a sustainable energy cooperative, learning to share resources, organize and co-create with your neighbors. I would also recommend investments in companies dedicated to true increased wealth productivity: efficient/sustainable farming like aquaponics, robotics, renewable energy, sharing and trust networks, biotechnologies. In the short-term, while shady assets are propped by, your returns may be disappointing, but when the illusion disappears, you will find yourself in a much better position.
Also, if you are a software developer, an angel investor or venture capitalist, you need to invest your talent and capital in the Open Banking infrastructure i.e. the infrastructure that will facilitate the creation of liquid money within and across communities with similar values. This is critical to lessen the power of the Fed to artificially prop up assets that most of us pay for, but which create no tangible value to us.
[This is not an investment advice]
I essentially think that investing in something because of its actual outcome is a quite attractive value proposition.
I define a currency as a transferable promissory note issued by an entity/individual and backed by its productive/creative capacity.
Currencies can be used to fund projects that equity or debt wouldn’t.
Debt/equity requires a discounting of future market value, that is to say an evaluation of the sacrifice that people other than the investors will be willing to make in the future. This is especially hard in a credit money system where your ability to sell in the future doesn’t just depends on your ability to produce, but also on the phase of the credit cycle. In addition, for the sacrifice to be possible, the wealth generated must be rival, which further limits the creative potential.
Currencies on the other hand simply require the investor to know how much they will value the wealth created. They only require the issuer to produce/create what they promise they would create. Since they allow wealth creation to be funded upfront, rivalry isn’t a requirement. Much easier.
Lately, there has been a lot of talks about Quantitative Easing, the Fed’s purchase of assets, as a way to fight disinflation or deflation. People talk about it as the Fed printing money, and the media and the population conveys images of Weimar-style wheelbarrows of cash and Zimbabwe. This has fueled an accelerated frenzy in all asset classes, equities, bonds, commodities, including Gold prices, which have reached ($1380/oz).
My take is that this frenzy is essentially based on a misunderstanding by most people of how the U.S. monetary system actually works. QE itself isn’t inflationary at all. What is inflationary is expectation of inflation. But because people believe it is inflationary, it can excite speculation, and in turns, generate inflation, if enough people believe it, particularly those creditworthy enough to get in debt.
Inflation is the result of too much purchasing power increasing at a faster rate than goods and services available to purchase. Deflation is the reverse: purchasing power decreasing faster than products and services available to purchase.
This purchasing power is composed of bank money and paper/coins, bank money being the lion’s share of purchasing power. This purchasing power is bank “created”. The bank takes promises of people on one hand, and gives credit to these promises in exchange for interest and collateral, so that they become acceptable by other people. Because some of this bank money is convertible on demand in paper or transferable on demand to other financial institution, people have the illusion that bank holds their money and actually transfers it. This is not the case. Holding an account at a bank with a positive balance is like holding a different currency than your Fed reserve notes. It’s pegged to the USD i.e. it’s convertible 1:1 for Fed reserve notes, but it’s not the same. The only true USD are the Fed reserve notes and their electronic version, the reserves, held by the Federal Reserve Banks. These Fed reserves are the banks’ currency: this is how they settle debts between one another. No one but banks and the Federal government use the Fed reserves.
So, in a nutshell, because most economic agents are not banks and they use bank money to pay, not reserves, only if bank “created” money increases relative to goods/services production is there a risk of inflation. Another way to say is that reserves have not effect until they are “transformed” into bank money. I’m using quotes again here, because there is no actual transformation, it’s just two sides of a balance sheet.
If we agree on this, let’s see what QE is and what effects it may have. When the Fed buys $1T of assets for Fed reserves, whether private (mortgage-backed securities) or public (Treasury Notes), what the Fed does is does is enter the following accounting entry:
- they record a new reserves as liability, on the account of the bank they purchased from.
- they record the purchased assets as assets.
So technically, the bank ends up with an excess of Fed reserves, which they are forced to seek yield from, which some people say they can lend to borrowers, which is inflationary.
Actually, this assumes that creditworthy entities are willing to borrow. Let’s assume 3 types of entities: households, goods/services producing companies, speculators, Government.
- If creditworthy households do not anticipate asset prices to increase, or have just been spooked by the housing crisis or worse lost they home, they are unlikely to borrow against such assets. If households are unwilling to borrow or if banks feel that they are not creditworthy enough, then no new bank money here.
- Companies will only borrow if they can invest in productive capacity to satisfy a need they identify.
- The increased liquidity at banks may end up in the hands of speculators. Problem is: speculators do not consume anything so they don’t really represent real demand. To make money, they need to buy low and then they need to sell to someone who actually values the asset for longer than a few microseconds or even days. It is possible to have commodity prices exploding then crashing just based on speculation, but not actual demand (ex. oil in 2008)
- The government can borrow money, but in practice the government (in the US) isn’t constrained to borrow to spend. They spend first, then borrow. So the government, represented by Congress, must be willing to spend. This requires political agreement.
Given this, how can we have a sustainable creation of bank money (hence inflationary) scenario:
- households as an aggregate decide to take on more debt. Not likely in my opinion for the next few years.
- companies seeing that household are not taking on more debt do not borrow (or borrow but to invest abroad).
- speculators bid each other rapidly, which creates an asset speculation frenzy. Some households or companies who actually need these assets feel that they are missing and decide to buy and hold. To me, this is possible but unlikely given the current lack of confidence by retail investors in financial markets.
- last, the government, is unlikely to spend or reduces taxes if there is a gridlock, which seems to be the case at the moment.
In conclusion, it is my belief that QE is more likely to not spur inflation in the coming months. I believe it will indirectly contribute to inflation after a new crisis prompts the Government to go on a new huge spending program. New government spending combined with QE does equal new money, but not QE without expansion of credit.
This is not an investment advice.
Interestingly according to etymonline, it comes from the same group as “think” so thanking essentially means to give good thoughts and gratitude. In French, the translation of thanks is “merci”, which is like mercy, to spare someone.
At the time these words started to be used, we had no way to publicize “good thoughts” beyond the parties to a transaction or a family or village, but today we have the Web.
If we think about the Web version of the “thanks”, it would essentially be a written statement of gratitude for something you’ve received, possibly because you didn’t have to sacrifice anything to obtain it, or because your sacrifice in the exchange was much smaller than the other party.
These “thanks” could be aggregated in a PageRank-like “ThankRank”, which would be quite useful when we want to decide where to direct our own generosity.
A few days ago, Patelco sent the letter below to their members asking them to voice their opinion against the REASONABLE FEES AND RULES FOR PAYMENT CARD TRANSACTIONS amendment (original text). This campaign seems to be orchestrated at the state and national level.
What is not clear to me is why would Patelco, a credit union with less than $4 billion in assets would campaign against an amendment, which exempts card issuers with assets of $10 billion and less?
A friend of mine sent me this 2008 video of Richard Koo from Nomura Research Institute in which he presents his theory of “balance sheet recessions”. Mr Koo has been consistent with this message, with his presentation appearing in 2009 and 2010, and consistency is something I respect.
Mr Koo makes the case that in the type of crisis we are in – one in which the private sector is not willing to borrow and are actually paying down their debt – monetary policy is pretty much useless. The only effective tool are sustained public stimulus over a long period of time, not a series of small or big ones as we come out and come back in recession. He argues that there is no need to worry about inflation and higher interest rate, even with increasing fiscal spending, the reason being that banks will be happier to lend the money to the government and earn interest, than not lend money at all i.e. destroying money.
I agree with Mr. Koo on his analysis of balance sheet recessions. But I think there are important cultural and political parameters for his solution to be viable in each geography (US, Europe, Asia):
- Debts must be repayable (including the government’s). If we are in a generalized Ponzi territory where we borrow to pay interest, hoping for assets to increase in value faster than debt, then it’s game over. I have high doubts about debts being repayable, but let’s assume they are.
- Economic agents must convincingly show they are doing their best to pay back their debt (and not hope that somehow they will be able to have someone pay for them). If they don’t, creditors will look for the exit and grab what they can before their promises become worthless.
- Savers must trust the public funds allocation process. This is probably the most important and challenging part and we must be creative about this. Good options to research IMHO to re-build trust that saved money lent to the Government will not be wasted: participatory budgeting or direct lending from savers to Government with specific projects people can invest in.