A loyal MR reader asks:
What is currency and what are the potential implications of a
completely digital currency that could have unlimited meta information
attached to it? [Some obvious implications would be tracking
transactions and the government’s ability to enforce taxes, etc., some
more esoteric stuff would be attaching conditions much like covenants,
say that a particular payment could only be used to buy products that
were carbon neutral, possibly down the road having policy implications.]
Higher taxes and carbon offsets we’ve already covered. More generally, the use of "covenant currency," as I shall call it, would raise prices. Restricted money simply isn’t worth as much. It also would lead to a secondary market in currency. Say you paid with me with money that can only be used to buy corn from Africa. I’ll try to resell that money to the people who were going to buy corn in Africa anyway. Of course the supply of targeted covenant money for that end may exceed the demand for it, and then price will adjust; think of this as an extreme form of legal tender laws.
Would it ever be efficient to use covenant money? I doubt it. It is a tax — on the holding and use of cash balances — when a simple transfer would do. Use regular money for your transactions and, if you wish, send some cash to the corn sellers of Africa.
Inflation is also a tax on cash balances, and few people think that is the right or the best fiscal way to finance subsidies to various worthy groups.
#11 in a series of 50.