The Libra reserve, discussion of background documents

Here is a 4-pp. appendix of sorts to the core Libra white paper, and it has some of the details that will be of most interest to monetary economists.  I have learned:

1. The Libra will be backed by a bundle of pretty safe, pretty mainstream assets (I don’t know which ones).  It is presented as one hundred percent reserve, though no system with fluctuating prices and also float really will be pure one hundred percent.  And the reserve is in “low-risk” assets, attention all critics of the Basel capital standards.

1b. The paper has a chance to say that the custodians will be separately capitalized, with no cross-collateralization, for purposes of Libra protection, but it does not do so.  I would recommend that change.

2. The assets in the reserve fund will come from users of Libra (how will they be charged?) and from “investors in the separate Investment Token.”  Furthermore “The funds for the coins that will be distributed as incentives will come from a private placement to investors.”

3. What about the public choice issues?  Won’t banks insist — correctly or not — that this represents competition and part of the payments system, and thus it should be brought under deposit insurance control and taxation, Fed regulation, various bank holding company acts, Monetary Control Act of 1980, and so on?  Have banks ever lost a political battle of this kind?

4. We are told “The association does not set monetary policy.  It mints and burns coins only in response to demand from authorized resellers.”  Maybe, of course there are hundreds of years of debate on that one, google “real bills doctrine,” noting that here we have a semi-dominant private issuer rather than a perfectly competitive banking system.  The association policy on interest rate spreads, floats, and credit, of course, can end up being a monetary policy de facto.  I don’t want to prejudge this one against Libra, since to me the validity of the real bills doctrine is a genuinely open question, but it is worth noting that most economists would not agree with the doctrine in most settings.

4b. Won’t some margins arise where there are fractional reserves, even if Facebook/association/Libra are not the ones doing it?  Imagine that a new class of intermediaries arises, offering some intermediate services between the core system and retail use, but not adhering to the 100% provisions.  The logic behind this tendency seems pretty strong, for better or worse, and it can reintroduce risk into the system.  Someone wants to be holding higher yields assets and then making them liquid through the Libra system.  But Facebook/Libra would not seem to have the power to regulate the surrounding system of intermediaries, or is that somehow to be done through covenant (“you can’t use Libra unless you promise not to pile your intermediaries on top of it”)?

5. The crypto angle does seem like a sideshow, for me that is not a problem.

6. Imagine a private payment company issuing SDRs, or some other similar basket, based on 100% backing.  They would offer you new transactions technologies for greater convenience (WhatsApp?), in return receiving access to your transactions data and sharing some of the float and spread all around, to merchants and customers too.  Perhaps that is one way of thinking about how the plan works?

7. Is there a provision in the system for zero or low-interest loans?  Can I send small amounts of “libras,” say to pay my water bill, without first having them in my account?  Might sellers sign up to participate in such a system, sharing part of the credit risk with Libra?  And is there a way to do it, with crypto and layered assets and float and implicit positions, so that all this is not subject to the usual consumer credit regulations?  Is that part of how the system will make money and attract interest?  This is just speculation, my question marks here are literally question marks, not tricks to make you think that is how it will be.

8. “Who holds intraday credit risk?” is always a question worth asking.

9. Does any of this try to arbitrage away the fees earned by credit card companies for their intermediation?

10. What if the market for the underlying currencies and assets is (for a while?) more liquid than the market for Libras?  Say the basket values adjust before Libra values do.  What kind of arbitrage opportunities does that create?  If we know Libras are due to depreciate, is there a higher nominal rate of interest on them, as with traditional currencies in an international multi-currency setting?  What are the equivalents of covered and uncovered interest parity in this setting?  Does a kind of “program trading” arise to perform the arbitrage?  Can perfect redemption be offered credibly while the prices are still out of whack?

I still don’t feel I have a great handle on the plan, but those are my immediate reactions.  You should take them with a grain of salt, as they may be based on misunderstandings or perhaps even plan incompleteness.  I look forward to learning more.

Addendum: If anyone connected to Libra would wish to send more information or address these questions, I would gladly run that material on MR.

The new Facebook cryptocurrency

Here is a thread on the new project from those running it, here is the White Paper (which I have yet to read).  Here is an FTAlphaville analysis of how it may not use a blockchain after all.  Note this:

Another important aspect of the Libra Blockchain is Move, its new programming language. This programming language will, says Facebook, allow users to define their own smart contracts in the future. Smart contracts are agreements written in code whose clauses are automatically enforced when a set of pre-determined criteria is met.

Any comments from the experts in the MR reading audience?  By the way, if you haven’t been paying attention the Facebook share price is up 44.2% this year.  Alphabet is up 4.7%.

Here is a further FTAlphaville analysis: “Managing a pegged monetary reserve system isn’t all that easy.”

Here is a Hacker News thread.

Why China is not close to democratizing

That is the topic of my latest Bloomberg column, here is one excerpt:

It’s also worth thinking through exactly what changes Chinese democracy is supposed to bring. China’s urbanization has been so rapid — it has had more urban than rural residents for less than a decade — that a national election might well reflect the preferences of rural voters, which after all most Chinese were until very recently. If you belong to the Chinese upper class or even middle class along the eastern coast, you may end up asking yourself the following question: Who is more likely to protect my basic economic interests, the current Chinese Communist Party, or a democratic representative of Chinese rural interests? China is also growing rich during a time of extreme economic inequality, which may make many Chinese elites think twice about democratization.

Compare China’s situation to that of Taiwan, which is much smaller, does not have a comparable preponderance of rural population, and started becoming democratic in an era when inequality was not so extreme. There was enough of a sense of a common Taiwanese national interest for democracy to be trusted, and furthermore Taiwan has always been keen to distinguish itself from a non-democratic mainland.

What about social issues? One recent study has shown that Communist Party members are more likely to have progressive views on issues of gender equality, political pluralism and openness to international exchange than do the Chinese public at large. Again, if you are an elite among the Chinese citizenry, it is not a sure thing that you will do better with democracy than under the Communist Party.

There are many other points at the link.

*The Great Successor*

The author is Ana Fifield, and the subtitle is The Divinely Perfect Destiny of Brilliant Comrade Kim Jong Un.  I’ve never read a book that has so much actual information about Kim, most of all about his early time in Switzerland.  Or how about this?:

Kim Jong Un’s efforts to clamp down on illegal drugs did not work.

At the time he left North Korea, Mr. Kang estimated that about 80 percent of the adults in Hoeryong were using ice [meth], consuming almost two pounds of the highly potent drug every single day…

For many North Koreans, taking meth became an essential part of daily life, a way ot ease the grinding boredom and deprivations of their existence.  For that reason, drugs can never be eradicated, he said.

Men are not allowed to have long hair, the concentration camps are reputed to be worse than those of the Nazis, and there is a detailed account of the rise of the “new rich” class in Pyongyang.  Plastic surgery has arrived as well.

Definitely recommended, the book also serves up the inside story on the Dennis Rodman visit to North Korea.  By the way, Kim hates the showiness of the Harlem Globetrotters.

*The Great Cauldron: A History of Southeastern Europe*, by Marie-Janine Calic

This book is perhaps the best general overview of its chosen subject area.  One part I enjoyed were the discussions of how much the Balkans once had numerous transport hubs for Europe, Belgrade being one but not the only example:

Thessaloniki was among the cities that experienced an economic boom.  The city was home to the third most important port in the Ottoman Empire.  Between 1880 and 1912, the volume of goods traded in Thessaloniki doubled from one to two million tons.  There were railway connections to Vienna and Istanbul.  new local factories produced flannel, woolen, and cotton products, as well as cigarettes.  Important exports included leather, silkworms, raw materials for textiles, and especially tobacco, the production of which took off around the turn of the century.  Thirty-eight of fifty large companies in the city were owned by Jewish families…The majority of these families specialized in the import-export business.

And:

Between 1850 and 1913, the value of exports from Serbia increased by a factor of five, and from Romania by a factor of fourteen.

You can order the book here.  I think about the Balkans a great deal (and enjoy visiting there), if only because they are one simple alternate scenario for what the rest of world history will look like.

Whale carrying costs > whale liquidity premium

Or so it seems to me, here is the headline: Washington state waterfront owners asked to take dead whales

Here is part of the story:

At least one Washington state waterfront landowner has said yes to a request to allow dead gray whales to decompose on their property.

So many gray whale carcasses have washed up this year that the National Oceanic and Atmospheric Administration Fisheries says it has run out of places to take them.

In response, the agency has asked landowners to volunteer property as a disposal site for the carcasses. By doing so, landowners can support the natural process of the marine environment, and skeletons left behind can be used for educational purposes, officials said.

But the carcasses can be up to 40 feet (12 meters) long. That’s a lot to decay, and it could take months. Landowner Mario Rivera of Port Hadlock, Washington, told KING5-TV that the smell is intermittent and “isn’t that bad.”

“It is really a unique opportunity to have this here on the beach and monitor it and see how fast it goes,” said his wife, Stefanie Worwag.

Via Anecdotal.

Sunday assorted links

1. The idea of prosecuting prostitutes’ clients is spreading, including possibly to the Netherlands (The Economist).

2. “Online, sobriety has become “the new black,” asserts a recovery site called, yes, Hip Sobriety.” (NYT. link here)

3. Critique of social psychology, not just the usual stuff.

4. Isn’t this abuse of Haitian orphans a way bigger scandal than most of what comes out of universities these days?

5. Data on what universities mean when they talk about diversity.

That was then, this is now

From Mrs. Bird, wife of Senator Bird, from Harriet Beecher Stowe’s Uncle Tom’s Cabin:

“Well; but it is true that they have been passing a law forbidding people to give meat and drink to those poor colored folk that come along?  I heard they were talking of some such law, but I didn’t think any Christian legislature would pass it!”

And today’s version?: “An activist faced 20 years in prison for helping migrants. But jurors wouldn’t convict him.”  The activist was giving them food and water, but that law against that of course is on the books, as it was in Harriet Beecher Stowe’s time for aiding fugitive slaves.  Later in the chapter (vol.I, chapter IX) Mrs. Bird continues:

“It’s a shameful, wicked, abominable law, and I’ll break it, for one, the first time I get a chance; and I hope I shall have a chance, I do!  Things have gotten to a pretty pass, if a woman can’t give a warm supper and a bed to poor, starving creatures, just because they are slaves, and have been abused and oppressed all their lives, poor things!

…Now, John, I don’t know anything about politics, but I can read my Bible; and there I see that I must feed the hungry, clothe the naked, and comfort the desolate; and that Bible I mean to follow.”

Here is a discussion of the religious issues behind current “aiding the immigrant” cases.

Zimbabwean passport seigniorage is the best kind of Zimbabwean seigniorage

With Zimbabwe’s economy in shambles and political tensions rising, leaving the country seems the best option for many who are desperate for jobs. But those dreams often end at the passport office, which doesn’t have enough foreign currency to import proper paper and ink.

A passport now takes no less than a year to be issued. An emergency passport can take months amid a backlog of 280,000 applications, never mind recent ones.

Here is the full story, via Charles Onyango-Obbo.  In turn via Garett Jones.

Neglected Open Questions in the Economics of Artificial Intelligence

That is my essay in the new NBER volume The Economics of Artificial Intelligence: An Agenda, edited by Ajay Agrawal, Joshua Gans, and Avi Goldfarb.  Here is one excerpt from my piece:

These distribution effects [from more powerful AI] may be less egalitarian if hardware rather than software is the constraint for the next generation of AI.  Hardware is more likely to exhibit constant or rising costs, and that makes it more difficult for suppliers to charge lower prices to poorer buyers [price discrimination].  You might think it is obvious that future productivity gains will come in the software area — and maybe so — but the very best smart phones, such as IPhones, also embody significant innovations in the areas of materials.  A truly potent AI device might require portable hardware at significant cost.  At this point we don’t know, but it would be unwise to assume that future innovations will be software-intensive to the same extent that recent innovations have been.

You can buy the book here, it has many notable contributors and other essays of interest.

The new Ben Horowitz management book

What You Do Is Who You Are: How to Create Your Own Business Culture.  It is the best book on business culture in recent memory, here is one bit:

When Tom Coughlin coached the New York Giants, from 2004 to 2015, the media went crazy over a shocking rule he set: “If you are on time, you are late.”  He started every meeting five minutes early and fined players one thousand dollars if they were late.  I mean on time…”Players ought to be there on time, period,” he said.  “If they’re on time, they’re on time.  Meetings start five minutes early.”

And:

Two lessons for leaders jump out from Senghor’s experience:

  1. Your own perspective on the culture is not that relevant.  Your view or your executive team’s view of your culture is rarely what your employees experience.

You can pre-order the book here, due out in October.