Rethinking Money: Breaking Up Currencies
from the different-purposes dept
I remember when I was quite young, my father predicted to me that we'd probably see the end of cash within our lifetimes, as all money would move to electronic money in the form of credit cards (or credit card-like interfaces). Every so often this idea has been discussed, but it usually gets shot down by those who like the anonymity of cash (which is one reason why some governments don't like it). So it's interesting to hear via Slashdot that an Estonian economist is recommending that the country go completely electronic as it adopts the Euro. I would imagine there are some issues with doing so (including the fact that cash and coins from other Eurozone countries would inevitably bleed in).
That said, there have been a few other stories lately that have me thinking about the future of money, and I actually could see a way that countries could move in this general direction without actually getting rid of cash entirely. Last year, we wrote about the question of whether or not the world would move to a single world currency, while simultaneously considering whether or not we'd actually start to see growth in very localized currencies, which are increasingly common in various cities to encourage people to shop locally. Again, neither situation seemed ideal, but were definitely interesting to think about.
Recently, however, Umair Haque wrote up an interesting post, positing that money could be split into three types of currencies which serve three separate functions. The idea is not to break them up by region -- as described above -- but by function. Umair's writeup is a bit opaque, but he notes that currency is used as a store of value, as a medium of exchange and as a unit of account, but those functions can be separated. The end result, would be as follows:
You have three kinds of notes in your wallet. The first you use at the grocery store. The second, at the bank and in the financial markets. The third, between your employer, the state, and public services. Each has very different volatilities and trajectories, because each has very different levels of supply, demand which are, crucially, independent from one another--but interdependent on real wealth, long-run productivity, etc.
Now, this may be difficult to comprehend in the abstract. How would that actually work and why would each have different volatilities and trajectories? Well, the good news is that we actually have a real world example of this. A few weeks back the always excellent Planet Money team at NPR did a wonderful episode on how "fake money" saved Brazil from rampant inflation. The story is fascinating, and I highly recommend listening to it. But, it was basically a simplified version of what Haque is suggesting. Brazil had crazy inflation, so crazy that every day, stores had to remark their entire stock to raise prices, and people would rush ahead of the clerk with the price stickers to get "yesterday's" prices.
The way Brazil "solved" the issue was to effectively issue a made up new currency to handle some functions of money: mainly the unit of account. You couldn't actually get paid in it, or pay with it, but all the goods in all the stores were suddenly priced with it. Then, rather than having to change the prices every day, each day, the government would put out a rate card with the exchange rate, and people would work off of that. Now, you might say this shouldn't make a difference, but it actually did. It got people thinking in terms of the new "stable" rates, and got them past their general distrust of monetary value. (One side note: this upset some of the wealthy, who were simply making a ton in interest -- and they complained about how this new system meant they actually had to innovate and invest to make money -- which reminded me of certain industries in the US who like to avoid innovating and investing themselves...).
Either way, you had a situation where the currency for prices was perfectly stable at the same time the other currency was still dealing with massive inflation. As Haque points out, you have different currencies with different volatility. Eventually, Brazil switched entirely over to this new currency and made the fake currency a real currency, but there's no reason why you couldn't keep multiple currencies, and break them up into a third bucket as well, as Haque suggests.
I can definitely see how there could be some value in doing so, providing a lot more flexibility, and removing certain risk elements. However, I do wonder if the greater level of confusion might be a problem for many, and lead to huge potential arbitrage opportunities, where the more financially sophisticated folks took advantage of much less financially sophisticated individuals, to swap these different levels of currency around. I'm not convinced either way on this, but it does seem fun to think about the possibilities...
30 Comments | Leave a Comment..
Wow, finally people noticed.
All it took was Google to supposedly offer $3.5 million to an engineer to not go to Facebook. Now, that is what rational people would call cutting off the nose to spite the face. But these are not rational times. I have been writing about the escalating irrationality in Silicon Valley, which for some odd reason exists detached from the global economic reality.
In past few months, I wrote about three major and potentially troubling signs.
- Silicon Valley & the Scent of Money talked about the increased number of startups getting funded and the amount of money being pumped into the startups going up, thanks to hyperactive, always tweeting, angel investors.
- Silicon Valley’s Talent Crunch talked about how there was a decline in certain kind of engineering talent and other professionals in the valley, thanks to the breathless hiring from giants like Zynga, Google, Apple, Facebook and Twitter.
- The media’s focus on investors and not the founders.
There are some excerpts from Fred Wilson’s post I think are worth highlighting.
I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.
Irrationality often doesn’t seem irrational because it is often labeled as conventional or fashionable thinking. Let’s step back for a minute: if you take what Michael Arrington wrote or what Fred Wilson has to say or my own reporting, we are beginning to see signs of hyper-inflation in the web and startup landscape.
Fred doesn’t want to call it a bubble and he is right, mostly because it is not a classic case of mass hysteria, and instead it is a madness that impacts only a certain genus, the professional investor. The implications of this early stage investment hysteria are going to be felt across the ecosystem.
Let me explain.
Google, worried and perhaps tired of losing its great engineers and talented people to other companies including Facebook, decided to fight back with a weapon it knows can be effective in the short term: money. A ten percent across the board pay hike and generous offers to exceptional and standout employees are a good way to stem the flow of talent. Facebook and others, if they do indeed want these people, now have to spend cold-hard cash to lure people out of their cushy Google gig.
Of course, one could argue that what is good for the goose is good for the gander. The more cash big web companies offer as salaries, the more startups and others are pressed to offer higher salaries to their recruits, which in turn means that startups are going to need more money. More money means that tide might turn against the angels in favor of larger Sand Hill Road firms. A million-dollar angel round isn’t enough when you have to pay $100,000 or more in engineer salaries! In other words, the startup economics are going to change.
This is not good for startup founders either. Inflation means they need to raise more money, which will come at a cost: They will be giving up a bigger portion of their business to investors. Of course, higher valuations would make exits –- still few and far between –- tougher.
I think Wilson’s comment about “investors are showing up at the first meeting with term sheets” is particularly telling and indicative of the irrationality in the market. And the sad part –- it is only going to get worse.
Image courtesy of Flickr user joelogon
Related posts from GigaOM Pro (sub req’d):
- Why Google Should Fear the Social Web
- Lessons From Twitter: How to Play Nice With Ecosystem Partners
- What We Can Learn From the Guardian’s Open Platform
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Sun <b>News</b> Gets Green Light: 'Fox <b>News</b> North' Secures Broadcast <b>...</b>
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Sun <b>News</b> Gets Green Light: 'Fox <b>News</b> North' Secures Broadcast <b>...</b>
Canada is to get a conservative all-news TV channel after the CRTC on Friday granted Quebecor Media a license to launch Sun TV News nationwide. The upstart cable channel, dubbed Fox News North by liberal critics, has the go-ahead to ...
<b>News</b> - Jennifer Aniston, Chelsea Handler Flaunt Bikini Bods in <b>...</b>
The new BFFs show off their curves while celebrating Thanksgiving abroad.
Clarissa's Blog: Fox <b>News</b> in Canada
"It will aim to challenge conventional wisdom and offer Canadians a new choice and a new voice on TV," Quebecor Media CEO Pierre Karl Peladeau said as the conservative news channel faces stiff competition from existing cable news ...
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Rethinking Money: Breaking Up Currencies
from the different-purposes dept
I remember when I was quite young, my father predicted to me that we'd probably see the end of cash within our lifetimes, as all money would move to electronic money in the form of credit cards (or credit card-like interfaces). Every so often this idea has been discussed, but it usually gets shot down by those who like the anonymity of cash (which is one reason why some governments don't like it). So it's interesting to hear via Slashdot that an Estonian economist is recommending that the country go completely electronic as it adopts the Euro. I would imagine there are some issues with doing so (including the fact that cash and coins from other Eurozone countries would inevitably bleed in).
That said, there have been a few other stories lately that have me thinking about the future of money, and I actually could see a way that countries could move in this general direction without actually getting rid of cash entirely. Last year, we wrote about the question of whether or not the world would move to a single world currency, while simultaneously considering whether or not we'd actually start to see growth in very localized currencies, which are increasingly common in various cities to encourage people to shop locally. Again, neither situation seemed ideal, but were definitely interesting to think about.
Recently, however, Umair Haque wrote up an interesting post, positing that money could be split into three types of currencies which serve three separate functions. The idea is not to break them up by region -- as described above -- but by function. Umair's writeup is a bit opaque, but he notes that currency is used as a store of value, as a medium of exchange and as a unit of account, but those functions can be separated. The end result, would be as follows:
You have three kinds of notes in your wallet. The first you use at the grocery store. The second, at the bank and in the financial markets. The third, between your employer, the state, and public services. Each has very different volatilities and trajectories, because each has very different levels of supply, demand which are, crucially, independent from one another--but interdependent on real wealth, long-run productivity, etc.
Now, this may be difficult to comprehend in the abstract. How would that actually work and why would each have different volatilities and trajectories? Well, the good news is that we actually have a real world example of this. A few weeks back the always excellent Planet Money team at NPR did a wonderful episode on how "fake money" saved Brazil from rampant inflation. The story is fascinating, and I highly recommend listening to it. But, it was basically a simplified version of what Haque is suggesting. Brazil had crazy inflation, so crazy that every day, stores had to remark their entire stock to raise prices, and people would rush ahead of the clerk with the price stickers to get "yesterday's" prices.
The way Brazil "solved" the issue was to effectively issue a made up new currency to handle some functions of money: mainly the unit of account. You couldn't actually get paid in it, or pay with it, but all the goods in all the stores were suddenly priced with it. Then, rather than having to change the prices every day, each day, the government would put out a rate card with the exchange rate, and people would work off of that. Now, you might say this shouldn't make a difference, but it actually did. It got people thinking in terms of the new "stable" rates, and got them past their general distrust of monetary value. (One side note: this upset some of the wealthy, who were simply making a ton in interest -- and they complained about how this new system meant they actually had to innovate and invest to make money -- which reminded me of certain industries in the US who like to avoid innovating and investing themselves...).
Either way, you had a situation where the currency for prices was perfectly stable at the same time the other currency was still dealing with massive inflation. As Haque points out, you have different currencies with different volatility. Eventually, Brazil switched entirely over to this new currency and made the fake currency a real currency, but there's no reason why you couldn't keep multiple currencies, and break them up into a third bucket as well, as Haque suggests.
I can definitely see how there could be some value in doing so, providing a lot more flexibility, and removing certain risk elements. However, I do wonder if the greater level of confusion might be a problem for many, and lead to huge potential arbitrage opportunities, where the more financially sophisticated folks took advantage of much less financially sophisticated individuals, to swap these different levels of currency around. I'm not convinced either way on this, but it does seem fun to think about the possibilities...
30 Comments | Leave a Comment..
Wow, finally people noticed.
All it took was Google to supposedly offer $3.5 million to an engineer to not go to Facebook. Now, that is what rational people would call cutting off the nose to spite the face. But these are not rational times. I have been writing about the escalating irrationality in Silicon Valley, which for some odd reason exists detached from the global economic reality.
In past few months, I wrote about three major and potentially troubling signs.
- Silicon Valley & the Scent of Money talked about the increased number of startups getting funded and the amount of money being pumped into the startups going up, thanks to hyperactive, always tweeting, angel investors.
- Silicon Valley’s Talent Crunch talked about how there was a decline in certain kind of engineering talent and other professionals in the valley, thanks to the breathless hiring from giants like Zynga, Google, Apple, Facebook and Twitter.
- The media’s focus on investors and not the founders.
There are some excerpts from Fred Wilson’s post I think are worth highlighting.
I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.
Irrationality often doesn’t seem irrational because it is often labeled as conventional or fashionable thinking. Let’s step back for a minute: if you take what Michael Arrington wrote or what Fred Wilson has to say or my own reporting, we are beginning to see signs of hyper-inflation in the web and startup landscape.
Fred doesn’t want to call it a bubble and he is right, mostly because it is not a classic case of mass hysteria, and instead it is a madness that impacts only a certain genus, the professional investor. The implications of this early stage investment hysteria are going to be felt across the ecosystem.
Let me explain.
Google, worried and perhaps tired of losing its great engineers and talented people to other companies including Facebook, decided to fight back with a weapon it knows can be effective in the short term: money. A ten percent across the board pay hike and generous offers to exceptional and standout employees are a good way to stem the flow of talent. Facebook and others, if they do indeed want these people, now have to spend cold-hard cash to lure people out of their cushy Google gig.
Of course, one could argue that what is good for the goose is good for the gander. The more cash big web companies offer as salaries, the more startups and others are pressed to offer higher salaries to their recruits, which in turn means that startups are going to need more money. More money means that tide might turn against the angels in favor of larger Sand Hill Road firms. A million-dollar angel round isn’t enough when you have to pay $100,000 or more in engineer salaries! In other words, the startup economics are going to change.
This is not good for startup founders either. Inflation means they need to raise more money, which will come at a cost: They will be giving up a bigger portion of their business to investors. Of course, higher valuations would make exits –- still few and far between –- tougher.
I think Wilson’s comment about “investors are showing up at the first meeting with term sheets” is particularly telling and indicative of the irrationality in the market. And the sad part –- it is only going to get worse.
Image courtesy of Flickr user joelogon
Related posts from GigaOM Pro (sub req’d):
- Why Google Should Fear the Social Web
- Lessons From Twitter: How to Play Nice With Ecosystem Partners
- What We Can Learn From the Guardian’s Open Platform
bench craft company camera tear
Sun <b>News</b> Gets Green Light: 'Fox <b>News</b> North' Secures Broadcast <b>...</b>
Canada is to get a conservative all-news TV channel after the CRTC on Friday granted Quebecor Media a license to launch Sun TV News nationwide. The upstart cable channel, dubbed Fox News North by liberal critics, has the go-ahead to ...
<b>News</b> - Jennifer Aniston, Chelsea Handler Flaunt Bikini Bods in <b>...</b>
The new BFFs show off their curves while celebrating Thanksgiving abroad.
Clarissa's Blog: Fox <b>News</b> in Canada
"It will aim to challenge conventional wisdom and offer Canadians a new choice and a new voice on TV," Quebecor Media CEO Pierre Karl Peladeau said as the conservative news channel faces stiff competition from existing cable news ...
bench craft company camera tear
Sun <b>News</b> Gets Green Light: 'Fox <b>News</b> North' Secures Broadcast <b>...</b>
Canada is to get a conservative all-news TV channel after the CRTC on Friday granted Quebecor Media a license to launch Sun TV News nationwide. The upstart cable channel, dubbed Fox News North by liberal critics, has the go-ahead to ...
<b>News</b> - Jennifer Aniston, Chelsea Handler Flaunt Bikini Bods in <b>...</b>
The new BFFs show off their curves while celebrating Thanksgiving abroad.
Clarissa's Blog: Fox <b>News</b> in Canada
"It will aim to challenge conventional wisdom and offer Canadians a new choice and a new voice on TV," Quebecor Media CEO Pierre Karl Peladeau said as the conservative news channel faces stiff competition from existing cable news ...
bench craft company camera tear
Sun <b>News</b> Gets Green Light: 'Fox <b>News</b> North' Secures Broadcast <b>...</b>
Canada is to get a conservative all-news TV channel after the CRTC on Friday granted Quebecor Media a license to launch Sun TV News nationwide. The upstart cable channel, dubbed Fox News North by liberal critics, has the go-ahead to ...
<b>News</b> - Jennifer Aniston, Chelsea Handler Flaunt Bikini Bods in <b>...</b>
The new BFFs show off their curves while celebrating Thanksgiving abroad.
Clarissa's Blog: Fox <b>News</b> in Canada
"It will aim to challenge conventional wisdom and offer Canadians a new choice and a new voice on TV," Quebecor Media CEO Pierre Karl Peladeau said as the conservative news channel faces stiff competition from existing cable news ...
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