A Free Market on Money

23 Dec 2008

On Sunday morning, I found myself sitting in a trendy little cafe in Hollywood, talking to a good friend of mine, Spaceman. We stood in line to place our order, discussing a wide variety of topics ranging from work to life to (naturally) the economy. We mused over the concept of a private currency, which some companies are implementing in baby steps (like Visa gift cards) and others are truly running with (like Microsoft points). And that brings me to tonight's musing:

What would happen if the dollar lost 50% of it's value next week? What would it mean? A lot of people have a difficult time separating the terms "currency", "money", and "wealth". The US Dollar is just currency - it symbolizes an agreed-upon value (known as fiat money), but has no intrinsic value in and of itself. It is a tool, to facilitate trade. But like all tools, its usefulness waxes and wanes, and sometimes there's a better tool for the job. Another currency, or another method all together.

Right now, I get paid in US Dollars, because the convenience (and expense) of not having to convert form another currency to the one used where I live is less than I'm likely to lose due to fluctuation in the value of the Dollar. If my economy started to nose-dive, what motivation would I have to keep my money there? Sure, decades ago it would have been nearly impossible to jump-ship with my money. Today, it's a button on a (good) bank's website. Why shouldn't we shop around for the currency that offers us the best "bang for our buck"?

If the USD began to slide, and I mean really slide, due to inflation, poor management by our government, or for any other reason, today I can opt for another. How's the Yen, Yuan, or Euro doing?

If you want to see what this is like, open up a Paypal account. Deposit, say, $20. Then flip it back and forth between any of the few dozen currencies they suppor, maybe once or twice a week at most . Their conversion rates are pretty good, they take a very nominal fee for the conversion (less than 3%). You'll see you can, in fact, keep your money in any curency from USD to GBP to Yen to Euros. Neat, huh? Now, you're a currency trader.

if you can easily switch currencies, there's a second advantage: any one backed by a reasonably large and developed country won't really nose-dive. The value of wealth circulating in a country can be thought of a lot like the market cap of a corporation. Currency is a futures market; betting on the ability of one currency (country) to out-perform another in the long-term. If the USD slips below the cash value of all the assets within the country, international currency traders will buy up TONS of it, because you know it is going to recover. You know you'll get your money back if you wait long enough. Buying up billions of dollars will raise the price of dollars, correcting any downturn we begin to see. Or maybe they'll just offer really valuable foreign currency for local services, like buying your house or car off you.

But until the rest of the world's major and ancillary economies all collapse at the same time (in which case, you're SOL no matter what),

don't panic.