Money changes everything, even money
Money is having an identity crisis. It has moved out of banks and wallets onto smartphones and distributed ledgers, and like a newly i ndependent teenager, it seems always on the brink of some new catastrophe.
Interviewed on the sidelines of the Davos meetings on Thursday, Christine Lagarde, managing director of the International Monetary Fund, described one strange symptom of this generational shift, cryptocurrency, a new kind of money so cool it denies being money at all.
She described a surge of interest in cryptocurrencies like Bitcoin among central banks, attracted by the promise of traceability. The flip side is anonymity, which Lagarde said is “likely to facilitate money laundering, dark money moving around.”
For a sense of scale, she added that the even newer industry of Bitcoin “mining,” in which massive networks of computers crunch numbers for potential reward to optimize the underlying software, is so energy intensive that it will soon consume as much energy as Argentina.
Like gold, money “has a slightly magical feel to it,” said David Orrell, the Toronto- based author of The Evolution of Money and The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets. It relies on general agreement, which seems fragile, almost like a confidence trick. The money magic seems darker by the day.
In Canada, the unending rise of housing prices threatens to undermine the traditional social contract, in which people can afford to live near their workplace.
In America, major tax cuts are expected to contribute to soaring government debt, straining social fault lines that are already threatening to slip. In Europe, the sovereign debt crisis lingers, with effects felt in everything from the Catalan independence movement to the rancorous Brexit negotiations.
And in Asia, India continues to deal with the shock of its wild experiment to declare all high- value banknotes worthless — a gambit intended to stifle tax evasion and black market dealing, which ended up crippling a cash- based economy that suddenly had a lot less cash.
Amazon has just debuted what it calls “Just Walk Out” shopping — an automated inventory system that tracks what you take. Not only are there no cashiers, there is no cash. Already many restaurants have similarly done away with the till, most recently Marutama Ramen in Vancouver.
Cash is hard to control, moving around without leaving a written or digital trace. Canada, for example, has more than two billion bank notes in circulation, representing more than $ 80 billion, according to the Bank of Canada.
“Probably there’s quite a few people in central banks and whatnot who would love to get rid of cash,” Orrell said.
Even cheques, once the best vehicle for large sums in personal finance, are increasingly fusty and outdated, made obsolete by technology that scans and processes their instructions digitally, as if they were no different than a credit card.
All of this looks like the end of money as we know it.
“The only things that are close to it are sex and power,” said Orrell.
He sees a culture that fetishizes money. People are awed by money, but they simply don’t understand it, even economists and politicians and the people in the best position to manipulate it.
A few years ago in England, for example, there was widespread shock when the Bank of England released a paper showing money is created at the whim of private banks, every time they set a price for a loan, for example.
“In theory it balances out,” Orrell said. “People were always kind of aware that there was a bit of an accounting trick going on, but they thought the central bank was pulling the strings.”
It turns out they were wrong, as a survey of British MPs recently showed. Only 15 per cent were aware that new money is created when banks make loans, and existing money is destroyed when members of the public repay them. There is no fixed amount of money in circulation, set by a central bank, as many people seem to imagine.
“It comes as a shock to most people,” Orrell said.
The history of money is instructive, as it shows how money is not some inevitable fact of social life, but rather it arose for specific needs in specific times.
Money began as a Sumerian system of accounting, with notches on clay tablets. A physical embodiment of money — coins — first appeared in about the 7th century BCE, and was almost always as the result of deliberate imperial policy, rather than organic social development. Paper money followed, and gold standard under the guarantee of empires, and eventually money could be held in the form of financial instruments like stocks, mortgages and derivatives.
So money that takes the form of a digital code, such as Bitcoin, is not a new kind of currency, but the latest step in a long historical process.
A key aspect of this process is how many people have misunderstood it, Orrell said. The great Enl i ghtenment e c onomist Adam Smith thought the value of money represented l abour. Others have suggested it represents utility. Orrell thinks they have it all wrong, and that value prices are an emergent phenomenon that arises from trading.
“They don’t have to make sense,” he said.
This can be a tricky concept to work into an investment or monetary strategy.
The European Central Bank, for example, realized one of the reasons they failed to predict the great crisis of 2008 was that they had not factored the financial sector in their models, with all the complex derivatives and credit default swaps that turned out to be built on sand.
The dangers are self evident. Money has collapsed before. In 1914, investors panicked trying to buy gold and cash in anticipation of war. In 1929, Black Tuesday befell Wall Street, kicking off the Great Depression. In 1973, an oil embargo sent energy prices soaring. In 2008, complex derivatives based on reckless lending finally collapsed.
Caught up in the promise of numerical growth, people had lost sight of what they were playing with. By the time they got their heads around it, it was too late.