I have been desisting from commenting on Facebook's proposed new currency, which they call Libra. There has been good reason. I wanted to know more; I did not have time to do a lot of initial reading, and I wanted to read what others said.
I would recommend looking at FT Alphaville's analysis of this issue: they shred it, and it's supposed social motivations.
Naked Capitalism has also done an excellent review.
But the real issue here is existential. Whatever Facebook and its partners (who include MasterCard and Visa as well as Uber and other actual or upcoming oligopolist or monopoly users of payment systems) say their purpose is, this supposed currency will be a challenge to the state. The choice of the name is not, I suspect, a coincidence in that case. This is about declaring money free from state control, as far as I can see.
Why else do this after all? Is there really a demand for a new currency from almost any user of Facebook, or other platforms? Do we really want to put exchange risk into the transaction to pay for a cab, or anything else, come to that? And do those making remittances actually want to add another currency into their transmission equation? I can't see any positive answers to any of those questions. To be blunt, I cannot see the consumer at the heart of any of the questions that this currency gives rise to. In that case the answer must be that there is another reason for creating this arrangement.
And let's also dismiss the idea that this is about introducing Blockchain to the world: all the experts dismiss the systems involved in this currency and say that they are not Blockchain. I also note, with some satisfaction, since it is an opinion I have long held, that those experts also think that Blockchain simply could not handle the volume of transactions this system might create. The idea that Blockchain is, then, an answer to anything is, in that sense, shattered as a result and I suspect it always will be that way.
So, this new arrangement would appear to have two purposes, at most. One is to control the consumer. By requiring that they use this service to access other arrangements - and it is suggested that a lot will eventually have this conditionality built into them - then Facebook and its partners can effectively control significant parts of the user's consumption - and even, it has been suggested, auto-charge for many services. This looks like a range of very large companies - few of whom are much trusted - seeking to take control of a great deal of activity that many would rather remain out of their domain, but about which they may, if Facebook gets its way, eventually have little control. It is a remarkably unattractive idea.
The challenge to government is even less attractive. In my opinion government is all about the ability of a state to exercise economic control of an economy for the benefit of those resident within that place. This is why a currency is synonymous with statehood - as those who created the euro did realise, which is why they did mistakenly put it at the heart of their hope for European integration. And this is also why the power to tax - which is the only thing that really gives a fiat currency its value - is also key to both statehood and economic control of the nation.
Libra is intended to challenge both these ideas. Facebook says that Libra is not a fiat currency, because it is claimed that it will be backed by a bundle of fiat currency holdings. And it says it is not a bank that will issue loans, so it can claim it is not a currency creator. But that, with all due respect them, looks to be a move to be ensure that regulation as a bank is avoided. The prospect that a currency that is intended to be used over an enormous range of transactions over a wide range of countries is not akin to a full-blown currency is simply implausible. But, and this is key, the aim to avoid banking regulation is also critical.
I have long argued that the suggestion put forward by the likes of Positive Money that up to 97% of all currency is created by private banks is wrong. This is because private banks can only create currency because they operate under a licence to do so granted to them by a government. In that case the money creation activity that they undertake is simply an extension of the activity that the government itself can undertake to create currency, which it does when spending cash into the economy in pursuit of its own activities. As such there really has been no private money creation of our economies to date: what there has, instead, been is a mechanism where the credit risk on the creation of money has been outsourced to the commercial banks who have made the decisions on to whom to lend to in exchange for which those commercial banks have enjoyed a part of the seigniorage (or profit) arising on currency creation that would otherwise accrue to a government.
Facebook look to be challenging this. They are creating a currency without, apparently, seeking a licence to do so. Their argument might be that this is little more than an extension of an air miles scheme, or any other tradable voucher arrangement, but this is clearly not true. Those schemes first of all have limited application and secondly rely solely upon the promise to pay of the creator of the arrangement: they are, then, fiat currencies, but with remarkably little scope for use which is why they fall out of the remit for any real concern.
Libra on the other hand is designed for general use, over a very wide range of platforms, and is very clearly intended to be a tradable currency in its own right, which, if it is permitted it will no doubt be. To claim that it will be asset backed is highly likely to be misleading in that case: the idea that Libra will be 100% backed by fiat currencies is only credible on the basis that the person making payment using the system has first to translate their fiat currency into Libra, in the process relieving the creators of the scheme of the obligation to provide much of the capital to support this exercise, but whilst instead supplying them with substantial fiat currency deposits that they will then be able to use to earn a return which will not be shared with those supplying the capital. Coincidentally, these deposits might, in themselves, supply considerable power to Facebook and its partners over currency markets, and therefore governments, which is an issue to which I will return, below.
Let me instead note first that what this currency deposit arrangement makes clear is one aspect of the whole Libra scheme. It is a giant leveraged rent seeking activity intended to benefit a very few at cost to a great many in society. In this way it might well be seen as a classic late-neoliberal enterprise.
Prof Len Seabrooke of Copenhagen Business School and I have been putting a lot of effort into considering just what typifies such activity as part of research for an academic paper that we have been writing. Two characteristics are those that I have already noted. The first of these is indifference to the consumer, whose interests are considered secondary to those of the supplier. A second is a bias within economies towards multinational enterprises, which will provide them with an implicit competitive advantage over the nationally based concern: it should be readily apparent that this is at the core of what Libra is about. And there is a third element that is just as important.
This third element relates to the bias in political administration. As with the other two, we see what is essentially a binary divide. That administration can be biased towards the interests of the nation state or, alternatively, those engaged in the political process that determines this bias can instead focus on the needs of the very small minority of people who, alongside the immensely powerful companies that they control, have a multinational focus to the activities, and whose activities seek to make exceptional, or supernormal, profit by arbitraging international regulation for private gain.
Typical firms that might arbitrage in this way include banks and the Big 4 firms of accountants: together they created the offshore world of tax havens and secrecy jurisdictions that have deliberately undermined the tax revenues of nation states. It is readily apparent that some governments, including that of the UK, have gone out of their way to facilitate this activity. The result is classic neoliberal activity that by necessity reduces state capacity and which, by definition, translated state capacity to tax into private gain for a few individuals.
What I now suggest is that Facebook are simply elaborating on this model. A little macroeconomic theory helps here. The formula that best summarises a government's choices within its fiscal policy is as follows:
G = ∆B+ ∆M + T
G is government spending. B is government borrowing, meaning that ∆B is the change in government borrowing in the period. M is government created money supply, which can be thought of as QE, but can very clearly be something more if the ideas implicit within modern monetary theory become more commonplace. ∆M is then the change in a government's money supply used for its own purposes during course period.
To put this another way, G (government spending) is the level of spending provided by the government in pursuit of its policies. Few would dispute that neoliberalism wishes to constrain this. Undermining tax revenues (T) is one way to do this, but it may be that limits to this are now being found. In any event, what fiscal policy makes clear is that government spending need not equal tax revenue. Usually tax revenue is less than government spending, precisely because the government needs to inject more money into the economy to provide it with the liquidity it needs. ∆M is not just a means of government financing, it can also be a mechanism for stimulating economic activity. And in the same way, more borrowing is also a way to meet the demand from the banking sector, pension funds, and others for secure mechanisms for saving the market is, itself, unable to supply. It does, therefore, have fundamental economic role all of its own, albeit that in the neoliberal narrative this, supposedly, ‘crowds out' the private sector. Without these mechanisms there is no fiscal policy.
As noted above, the ability to tax has already been challenged. This is one way of threatening the ability of a state to govern, of course. And to some extent there has been a backlash, or at least a reaction, to this. The consequence has been that maybe, as I have suggested elsewhere, the tax gap has fallen. As I also think to be true, tax avoidance is now harder. Mechanisms like country-by-country reporting have ensured that this is the case. The ability of the neoliberal elite to challenge the power of the state by threatening its ability to tax, which in turn undermines its ability to manage its fiscal policy, and so control the economy has, as a result, been reduced. I stress, it has not been eliminated, but it has been reduced.
Now let me put the Facebook proposal into this context. We know two things about government borrowing. The first is that any government that wishes to have full control of its fiscal policy has to borrow its own currency. Second, we know that the government can only create its own currency: it does not have the power to create another. Control of the currency is, then, critical to the effectiveness of any government's fiscal strategy. What we also know is that such fiscal strategies are now fundamental to macroeconomic policy control within any economy precisely because monetary policy is, for all practical purposes, ineffective because interest rates are at, or near the zero bound. But without control of the currency in a jurisdiction the effectiveness of both ∆B and ∆M — or changes in borrowing and government created money supply - might be severely reduced.
There are a number of ways in which this can happen. First of all, capital flows cannot be controlled. If money flows do not go near a central bank — and they would not in the Libra scheme - then the effectiveness of any policy to control capital is severely undermined.
Second, if there is a parallel currency in circulation, in which trade takes place, then we well know that the threat to a government's tax base is very real. We only have to look at why tax yields are so low in places where use of a parallel currency is commonplace to know that this is true: beating tax evasion when parallel payment mechanisms exist, whether peer to peer or via an institution massively compounds the problem of beating tax evasion.
And third, the existence of that parallel currency means that the power of fiscal policy - which depends upon making available or denying a monetary stimulus as a consequence of government action - is necessarily curtailed. And this, if Facebook's Libra were to become commonplace, would be its consequence.
Facebook need not, then, create a new bank. And it might avoid banking regulation. But its goal would still be achieved: the power of the state to manage the economy of a nation could be critically undermined in those places where it still exists by the existence of its currency. And, I would suggest this is precisely what the goal of this policy is.
I can be accused of cynicism for saying so. It may, after all, be that this currency is just about the extraction of rents by an elite. It could be said that I should trust them and believe that this is enough to suit their purposes. But I don't. The tax haven model, and the capture of many of the states involved in it through the process known as the finance curse, has shown that profit is not the sole motive in these cases. There is, instead, something much more systemic in play, and that is what I am seeing with Libra as well.
Modern monetary theory and thinking associated with it threatens the revival of fiscal policy as a credible basis for underpinning the transformation that the Green New Deal requires. Both those policies threaten the objectives of the neoliberal elite who think that they can, in any event, buy themselves out of the consequence of climate change. Having a currency to undermine government effectiveness is a tool to deliver that option. And that is precisely why it has to be challenged and regulated out of existence.
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I concur with your analysis.
It beggars belief that given the furore over Facebook’s behaviour with regard to personal data leakage that they would float the idea of issuing a currency.
Facebook in my opinion is not a trustworthy organisation to do this. It’s founder refused to come to our Parliament and explain himself for a start. Issuers’ of currency must be accountable to all those who use it.
Maybe it is something to do with what Jonathan Aldred talks about in his book ‘License to be Bad’. That bad economics has inculcated society to such a degree that ideas like this can be floated and stand a realistic chance of being realised because the values in societies have been warped.
The other thing that makes me laugh is that these new ideas come about claiming to break the strangle hold or monopoly power of the status quo but then also breed monopoly tendencies within themselves so that instead of ridding us of monopolies, they just replace one with another. It is typically Neo-liberal behaviour.
Is that progress? Answer: No.
Advice: Stop it now or avoid it using it – if they’ll let you.
But honestly – Facebook – trustworthy? Principled? My arse. Sorry. They are not a fit and proper ‘org at all to carry out such an undertaking. If this idea is allowed to develop, then Frank Zappa was right – stupidity IS the most plentiful substance in the universe.
100% agree with this, and have thought similar things.
From a pure MMT perspective, governments needs to tax in order to free up resources from the private sector, which now can be bought by the government without inflationary consequences.
But, if Libra becomes common place, with the economy stimulated to full capacity, then the only way the government can get the resources it needs, is to start taxing in Libra in order to reduce demand. There would be certain countries that accumulate Libra, and certain others that don’t, so the people of those countries that don’t will be sending their own countries currency to Facebook, in exchange for Libra….. And, (as the monopoly issuer of Libra), Facebook can charge what they like. They have the power to manipulate currency rates, making or breaking countries at the touch of a button.
They could write a futuristic dystopian movie about this. 🙁
So, have I understood correctly? Wages and salaries paid in Libra. Goods and services purchased in Libra. TNCs do business in Libra. Personal and corporate wealth in Libra. Public taxation reduced. Public welfare services replaced by Libra private insurance. Macro economic policy ineffective. MMP a historical theory. The state reduced to a police force to protect against civil unrest (a police state).
Is that about it? What national/regional regulation is required to preserve public interests?
Is this a serious question?
We already live under the lie that the Government has to consolidate its debts to the private sector when it is in fact Government who effectively owns the nation’s currency.
Libra effectively turns that lie into a truth. This is currency privatisation and it is hostile in intent. It is the cherry on top of the anti-state, von Hayek cake.
Oh, the markets will love another opportunity to make money out of arbitraging the values between say Libra and other currencies so they’ll love it. But the effect it could have on real people outside of the financial sector bubble would be another matter.
@Chris Newdick –
So, have I understood correctly? Wages and salaries paid in Libra. Goods and services purchased in Libra. TNCs do business in Libra. Personal and corporate wealth in Libra. Public taxation reduced. Public welfare services replaced by Libra private insurance. Macro economic policy ineffective. MMP a historical theory. The state reduced to a police force to protect against civil unrest (a police state).
You haven’t really got it right here, Chris… My emphasis shows where you’re off the mark, so the nightmare scenarios that you suggest are unlikely.
Libra might seem quite scary with massive potential to upset the UK’s financial apple cart… but have faith. Our laws dictate that tax is paid on the profits or gains of a trade. Employment Duties are due on income arising from employment or office. Clearly, I’m abbreviating, but that’s what the law says and, crucially, that’s ALL it says. It’s completely silent as to whether those profits come in the form of Libra, Sterling, USD, Euro or whatever other functional currency a person chooses to use. That’s not Government’s business… you can use any form of currency you like to carry on your business. Fill your boots.
Where the law is NOT silent on currency is when it comes to tax. Make your living by trading in Libra, or Potatoes, or Angel’s Tears or whatever the hell you like, but when the tax (which is calculated on the profits and gains arising from your trade) falls due, it will be paid in Sterling. Nothing else will do*.
So, go ahead and make your fortune in Bitcoins or Libras or any other kind of magic beans that you like. Just make sure that somewhere along the line you gathered in enough Sterling to cover that tax that will be due on your profits, or you’re going to jail.
Question – “But if I’m trading in Libra, and so are all of my customers, where am I meant to get Sterling from??”
Answer – “Not my problem. Pay your tax in Sterling as instructed or face the legal consequences”.
Question – “But what if everybody starts using Libra and nobody uses Sterling? What then?”
Answer – “Well, if the good people of the UK and their Parliamentary representatives really want to change from Sterling to Libra as the currency in which Tax is settled, then they can elect MPs of that view in large enough numbers to get the law changed. At which point, you’ll have to pay tax in a currency you don’t issue. You’ll effectively have sold the UK to Mark Zuckerberg. But f that’s what you want, then that’s democracy. The upshot for YOU, however, is that you’ll be earning profits and gains and paying tax on them. Absolutely naff all will have changed except you’ve become a willing vassal to an American corporation. Bravo. Let’s Take Back Control, eh? Marvellous.”
Now, I really don’t see the latter happening. Ever. So I wouldn’t worry about it too much.
I do think that only countries who are sovereign in their own right and recognised by the UN should be able to create any form of currency. And I think states should be taking a really hard line on this. Corporations who attempt to introduce their own currency are effectively trying to circumvent democracy and undermine the state. There should be (IMHO) powerful deterrents and sanctions in place to combat that.
* – I know that HMRC say they accept Euros in settlement of tax due, but all they are doing there is acting as a Bureau de Change. You may give HMRC Euros, but they are changing them to Pounds on your behalf. You’re not paying tax in anything but Sterling.
Agreed
Thanks, Geearkay, most helpful. I agree states should take “a really hard line on this” for the reasons you explain. Are there models for doing so? Or has it never been an issue until now? What realistic options are available?
Scary isn’t it?
The question must be asked and the hard truth must be faced of just wtf the globalist super villain psychopaths are upto?
I mean did anyone notice Clegg giving his employer an ‘all-clear’ for voter manipulation this week? Ignoring the evidence?
I ask – What does the Bank For International Settlements in Basel, Switzerland have to say on this? What about the IMF?
A thought provoking consideration by Brandon Smith, may help us get our heads around the ‘System’ change and ‘Global Reset’ planned by the Pathocracy for their humans.
‘To summarize: For at least the past century the globalists have been pursuing a true one world system that is not covert, but overt. They want conscious public acceptance of a completely centralized global economic system, a single global currency, a one world government, and a one world religion’
http://www.alt-market.com/articles/3792-the-next-stage-of-the-engineered-global-economic-reset-has-arrived
Almost all the Identity Politics issues are created and shoved down our throats to divide our attention and remove focus from these psychopaths threat to greater humanity.
I wonder, what are the ECB saying about this? I can’t see the creators of the Euro being overjoyed at the prospect of there being a parallel currency easily available.
[…] Cross-posted from Tax Research UK […]