— Bay Area Community Exchange

John Carney at CNBC tells the fascinating story of a college currency called the Buckaroo and asks the question: is the demand driven by the community service taxes that the college only collects in Buckaroo, or is it driven by what goods/services these Buckaroo can be traded for from students. John argues in favor of the latter.

This has implications for real world economics, of course. It demonstrates that taxes are not sufficient to give money value—at least, not beyond the level of near-term anticipated taxes. What is required first is the creation of wealth, or genuine economic output.

The desire for the products of our economic output drives money. If productivity collapses—or if it is anticipated that productivity will collapse—the value of money will collapse right along with it.

I tend to agree with John. Here’s my comment, based on my practical experience with rewards systems and simply looking at young gamers:

There is no need for coercive tax to assign value to the unit in a credit system. All is needed is that the units be accepted/ recognized by those with the products/services people want, and people willing to get in debt measured in such unit b/c they know they will be able to earn/repay later.

Case in point: kids spend enormous amount of time earning points in their virtual games, only because they can buy virtual goods that they value from the game’s marketplace. No taxing authority here drives the demand for the virtual currency.

Another example are rewards currencies. Hoarded and desired enough that they are used by some as pseudo-money, not b/c of taxes, but b/c they are redeemable for travels.

So what does the capability of forcing people to accept a computing entry in exchange for desired goods/services bring? what does the capability of taking back by force these computing entries and deleting them bring? what does the capability of arbitrarily creating these entries and buying other entries with them bring?

It brings stability of the liquidity over time and space.

I ran out of credits characters before I could finish my thought. What I describe is the very reason why Governments borrow money. They could spend it and tax it back, but instead they spend it, then borrow it, then tax it. Why? Well they borrow it as a way to show that they are not abusing their coercive spending power, while providing a risk-free financial savings assets and stabilizing the amount of liquidity available in space and time via monetary policy.

Of course one can question how well there are doing this. It seems that – perhaps because of a political process driven by money – every market-driven credit expansion comes with demand for lessened Government oversight, while market failures require massive and messy Government interventions. In both cases a more gradual counter-cyclical use of coercion might be a good idea, but somehow it never works out this way, only through bubbles and crisis.

The big question then is whether there is an alternative to coercion for keeping a credit system robust and stable. More specifically, is there a decentralized algorithm, a set of simple rules through which we can provide good enough liquidity in a way that matches the (hopefully expanding) real productivity. In other words, will banking someday shrink to a clearing algorithm, in which everyone will pay w/ their own promises and will vote by accepting others’?

It is said that a city inside a group of people enjoyed the village idiot. A poor man of low intelligence,odd jobs and lived on alms.
Every day they called the idiot at the bar where they met and offered him the choice between two coins: one large of RÉIS 400 and one smaller of 2,000 RÉIS. He always chose the largest and least valuable, what was the laughing stock for everyone.
One day, a group member called him and asked him if he had not realized that the larger coin was worth less.
- I know, replied the fool. ”It is worth five times less, but the day I choose the other, the game ends and I will not earn my money.”

One can draw several conclusions from this brief narrative.
The first: Who looks stupid, is not always. The second: What were the real fools of the story?
Third: Who is greedy ends up spoiling their source of income.
But the most interesting conclusion is: The realization that we can be good, even when others do nothave a good opinion about us.
Therefore, what matters is not what they think of us, but who we really are.
The greatest pleasure is an intelligent man playing the fool on a fool who plays the intelligent man (Chinese proverb).

Arnaldo Jabor, 2007

From a PhD dissertation on social money.

In Andrew Niccol (Gattaca) latest dystopian science-fiction movie “In Time”, money is time, quite literally: money is measured in seconds, minutes, hours, centuries and beyond 25, people need to earn and buy themselves time, every minute of their life, or die in an instant.

A very privileged few have enough to buy themselves immortality.

Will Salas: Quality time… There really is a man with a million years.

Philipe Weis: It’s my first million. It won’t be my last.

Will Salas: You know how much good it could do?

Philip Weis: I know how much harm it could do.

Philip Weis: Even if you give a year to a million people, you are just prolonging their agony.

Sylvia Weis: We are prolonging their lives.

Philip Weis: Flooding the wrong zone with a million years, it could cripple the system.

Will Salas: Let’s hope so.

Sylvia Weis: We are not meant to live like this, we are not meant to live forever. Although I do wonder, father, if you’ve ever lived a day in your life.

Philip Weis: Is that so? You might upset the balance for a generation or two, but don’t fool yourself, in the end nothing will change. Because everyone wants to live forever. They all think they have a chance at immortality even though all the evidence is against it. They all think they will be the exception but the truth is for a few to be immortal many must die.

Will Salas: No one should be immortal even if one person has to die.

In Time (2011)

Without having to go in a far and dark future, the connections between money and life or death are many.

• If wealth is what sustains life, in our industrial society, money is pretty much the only way to access wealth and survive.
• Moreover, money is already a way to prolong life. It can’t prolong it forever, but it can significantly increase the probability of a longer life.
• Money is also a way for us to at least convince ourselves that we can conquer death by minimizing its unavoidable effects. In the past, the belief was that giving to the clergy would buy yourself a ticket to paradise “what you give in this life will be returned to you to a thousand times in paradise”. Nowadays, the belief is that the state can maintain and ever growing set of public services as well as keep financial markets stable enough that our financial life insurance products can be relied upon to provide for our loved ones in the event we die.
• Modern money itself is backed by the sovereign’s ability to force us to accept coins, pieces of paper and bits in exchanged for real wealth, including labor and sometimes life itself. Ultimately this force comes from the legitimate use of the threat of death.
• Last, money like death, is something that our society tries to hide. We no longer use envelopes to wrap dirty cash, and don’t even need to pay with a cold, business card-like plastic card, we can just say hi and act as if what we just ordered we got for free. Death is just like that, something terrible that no one should talk about anywhere, as if it’d never happened, and instead revere youth.

What this intimate connection between money and life/death mean is that while there may be a bright future for all kinds of new currencies, there is still also a bright future for currencies that can truly guarantee you a future, and in some case help you overcome death.

These currencies will likely place a particular focus on:

• privacy: few people other than ourselves will know, and it will not be used for daily transactions.
• security: they will be very difficult to misappropriate.
• high trust: they will rely on a framework that we know will survive us well after we are gone.
• redeem-ability for goods and services that can keep you safe from harm, save your life or simply help prolong it.

For instance: healthcare savings account + life insurance policy + access to a large network of healthcare, fitness, safety/security services.

Repost from another list.

Starting a community currency does feel sometimes like going against the current. It’s ironic and I don’t think such initiatives should require massive exertion of will, selling, convincing, showing. To me these are symptoms of a design process that failed to progressively engage the community, starting with the very simple before moving to the ever more complex.

To be concrete, trying to replace our current medium of exchange is very complex because ensuring reciprocity is hard and I don’t think this should be the starting point.

On the simple end, I see for instance: starting a group for your community where people are encouraged to share stories, pictures for the simple purpose of seeing what they do acknowledged by others in a way that’s recorded and semi-public. Over time, these acknowledgements can be formalized from plain english comments to more formal hence accountable forms of expression such as hashtags or “like” buttons, to which the community collectively assigns meaning over time.

So how we move from the simple currency of ideas/stories to the more complex currency of reciprocity/exchange?

Next week is an important week for the US economy. The Fed has probably its last opportunity to make bold announcements before staying mum for the presidential election. This is why it’s important to re-read the speech Bernanke made about fighting deflation years ago, which many see as the roadmap followed by the Fed Chairman in combating deflation in the US.

My conclusion at this point is that the Fed is likely to not commit on a quantity of money (as it did in “Quantitative Easing 1″ and 2) but focus on an inflation or interest rate target, leaving open the quantity and type of assets it will buy to achieve that goal. This is what will give them the most flexibility over the next year as the election unfolds. This is what analysts have referred as “interest rate caps“.

Of course, I’m highly skeptical of the actual benefits of this action for the real economy, unless it can be focused on assets that will create local jobs and restore confidence in the future, and unless it can limit the abuse of free money. But this would be quasi-fiscal policy. I also think that the Fed is experiencing diminishing returns on their actions (QE2 was less effective than QE1 from a Main Street economy standpoint), and their credibility in actually fighting deflation may start to be put into question by markets.

Noteworthy excerpts of the speech below.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities.⁹ There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.¹² However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.¹³ Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.

The following is interesting in the context of the recently announced collaboration between central banks to address the US dollar demand of European banks. Of course, the plan announced by the Fed is unlikely to be specifically linked to this, since this type of operation is politically difficult.

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

This part is interesting in the context of Jobs plan that Obama recently announced. But the plan is unlikely to be in effect in time for the Fed to play its role, if it is voted at all, so it’s unlikely that the Fed actions will be directly linked to it.

the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.

[...]

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

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.