Thoughts on the future of money in the aftermath of Libra

Libra white paper describes actually privatization of money making, up till now a government monopoly. Although there were other alternative currencies (crypto and others), they were inferior as a medium of exchange, a crucial factor in an economy. The profit from money printing known as Seigniorage and people are willing to pay it for the utility they received from using it as a means of exchange and store of value. As the economy grows, the same way as more crucial production factors such as electricity and trucks are needed, also more money is needed. And as manufacturers of trucks make a profit from the need for trucks, also the manufacturers of money i.e. the governments make a profit from the need for money. The monopoly of the government (actually the central bank) enabled it to sell money at a much higher price than its production cost by adjusting the amount of money so to maintain its price. Printing money is one of the resources of the government budget. When governments tempted to print more then what is needed to maintain a stable price, their currency suffered inflation.

If Libra will be indeed a better means of exchange, it would challenge the monopoly of the governments and probably will take a larger share of the money market and the profit of manufacturing this money. This “profit” is actually the source for paying the validator nodes of the Libra Blockchain. One thing which governments could do is to fight Libra with regulations and taxes, but as history taught us, Facebook probably will prevail this war.

So if and when people will start using Libra massively, it will increase the quantity of money in the global economy and potentially cause inflation. In order to fight this inflation, central banks would have to raise the interest rate on their own currencies or to sell bonds to absorb their excess money (correlated to the amount of bond Libra-foundation would buy to its reserve) and shrink their money market share, the gains involved with it together with higher interest rate to pay for their bonds.

Money is an asset used as a medium of exchange. Economists distinguish between three types of money based on its degree of liquidity, from the most liquid to the less. As it more liquid it is a better medium of exchange but less useful as a store of value and vice-versa. The types are:

  1. M0 - known also as the monetary base, is the cash money created by a Central Bank (coins and banknotes).

  2. M1 known as money supply (or money stock) = M0 + current (checking) bank accounts, this money is created also by the banks. M1 is what Usually economics mean when they say “money”

  3. M2 = M1 + Short term Bank Deposits, money market securities and money market mutual funds. These assets can be quickly converted into cash or current accounts. (M3 is redundant for this matter)

As a storing value asset, money (M1) is inferior, it has no yield and can lose value due to inflation. The reason people and firms hold money is to meet cash-flow needs and uncertainty. If we could have all of our proceeds and spending at the same time, once a month with no uncertainty, we would hold all our surplus in other assets like bank deposit or securities. Or if exchanging from yielding assets to money and back was costless (including no time spent), then we might have not holding money at all.

The same way the Libra blockchain made transferring money almost costless, I predict that sooner rather than later, we could make the purchase and realization of security and deposit frictionless. Then we might need money only for a brief moment. We could than holds our surplus within securities. When Adam would wish to transfer money to Eve, the app at Adam’s account will briefly sell the security for Libra, transfer the Libra to Eve and then buy a chosen security at Eve’s account. Money in this setting is a temporary entity and negligible. So in the near future, Libra may change the game of money. But in the long run, we might not need to hold money at all. The income of the Libra foundation will shrink to its operating cost due to the small number of Libra coins, with no monopolistic rent. We as users will gain what they may lose.

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