Libra as a medium of exchange

I’ve already outlined the case for how Libra might be able to significantly lower the 7-8% costs and commissions currently charged for making remittances.  That would make Libra a widely used means of payment.  I am less optimistic, however, about Libra being widely used as a medium of exchange.

Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar.  It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving).  I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average.  That is in essence a two percent tax on currency holdings, not an eight percent tax.  I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.

If an unbanked farmer is in debt, I would think the velocity of currency would be well over 4x a year (consider monthly microcredit borrowings and repayments), although certainly some MR readers can enlighten us here.

A few decades ago, when inflation was much more common, it was generally believed that people were not very interested in switching monies until inflation rates hit about forty percent.  I am not sure if that same number would hold today, but of course that is pretty high.  Furthermore, the countries with the highest inflation rates, such as Venezuela, can be impossible to do business in.

Don’t forget that Libras are specified as paying zero nominal interest throughout.

You might think that Libras have some advantages over current e-monies and smart phone banking systems.  It is hard to make that judgment for a product which does not exist yet, but it is unlikely those advantages will run close to the range of seven to eight percent.

For those reasons I am more optimistic about Libra as a means of payment — most of all for remittances — than as a general medium of exchange.

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