CB Libre

The Cuba Libre (Rum and Coke) became the symbol of Cuban independence during the Spanish-American war.  What will symbolise the take-no-prisoners war about to erupt between Facebook and the world’s Central Banks over Libra?

I recently attended a meeting of senior Central Bank and Academic researchers in Singapore. The discussion quickly focused on the effectiveness of Monetary Policy – to be more exact, it was all about the ineffectiveness of Monetary Policy. The mood amongst the Central Bankers was that of capitulation- interest rate targeting had failed even with negative interest rates in place and QE in all its forms had failed to either influence prices or output. All is lost…

To be honest, while Central Bankers are no longer rock stars in the eyes of the markets or businesses or the general public, they should not be surprised. The writing that monetary policy is ineffective has been on the wall (and in the volumes of empirical evidence that modern economics has generated)  for decades and decades. The Real Business Cycle literature made this point elegantly 30 years ago by simply omitting money from its analytical framework altogether! Critics of RBC at the time dismissed the framework completely, arguing that a theoretical economy without money could not generate realistic predictions. Three decades later, the ‘money doesn’t matter ‘ chorus is being sung by those critics themselves.

Reluctantly admitting that current approaches to monetary policy are ineffective, radical approaches were proposed and contemplated. One idea is to ‘helicopter drop ‘ money directly into people’s bank accounts. Radical as it may sound, this is probably the purest expression of the classical monetary injection…but while increasing the money supply might bring joy, reducing the money supply means confiscating cash from bank accounts and would lead to riots.

Another idea is to give Central Banks the right to tax. The argument here is that tax policy is quite powerful (true) and that elected governments cannot be trusted to tax properly (also true) while independent Central Banks can be trusted to tax correctly (not true, but less not true than the truth that elected governments cannot be trusted).

Central Bankers have all this misery and introspection to deal with, only to be sucker punched by the rise of crypto and private money. Admitting your own ineffectiveness is one thing, being challenged by your serfs is another. There was uniform agreement amongst all the Central Banks that everything that has to be done to prevent crypto from dominating traditional fiat money will be done! As a contingency, Central Banks globally have crypto currencies of their own, ready and waiting to challenge the potential threat of a private currency…

…and then came Libra. Facebook, the internet phenomenon with the world’s largest privacy waiver, announced their plans to issue a crypto-currency for online payments within the Facebook ecosystem…

Libra is planned to have full backing from the underlying mix of currencies represented by the official fiat currencies used to purchase it. This is a trade-weighted valuation reflective of the proportion of Facebook online shoppers’ currency sales.(If 50% is USD and 50% Yen, then Facebook will hold the subscribed currency in cash-like securities in a 50-50 proportion). While most trade weighted baskets reflect a nation’s external business transactions, Libra will reflect Facebook’s demographic consumer mix.

Reading the description of Libra from Facebook’s press release it becomes quite clear that the currency has been constructed quite intelligently. Zuckerberg must have decided to ignore the dreaming of the crypto-zealots and hired some quality monetary theorists to design Libra…

The big problem, however, is that any interest earned by Facebook on its deposits of traditional fiat money is kept by Facebook. Very greedy and very dumb. Even the Central Banks don’t favour themselves that much when it comes to paying interest on reserves. By construction, therefore, the Libra is designed to fail as an alternative to USD or Euro since it has no value other than to trade online with Facebook merchants.

Mark Carney, the Bank of England’s Governor, told parliament that the BoE and other major Central Banks would have ‘oversight’ of Libra to prevent money laundering and terrorism usage. Beyond that the Central Banks collective silence on Libra has been deafening.

So even though Libra will fail initially, eventually the Central Bank of Facebook will wake up to their self-imposed handicap. Central Bankers know this and war rooms have been set up around the world readying for a fight. A massive coordinated attack on Libra is being prepared for launch at any moment.

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