Libra Rising in the West

I’VE been off for a few weeks dealing with family things.  Meantime the global and UK economies have been doing their thing.

The US central bank (the Fed) has started backtracking on its earlier decision to raise interest rates – a sure sign the economy is in danger of slowing, thanks to Trump’s toxic trade war with China. Christine Lagarde, current head of the IMF, is set to become the first female boss of the European Central Bank – an interesting choice given she is a corporate lawyer rather than an economist.  Here in the UK, the latest numbers show the economy cratering as Brexit uncertainties cripple investment.

But the most fascinating news, to my mind, was the announcement by Facebook that it is to launch its own cryptocurrency, Libra, in concert with 27 other global financial and tech players, including Mastercard, Visa, PayPal, Uber and Spotify. Facebook supremo Mark Zuckerberg claimed Libra would be a modest (if slightly more sophisticated than usual) payment app.  And pigs might fly into orbit. More like it, we are in the first stages of a major financial revolution that has disaster written all over it.

OK, a primer on cryptocurrencies like Bitcoin and Ethereum. Money is anything everyone accepts in exchange when buying and selling. It helps if the form of money keeps its value and can’t be forged easily. Money used to be something tangible like silver, now it is mostly electronic pulses.  In this sense, cryptocurrencies are nothing special.  They are just a more sophisticated form of electronic money – but with one big difference.
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Till now, electronic money originates and is policed by national central banks like the Fed or the Bank of England.  In other words, it is a state monopoly. The key thing about Bitcoin and Libra is that it is electronic money created by private individuals and corporate giants.  That – not the abstruse techy stuff about distributed legers and blockchains – is the key thing to grasp.

Why does it matter who manufactures money?  At the moment, you have two kinds of money in your wallet or purse. First there is hard cash in the form of notes and coin. That stuff comes only from the Bank of England (Scots notes are just facsimiles which have to be backed note for note).  In other words, the Bank of England controls the amount of cash spending power in circulation.

Second, you have a debit card that allows you access to the money in your bank account. Bank account money is created by private banks in the course of lending. However private banks like RBS and Barclays must by law keep basic reserves of Bank of England electronic money, in proportion to how much they lend to you or me.

Effectively this means the Bank of England – by expanding or contracting the electronic money it makes available as private bank reserves – can control the lending of those private banks. Think of it as a kind of leash. Which means, in the end, that spending in the UK economy is government by the amount of electronic money that comes out of the Bank of England.

Enter cryptocurrencies.  These are stateless and so outside the easy control of central banks.  To date that has not mattered as cryptocurrencies like Bitcoin have functioned as exotic forms of investment for those few willing to take a punt. But Mr Zuckerberg is about to change that by getting consumers across the globe to use Libra to buy and sell.

Uber is in the partnership to ensure you use your Libra account to pay for a ride wherever you are on the planet. Spotify is there so you use Libra to download music. And Mastercard, Visa and PayPal are there to ensure that US finance capital controls every payment for every good or service in the world (outside of China, anyway).  Facebook and Zuckerberg are there to compile data on your spending habits and make a fortune out of advertising.

But they do that already, you say! Here’s what’s new. Potentially, Libra represents the apotheosis of neoliberal attempts to replace national regulation with unfettered control of the global economy by US finance capital and/or their client tech monopolies. The danger is that by threatening to dismantle national bank regulation, Libra could end up undermining all forms of regulation.  Result: another catastrophic financial implosion on a global scale.

Example: suppose a major private bank in Country A fails or looks likely to fail. Panicking, Country A’s citizens sell their local bank currency for Libra.  Money and spending power flows out of Country A, depressing the economy and turning a bank wobble into a deep recession.  The normal response of Country A’s central bank – lowering interest rates and expanding credit – would be useless because the more domestic central bank money is created, the more it is converted into Libra and ends up abroad.  If the contagion spreads to Country’s B, C and D, then we have a global problem.

This prospect is already causing panic among the various central banks and national regulatory agencies. Some central banks – for instance Sweden’s Riksbank – are planning their own cryptocurrencies. But a national cryptocurrency is (in essence) not any different from any other form of state electronic cash.  The point about Libra is that it is international in scope. Any regulation will have to be international.  Alternatively, we could build a public global cryptocurrency. But that’s a discussion for another column.