As IF Times

It’s difficult to have a party conversation these days without someone bringing up the topic of crypto-currencies or meme tokens. If they’re not involved directly in some way, (and believe me, they would tell you if they were) they know someone who has become wildly wealthy on these products.  Bitcoin is certainly the most well-known of these products, but imitators and variants of all kinds appear like mushrooms after a summer rain.

Typically, the discussion falls into 3 camps.  One camp is pro, one is skeptical and the third has no clue how it works.  I suspect most people are still in group 3, but that’s likely to change in the next year.

In the skeptical camp are those wedded to the idea of fiat currencies, which is by and large how the world operates after the decoupling from the gold standard by the US in the 1960’s. Once there was no underlying exchangeable value between a given currency and something tangible, like gold, then the value of the currency became worth only what the issuing country said it was worth.  This works fine as long as they didn’t keep printing more of them with no underlying basis. It’s a bit like musical chairs but with more chairs added all the time and the music keeps playing.

The skeptics also point out that digital currencies are just air; that there is nothing behind them other than ‘scarcity value’.  In fact, today’s reality is that fiat currencies are also mainly digital and that any link to a physical asset is debatable.  While some may scoff, assigning value to a few pieces of government paper is pretty complacent too. While we no longer have to lug around a bag of gold or silver, increasingly, physical cash is also less and less used in our daily activities.  We use digital ledgers to record our transactions and bank balances for the most part…same as crypto.

Skeptics point out that a currency has a value based on the good faith and undertaking of the issuing government. While true, we’ve seen numerous instances of governments reneging on the value of their currency by devaluing them without notice. Savvy people realize that prices of things aren’t going up because of inflation, but rather that the purchasing value of the currency is going down because of devaluation.  Just ask Canadians.   It wasn’t long ago that the value of the Argentine peso was derived from its collective weight, not the nominal printed value.

In the case of digital or crypto currencies, no one authority determines the value of the currency; the value is kept by a common ledger which determines the value of the currency by aggregate supply and demand.  Of course, the downside is volatility since prices can be subject to crowd manias and panics.  But at least they aren’t subject to a small group of manipulators printing currency as it suits them.

With crypto, the issue is fungibility; that is the interchangeability of the currency. In the 1800’s it was common for individual US banks to issue their own currency notes which were not exchangeable for those of other banks.  As time goes on, all of the various crypto products will require some method of exchange.

The entire point of crypto currencies is to retain a storehouse of value when fiat currencies are debased by bad or incompetent state actors….as we’ve seen in many nations, including western nations over the past half century. In theory, this storehouse is immune from the confiscatory policies of governments.  As these policies become more evident, it’s likely that people will move some of their assets towards reserves of non-manipulated currencies. That doesn’t mean governments can’t get you.  They can still tax you.

link Citi Economist Says It Might Be Time to Abolish Cash – Bloomberg Business.

I think it’s a fair comment to make that if an economist says it’s a good idea, then the idea must be suspect.  There’s the old joke that the reason that there are decimal points is because economists have a sense of humor.  As many will know, economists live in the most esoteric of worlds in which arcane models are developed to explain movements in prices and in the supply and demand dynamics of goods and services in an economy.  If convincing enough, such models are used to form political policies which greatly affect the lives of citizens. Often, these models are created with the most fundamental error in assumption: namely, that people are rational.

Do they work? One word: Keynes. Another one: Obamacare.  So the musings of Citibank’s Mr. Buiter who thinks that the time is nigh to consider abolishing cash is a clarion call to go exactly the opposite way.  As many should have realized by now, the pervasive invasion of everyone’s privacy by all manner of intrusions whether mandated by law or volunteered via the seduction of social media has made everyone a drone whose activities can be traced at almost any given time.  You don’t need to wear tinfoil hats to be a bit wary of that.  Who isn’t a bit creeped out when an ad for electric dog polishers shows up on your favorite website right after you were searching for the prices of them the day before?

If all money is electronically stored and there is no cash, there is a trail of every activity that you engage in.  This will make life entirely more cumbersome for the regular people who don’t live in the make believe world of economists.  While this can put a crimp into nefarious activities such as drug deals, it will also make it difficult to bribe doormen at bars and restaurants, to say nothing of how to discreetly show appreciation for your favorite exotic dancer.

A world in which cash is eliminated is  a world in which we all become just numbers to be picked up as if we were in some futuristic Tom Cruise sci-fi flick.  I think we should go the other way.  Rather than having our net worth governed by some geek bureaucrat with access to a keyboard, we should go back to paying for things in cash.  Judging by what has happened when you allow lawyers to make laws and accountants to oversee taxes, it would be fatal to allow economists to eliminate cash.