We recently read a book titled “The Future of Money” by Cornell University Economics Professor Eswar Prasad, and our thoughts about the work are the subject of today’s Disruption discussion. We picked it up because Prasad clearly knows some influential people in the space. The recommendation blurbs on the back cover include glowing praise from Larry Summers, Mark Carney and John Taylor. Those aren’t always reliable indicators, of course, but in this case they were. This is a must-read book for any investor.
The Future of Money covers a wide range of topics, starting with a basic discussion of money and banking today and then wending its way through fintech innovations, block chain technology, and how central banks may need to adapt to those. Most DataTrek clients will be familiar with the ideas, but the book still acts as a useful compendium and timeline of past events. It’s easier to see the arc of the “future of money” story when it is in book form rather than spread all over the internet in 1,000 blog posts and articles.
The most useful part of the book is in the last section, titled “Ramifications”, which discusses how policymakers should consider the rise of virtual currencies. Three points on this:
#1: Most of the world’s governments see the dollar’s global dominance as an “objectionable situation, and with good reason.” Small countries feel the brunt of shifts in the value of their currency versus the dollar most acutely. Even large countries, however, must often pay for oil and other commodities in dollars. Reserve currency status allows the US to borrow cheaply to finance trade deficits. “That the United States can persistently live beyond its means and suffer no consequences for such spendthrift behavior has irked foreign officials, who have long railed at the ‘exorbitant privilege’ the dollar’s status bestows on the US economy”.
Our take: the rest of the world has ample motivation to develop innovative forms of money and payment systems that disrupt the dollar’s global preeminence. This is one good reason every major central bank outside the US is discussing a central bank digital currency, and certainly the best explanation for why the People’s Bank of China is ahead of the pack on developing one.
#2: The “future of money” is really two stories: the evolution of paradigms for payment & transfers and capital storage & investing used 1) by individuals and 2) by large companies and governments. The story around the former has moved quickly, with thousands of fintech providers offering a wide array of payment and banking products to individuals around the world. The latter is barely in the parking lot, let alone getting in the game, as large institutions struggle to leverage the new technologies available.
Since individuals around the world are driving innovation, “The Future of Money” argues that the dollar is not as much at risk from disruption as other currencies. When a fintech user in Africa or southeast Asia or Latin America is deciding between stablecoins backed by the dollar, the yen, the euro and maybe the yuan, they will most likely choose the dollar. It may not have the potential upside of a traditional virtual currency, but the dollar is still the best currency “brand” on the planet.
Our take: we think Prasad’s answer to the “will virtual currencies tank the dollar?” question is both novel and sensible. It is not the greenback that has the most to worry about rising popular interest in stablecoins (like Facebook’s pending offering). It is the yen and, to a lesser extent, the euro. China’s recent crackdown on virtual currencies shows they see things in a similar vein and don’t want to enable competition to the yuan on their home turf.
#3: Prasad is deeply skeptical that a virtual currency with a fixed supply (such as Bitcoin) can truly compete with central bank backed money. His logic: “The central bank’s ability to provide such money easily and in massive quantities when the chips are down makes businesses and financial institutions more eager to transact in that money even in normal times, knowing that their counterparts will accept it as well.”
Our take: this is exactly how central bankers think, which is both a blessing and a curse. It’s fine that central banks operate in this fashion, supporting their local economy as best they can. It does, however, tie them to the prevailing political climate and also leaves open the possibility of a policy error. More than anything, however, the idea that infinite money supply engenders trust is one that works until it does not. Competition from virtual currencies with fixed supply provides users a choice they’ve not had before. Simply put, Prasad’s argument holds water today, but it may not in the future as more options come online.
By way of a summation, there’s a telling anecdote buried on page 145 of “The Future of Money” that speaks to the perils of over-analyzing as powerful a trend as the technological disruption of money.
- The author describes debating a 20-something who bought his first Bitcoin at $400 and had been adding to his position ever since.
- He “does worry for that young man … and others who have bet their life savings on” virtual currencies.
- But then Prasad adds: “Then again, with the price of Bitcoin where it is in 2021, as I put finishing touches to the book, perhaps my time would have been better spent in the last few years acquiring some Bitcoin rather than laboring on this book.”
Even academics know the pains of “woulda, coulda, shoulda”.
The Future of Money by Eswar Prasad, available on Amazon: https://www.amazon.com/Future-Money-Revolution-Transforming-Currencies/dp/0674258444