With Amazon minting currency, Fed at risk
Commentary: In future, good money could drive out the bad
new
Feb. 13, 2013, 8:45 a.m. EST
By Matthew Lynn
LONDON (MarketWatch) — Central banks are not exactly short of things to worry about right now.
The euro may well be on the road to a chaotic collapse, taking some of
the world’s biggest banks with it. A currency war may break out between
Japan, the U.S. and Europe. Printing money has run out of steam, but
there is still little sign of the global economy returning to the kind
of growth rates it saw before the credit crunch.
But in the long term what they should perhaps be most worried about is
losing their monopoly on issuing money. A new breed of virtual
currencies are starting to emerge — and some of the giants of the web
industry such as Amazon.com Inc.
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are edging into the market.
Gresham’s law famously stated that bad money would drive out the good.
In the 21st century, it is now possible the law might be turned on it
head. Good money might drive out the bad. If so, that matters to
investors — for the simple reason that investing in the right currency
makes a lot more difference to the kind of returns you can expect than
what you actually put your money into.
But Gresham’s law applied to the age when it was formulated — Tudor
England, where money consisted of the physical metal in the coins. If
someone started minting coins with less gold or silver in them, they
inevitably squeezed out the coins that had been properly made. But
today’s world, dominated by paper currencies controlled by central
banks, operates very differently. The money we use has no intrinsic
value — so bad money could be driven out by the good.
We are starting to see a flurry of new currencies.
Amazon
This month, Amazon launched its own coins — a virtual currency that can
be used to buy stuff for your Kindle tablet. It is a very tentative move
to start with: more like loyalty points on a reward card than actual
cash. But every river needs to start with a spring — and with the web’s
mightiest retailer behind it the coins could grow into something
significant.
If so, Amazon coins will be far from alone. The virtual web currency
BitCoin has already attracted a huge amount of publicity — and is
steadily gaining in both circulation and value. After a crash last year —
regrettably virtual currencies are just as prone to booms and busts as
the real sort — it has steadied at around $25 and has gained acceptance.
There are virtual currencies swapped on games such as Second Life and
Farmville that may one day escape into the real world. At the time of
the launch of the iPhone 5, there was speculation that Apple
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would include a banking function, and perhaps even a currency — an
iCoin would, of course, be much the same as everyone else’s money except
twice as expensive and really cool to look at.
We might be reaching the point where virtual currencies start to pose a real challenge to the existing ones: the dollar
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, euro
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, yen
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and pound
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. Indeed, at the end of last year, the ECB put out a paper warning about
the competition from these new currencies. Although still small, the
paper suggested they might undermine the credibility of national
currencies.
It is not hard to see why central bankers are worried. Right now,
virtual currencies are tiny. Hardly anyone is taking them seriously. And
yet people are increasingly losing faith with traditional currencies.
They are losing value steadily to inflation. And quantitative easing and
currency wars mean they are constantly being debased. They are open to
alternatives.
Plenty of investors have been turning to gold. Russia and China are
building up their reserves, and so are many private individuals. But
gold has always had its own problems as a currency. After all, if it was
perfect the world would not have stopped using it as a currency. It has
irregular supply. And it is as prone to crashes and collapses as any
other monetary unit.
There is little doubt there is a demand for virtual currencies. They
are, of course, completely untested. But with so much of the world’s
business now conducted online there is little reason why currencies
shouldn’t be minted online as well.
For investors, this matters. As a general rule, investing in the right
currency matters far more than what stocks or bonds you choose. If you’d
invested in Swiss francs
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in the 1970s, for example, you’d have done very well over the next
four decades, regardless of whether the stocks you picked were any good
or not. Likewise if you’d invested in gold
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— a quasi-currency — during the 1990s you’d have done better than most other investments.
Right now, what the virtual currencies need is a major company to make
them universally acceptable. Amazon may be the one, or it may be an
iCoin from Apple, or G-Dollars from Google
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, or some new company we haven’t heard of yet. But the potential is
surely there. If a virtual currency can be just as good as a medium of
exchange, and a better store of value, it will start to gain traction,
taking its place alongside traditional currencies. And perhaps even
replacing them.
Of course, governments and central banks will try to stop it. They won’t
give up their monopoly over money without a struggle. A virtual
currency will never be legal tender. But the online universe is very
hard to regulate. Governments haven’t managed to stop spam, or
pornography, or terror chat rooms, or any of the other online activities
they don’t like. There is little reason to imagine they can prevent
virtual currencies circulating either.
And if you invest in one of the new currencies, it will certainly do
better than any of the traditional ones. As they emerge, they are almost
certainly worth a minor hedge — and who knows, perhaps even a major
one.
Matthew Lynn is a financial journalist based in
London. He is the author of "Bust: Greece, the Euro and the Sovereign
Debt Crisis," and he writes adventure thrillers under the name Matt
Lynn.
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