More on Libra and monetary policy

The FT has a new piece by a Facebook co-founder Chris Hughes, which argues that the proposed Libra cryptocurrency could undermine the power of central banks. I’m generally skeptical of that view, but in this case Hughes does make a respectable argument:

Let us imagine that Libra works as planned. Hundreds of millions of people around the world will be able to send money across borders as easily as they send a text message. The Libra Association’s goals specifically say that ability will encourage “decentralised forms of governance”. In other words, Libra will disrupt and weaken nation states by enabling people to move out of unstable local currencies and into a currency denominated in dollars and euros and managed by corporations.

The Libra Association promises to choose stable currencies and assets unlikely to suffer inflationary crises. The sponsors are right that a liquid, stable currency would be attractive to many in emerging markets. So attractive, in fact, that if enough people trade out of their local currencies, they could threaten the ability of emerging market governments to control their monetary supply, the local means of exchange, and, in some cases, their ability to impose capital controls.

This is the most plausible argument for the claim that Libra could undermine monetary policy. If Libra were so successful that local currencies stopped being the medium of account, then Libra could completely take over the monetary system, effectively dollarizing the local economy. In that case, it would not be Facebook that controlled local monetary policy, it would be the Fed.

I’m still skeptical that Libra could be successful enough to make currencies like the India rupee or the Turkish lira disappear, but to the extent that Libra is a threat to monetary policy independence, it’s in the developing world, not the USA.


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10 Responses to “More on Libra and monetary policy”

  1. Gravatar of Jose Jose
    21. June 2019 at 11:33

    Prof. Sumner
    As you stated in your earlier post, Libra challenges seignorage. Some coutries with high inflation won’t like that.

    The current system is based in a US dollar that was gold pegged once. After a while, it was not pegged anymore.

    The peg is only a nominal anchor that is needed now, in order to make people use the currency, because they are attached to the notion of intrinsic value. Once they are using it for a (long) while, who cares?

    Dr Sumner, if you ever want to see your NGDP system work at a global level, start preaching at the policy makers within The Libra Associatoin. There will be a time when they will find that 100% reserve is not necessary anymore, and will need a monetary policy framework …

  2. Gravatar of ssumner ssumner
    21. June 2019 at 14:24

    Jose, They would not be able to target NGDP.

  3. Gravatar of Benjamin Cole Benjamin Cole
    21. June 2019 at 15:34

    Interesting.

    But people can already send money all around the world, by tapping keys a few times on their smartphone, using the PayPal system. I do this.

    Also, at least in Thailand, people use their smartphones to transfer money to pay bills or to each other. Most banks have online services. To someone of my generation, it seems sinfully easy and a step towards decadence.

    Is not the key whether people will accept a new digital currency? People accept paper cash as they know, ultimately, they can pay taxes with it. That gives paper cash its universal credibility.

    Can a new digital currency become universally accepted, even though one cannot pay taxes with it? Maybe. Gold has value and you cannot pay taxes with gold. It seems to me a digital currency backed by gold would be a viable proposition, yet to my knowledge no one has done this, even though it is a rather obvious idea.

    The second key seems to be if the new digital currency is created out of thin air, or if it is backed by assets that were initially purchased by official money.

    My understanding is that Bitcoin was created out of thin air, yet it seems to have gained some sort of credibility and acceptance.

    We can hope that a universal (or several widely accepted) digital currency will evolve over time, and offer refuge from overly tight central bank policies.

    The example of Bitcoin, however, is hardly reassuring. The value of Bitcoin fluctuates wildly and is now above $9,000 again after having been below $4,000 in March.

    Given that money has become blips on computer chips which can be transferred globally instantly, it is worth pondering what is monetary policy by a lone central bank anymore. Globally, commercial banks are creating money endogenously, while other central banks are tightening or loosening. On the fringes, are a few digital currencies which may grow in the future.

    I hate to say it, but under such circumstances, to stimulate the economy in a defined geographic area, such as a political entity, may require some sort of direct fiscal stimulus.

  4. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. June 2019 at 16:18

    Cryptocurrencies are to a significant degree about trust, though not in a simple way. Do people trust Facebook(tm)? Facebook(tm) does not seem to be assuming that they do, as they are explicitly not the sole controllers. But then do people trust a mob of corporations? More than their central banks? More than their own governments? Perhaps it will be a form of natural experiment.

    This blog post provides the results of global experiments on civic honesty using lost wallets. Unsurprisingly, the Swiss are the most honest. Perhaps a little more surprisingly, the Chinese are the least honest. So, perhaps a lot of potential demand in China but the People’s Republic would seem to be unusually well placed to suppress Libra.

    http://joannenova.com.au/2019/06/surprise-17000-lost-wallets-show-humans-are-nice-people-mostly/

  5. Gravatar of ssumner ssumner
    21. June 2019 at 17:15

    Lorenzo, I lost a wallet in a Swiss train station, and later recovered it.

  6. Gravatar of Kgaard Kgaard
    21. June 2019 at 17:23

    Lorenzo — I don’t think the issue is ease of sending money via paypal etc. I think the issue is getting around capital controls. THAT has got to be the real new utility Bitcoin brings to the table.

    Now that Bitcoin exists it’s not entirely clear what new utility the Libra brings. But the gigantic user base of Facebook does give it instant credibility.

    My question is: Why won’t Zuckerberg and his henchmen just take your Libras when you post something they don’t like about Neocons on Facebook?

  7. Gravatar of Benjamin Cole Benjamin Cole
    21. June 2019 at 17:44

    Reading Lorenzo’s comment, I have to toss in the old “salad oil tank” scandal.

    For youngsters, this was 1963.

    “Ships apparently full of salad oil would arrive at the docks, and inspectors would confirm that the ships were indeed full of oil, allowing the company to obtain millions in loans. In reality, the ships were mostly filled with water, with only a few feet of salad oil on top.”

    The reason I bring this up is Facebook’s plan for a “digital currency backed by assets.” Or a digital currency backed by gold.

    I can imagine a storehouse of “gold” backing a digital currency. Then over time, suppose the “gold” becomes gold-plated lead. As long as no one finds out, all is well!

    BTW, both the PBOC and the Russian central bank have been heavy buyers of gold for years. Gee, do you suppose Putin has substituted some gold-plated lead for gold? Oh, never! A friend of mine in Hong Kong says corruption in mainland China’s financial sector is what beer is to a biker rally. But since state central banks can print money, I don’t think it really matters if the PBOC or the RNB have any gold or not.

    Sometimes people say the private-sector alone can self-regulate the financial industry. Maybe so. AIG was the private-sector’s idea of financial insurance for very sophisticated buyers, and it blew down in a stiff wind. The St. Louis branch of Page, Bacon & Co. stored gold for West Coast gold miners, and it collapsed. Some miners lost everything.

    I hope the best for digital currencies, but human behavior suggests at some point a digital currency will implode, perhaps taking down the industry for a few decades.

  8. Gravatar of msgkings msgkings
    21. June 2019 at 23:53

    Bitcoin going parabolic again…not sure what to think of that

  9. Gravatar of S K S K
    22. June 2019 at 08:31

    Err, say one has 10000 Lira (or Pira or Jira or Kira, whatev EM currency that isn’t one of this stablecoin’s constituent fiat currency). How does that 10000 Lira get converted into this stablecoin in the first place – wouldn’t that need a conversion that respective central banks and governments would be able to control perfectly well.

  10. Gravatar of Jose Jose
    24. June 2019 at 11:15

    Prof. Sumner
    I know you think of NGDP as a country/currency specific. Therefore, they would be able to target Libra NGDP. It is always possible to buy and sell assets (whatever) in order to track Libra (or any coin) NGDP.

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