Why Washington Should Get Behind Facebook’s Libra

It’s a Real Opportunity for the U.S. Financial Industry

 

By Peter Morici, Ph.D.

Aug. 9, 2019 (First Published in The Washington Times)

Few things unite Democrats in Congress, the Trump administration and Federal Reserve Chairman Jerome Powell like opposition to Facebook’s Libra. Instead, they should get behind the new cryptocurrency by crafting effective regulation.

Washington’s grievances are that it could instigate financial instability and become a vehicle for drug dealers and terrorist states to dodge law enforcement and sanctions.

Virtually all this is disingenuous and reflects the insecurity of Washington’s political class.

The financial crisis was denominated in dollars. The schemes, shaky mortgages and shoddy bonds and derivatives that created bubbles in the housing and other asset markets were the work of banks, mortgage brokers and other financial institutions doing business in greenbacks. All were cooked up before Bitcoin.

Class of its own

Libra would be in a class of its own. Unlike Bitcoin, Libra would not be created out of thin air but through purchases with dollars and other currencies that an association, based in Switzerland, would hold in a reserve of bank deposits and bonds denominated in those currencies.

Backed dollar-for-dollar by this collateral, Libra would have much stronger reserves than the euro, yen or Swiss franc, and its value would be more stable than gold and national currencies, including the dollar. Those fluctuate with business cycles, political conditions, trade disputes and the manipulation of governments seeking to gain competitive advantage.

Existing banks and new institutions around the world could take deposits and make loans denominated in Libra much as foreign institutions now do in dollars. However, with proper Swiss and American regulation, those transactions and investments could be tracked as easily as those denominated in francs or dollars and pose no more threat to stability than dollar-based investments.

Beijing has more to fear from Libra, and America much more to gain.

China’s fintech industry

China’s fintech industry is well ahead of ours – it has already developed, through Alipay and its competitors, a virtually domestic cashless economy.

It is a travesty that Americans still must haul around greenbacks – often used to enable tax dodging, gray market purchases – and pay 3 percent for the privilege of using credit cards. The former cheats ordinary citizens and the latter is a useless bankers tax on ordinary folks and economic growth that could be eliminated by electronic money and a reliable blockchain payments system.

Libra would provide such a system that is far less costly to run and susceptible to fraud than the current systems now run by Visa and MasterCard for ordinary consumers and Citibank and SWIFT for cross-border business transactions.

Similarly, Libra would provide a reliable currency and banking system in the Third World to poor folks and small businesses who are underserved and vulnerable to recklessly managed national currencies and unsafe local banks. Secure money and banking are a necessary foundation for economic development and would become accessible on cell phones.

Shaky banks

Similarly, Italy and other European economies are hamstrung by shaky banks and a euro that is overvalued for their exports and undervalued for German businesses. Widespread use of the Libra could ignite growth the European Central Bank’s negative interest rate policies have failed to deliver.

Beijing has effectively frozen out foreign competitors to its domestic fintech market, but so far Alipay and others have enjoyed little success in the Third World. Penetration into offshore markets could accomplish a long-coveted Communist Party goal – replacing the international prominence of the dollar with a yuan-based alternative.

If widely successful, Libra – whose backers include Visa, MasterCard and PayPal – could shut those doors forever.

The genius behind the Libra’s architecture is not patentable. If Washington manages to block Facebook’s initiative, Libra’s backers or Western competitors could simply establish a facsimile offshore – establishing a cryptocurrency association in Switzerland or a regulatory haven in the Channel Islands would accomplish that.

If not, Chinese fintech could do the same in some jurisdictions outside China.

Appropriate allocation

American, European and other Western regulators should require that the association back Libra with an appropriate allocation of Western currencies – the dollar, followed by the euro and yen should be prominent to ensure public confidence – and that banks, credit card companies and other financial institutions make transactions traceable as they do now for those in national currencies.

Libra is an opportunity for the American financial industry to leapfrog Alipay and other Chinese fintech, provide much of the world with sorely needed reliable banking and simply make doing business in America less expensive.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

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Putting Aside Obsessions to Cope with Immigration

What Values Do We Offer Newcomers when We Are Engaged in Self-Destructive Cultural Wars?

 

By Peter Morici, Ph.D.

Aug. 5, 2019 (First Published in MarketWatch)

Mass immigration, low birth rates and China’s rise pose challenges our political and economic institutions appear ill-equipped to address. Rising to these challenges, however, will prove critical to sustaining our economy in the near term and ultimately the viability of our democracy.

Some 750 million people would like to migrate – mostly from the Third World to Western Europe and America. Close to home, millions from Latin America could easily overwhelm our capacity to culturally assimilate new arrivals and create destabilizing tensions within working-class communities-especially in smaller cities and rural communities where the availability of good paying jobs significantly lags metropolitan centers of finance and high tech.

Casting an undisciplined eye at failing economies, state entropy and rampant violence, immigration maximalists advocate policies that would effectively create an open border. Many preach limiting the human tsunami by aiding economic development, promoting democracy, and weeding out corruption in places like Colombia and El Salvador.

Unfortunately, globalization and modern technology make those prescriptions nearly impossible. Unlike 100 years ago, these societies must build export industries to buy tractors, industrial machinery, computers and technology from the North-long gone is it tenable to rely on draught animals, plows, and artisan workbenches to create prosperity.

Trade tensions

Trade tensions among America, Europe and China clearly demonstrate there are hardly enough manufacturing jobs to go around. President Donald Trump and populist movements in Europe owe their electoral success in some measure to the shortage of good-paying industrial employment.

Building universities and technical programs to train enough workers across the broad range of skills necessary to compete with the likes of America’s finance and high-tech businesses is no more plausible in El Salvador or Colombia than it is in poorer counties of Mississippi or West Virginia.

For the same reason that rural Americans must migrate to more prosperous medium-sized cities, Latin Americans must move to the same places to escape poverty.

Knocking out corruption requires establishing well-disciplined democracies where bribe taking is not merely illegal but the object of social ostracization-as those are in the West. But Americans wrongly believe the values necessary to sustain democracy are cultural universals when those are not.

China’s autocratic kleptocracy

China’s autocratic kleptocracyWell-functioning democracies are scarce outside of Western Europe, North America and Japan. As China’s autocratic kleptocracy demonstrates, those nations cannot presume to offer the most efficient paths to economic development.

And to avert even greater pressures for migration north, climate change will compel huge investments to save coast cities and arable land that Third World governments cannot afford-and that aid from the North will not likely finance.

The bottom line is that no matter how effective American border enforcement may be-no matter how easily the courts might permit an American president to send illegal migrants and asylum seekers back-they are going to keep coming. If they can’t cross the Rio Grande, they will risk ocean travel in the Gulf of Mexico just as Africans risk the Mediterranean to get to Europe.

America’s declining birth rate is an obstacle to accomplishing the economic growth needed to support our aging population without bankrupting the federal government. Consequently, we need immigrants but immigrants with skills and reasonable fluency in English.

American values

Acculturating new arrivals to American values to preserve our society is critical. We must recognize that some immigrants are not very assimilable-and this is tough juxtaposed against freedom of religion, thought and speech.

Seeking new citizens that embrace American values–tolerance, race and gender equality, self-reliance and respect for free markets-and not establish insular communities hostile to those values-should take precedence over allocating visas merely on the basis of economic expediency or personal distress.

All that is even more difficult when the left is attacking the founders of our civilization for sins endemic to the human existence one and two hundred years ago, and the right resorts to race baiting.

After all what are the American values we offer newcomers when we are engaged in a self-destructive cultural civil war.

It’s time to address the world as it is-messy in upheaval and riddled with injustice as it always has been. But to welcome the afflicted and for newcomers and Americans of established lineage to prosper together, we must put aside our hateful obsessions with sins past and fight less among ourselves.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

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Trump Should Boost Boris Johnson with a Quick Trade Deal

U.K. can harden the Irish border slightly as part of a badly needed hard Brexit


By Peter Morici, Ph.D.

July 31, 2019 (First Published in MarketWatch)

Brexit will challenge Prime Minister Boris Johnson’s character beyond measure and President Donald Trump’s ability to accommodate new order in Europe.

The tasks for Britain fall into two buckets. Minimizing the short-term costs of leaving a customs union that integrates manufacturing supply chains across the Channel, and confronting Ireland’s expectation for an open border. Longer term those matter less than most politicians and analysts believe.

Germany and France are bent on making the divorce punishing for the U.K. to discourage Euroskeptics in Italy and elsewhere. However, the European Union’s red-line conditions would require Britain to pay a final settlement of $49 billion for past services rendered by Brussels, protect the rights of EU nationals in the U.K. and no hard border – customs and immigration checks – between Ireland and Northern Ireland.

The first two are easy. Britain has the pound USDGBP, -0.1188% , an international reserve currency, and bonds can be sold. The U.K. needs similar protections for its citizens on the Continent.

Good Friday Agreement

By the Good Friday Agreement (1998), London is committed to maintaining an open border between the two Irelands. An absolutely open border is impossible because Irish goods will continue to be made inside the EU customs union but U.K. goods won’t-the U.S. and Canada have customs enforcement to sort goods made outside of NAFTA.

A sovereign Britain shouldn’t be compelled to admit through Ireland immigrants the EU chooses to admit. The rush of non-Europeans into Britain – and the sovereign right of London to decide who settles in Britain – were central to a positive vote for Brexit.

Ireland has persuaded the EU to insist on an absolutely open border as a condition for negotiating a long-term trading relationship. And Theresa May came back with a transitional arrangement, which would keep Britain vasal to EU laws until that question is resolved, that failed in Parliament.

That is akin to telling Johnson that the EU will negotiate a final agreement just as soon as he loses 50 pounds and plays striker for Manchester United. Simply, Johnson should live up to his reputation and call a mule a mule.

Technological options

Ireland simply cannot expect to be a member of the continental economic union and enjoy all the privileges of being one of the four states that comprise the U.K. Technological options are viable for tracking goods to keep the Irish border reasonably seamless. Quick access to Northern Ireland for Irish nationals – akin to that the enjoyed by workers crossing the U.S.-Canadian border for regular employment and visits – could be implemented.

Those are within the spirit of the Good Friday Agreement and consistent with modern circumstances-Ireland in the EU and the U.K. would be out. If Ireland choses to be obstinate, then it should be justly rewarded.

If the EU won’t negotiate within reasonable parameters, then on the Oct. 31 deadline Britain should declare unilateral free trade in goods if the EU offers the same. Leave it to Brussels to decide whether to cripple exporters in Ireland, Netherlands and Belgium dependent on the U.K. market.

Longer term, Britain’s future, like America’s, is tied to its formidable financial sector and high-tech activities. Since the Brexit vote, continental banks have had their troubles and U.S. banks have done very well in Europe without special access-forcing Germany’s largest, Deutsche Bank, out of many investment banking activities.

London’s financial houses can be expected to similarly fare well.

Artificial intelligence

The software that drives artificial intelligence and other high tech don’t pay tariffs. When Britain has the best technology, the Germans, French and others would be nuts not to buy it.

China’s subsidized exports of manufactures, protection of domestic markets and resulting loss of factory jobs in the Middle West and Europe did much to elect Trump and contributed to Brexit, but Trump’s trade negotiators have given high prominence to China’s piracy and protectionisms in high tech.

Sustaining Britain is vital to the United States – with Chinese and Russian adventurism in the Pacific, Middle East and elsewhere, and cyber warfare threatening global security and democracy America needs strong partners. Washington should offer immediately London the opportunity for free trade.

The obstacles present when dealing the EU – France’s agricultural protectionism and Germany’s veiled mercantilism – are simply not apparent with the U.K. and sharing common-law approaches to regulations should make negotiation of a bilateral trade deal much simpler than with the EU.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

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Here’s Why the Fed Is No Longer Relevant

Ineffective Central Banks Will Be Replaced by Private Money Like Libra


By Peter Morici, Ph.D.

July 29, 2019 (First Published in MarketWatch)

As the Federal Reserve considers lowering interest rates, it risks falling victim to its own dominance. For too long, the Fed has been a monastery where 2% inflation, 2% trend growth and the primacy of conventional banking are accepted without sound foundation.

President Donald Trump, perhaps awkwardly, gives voice to increasingly public impatience with the theology we call macroeconomics.

The Fed targets 2% inflation as a compromise between accomplishing strong growth and stable prices. Since the financial crisis, whether unemployment was 10% or less than 4%, no matter how high or low the Fed set interest rates or engaged in quantitative easing, inflation has mostly fluctuated below 2% with the variance largely determined by international oil prices.

The pace of economic growth has fluctuated widely, mostly between 0% and 4%, but stayed depressed without much correlation with inflation.

Irrelevant target

The Fed is chasing an irrelevant target with ineffective policy tools – that simply doesn’t work.

Money – traditionally defined as currency and checking-account balances – is not what it used to be. Businesses’ and consumers’ ability to spend against next months’ sales and paychecks is really defined by the size of the lines of credit and credit-card limits.

Small movements in the federal funds rates have little impact on the availability of these forms of liquidity.

The Fed can’t control the traditional money supply anyway. It has put huge reserves in the hands of banks – those are sums only banks, hedge funds and money managers are allowed to keep in electronic checking accounts at the Fed.

Since 2008, the Fed effectively has paid banks its target federal funds rate, and banks appear to prefer taking that rate on their reserves over lending those funds to businesses to create new checking account money and spending power.

Slow growth government policies

The size of the Fed’s balance sheet-which includes government bonds in addition to bank reserves and some other securities – and those of the European Central Bank are dictated by slow growth government policies.

Those include too much regulation, multilateralism and political correctness and a blind, polemical acceptance that despite automation, artificial intelligence, more women seeking work and immigration long-term economic growth must stay depressed at no more than 2%.

Those impel politicians to promise angry voters an increasing array of welfare benefits. Ten- and 30-year Treasury and mortgage rates are currently so low, not because of Fed or ECB aspirations, but because those institutions are compelled to hold ever larger sums of government bonds or  the finances of their central governments will unravel.

Soon the Fed, banks, fiat money and credit cards will be challenged by Facebook’s Libra. Its basic architecture is remarkably elegant and something like it will happen even if federal regulators won’t let Mark Zuckerberg have that much power.

In the coming decades, government’s deficits will soar to pay for underfunded social insurance and employee pensions, health care, guaranteed incomes, and efforts to combat and mitigate the consequences of climate change.

Issuing fiat money

The Fed and other central banks will be compelled to purchase huge sums of government bonds by issuing fiat money. Only fools will have confidence that anyone really controls the supply of fiat money and in the security of government bonds denominated in those currencies.

Libra will initially be  backed on a dollar-for-dollar basis by a basket of high-quality fiat money – dollars, euros yen and the like. But fiat currency and checking-account money were originally backed by the gold and silver coins and bullion that those replaced.

Also read:  Facebook’s Libra threatens the dollar’s international status

In time, Libra’s independent commission in Switzerland could do something the Fed and ECB can no longer do – manage and expand its supply for the needs of commerce as a Libra-based banking system emerges through private initiative.

Nothing Washington can reasonably do can prevent Switzerland from letting Libra or something similar establish within its jurisdiction or stop existing banks and new institutions around the world from take taking deposits and making loans in Libra.

Central banks everywhere have shied from issuing electronic money akin to Libra directly to consumers to by-pass banks and directly influence the private economy. The Fed and banks had better look out – Mr. Zuckerberg’s cryptocurrency could make them as irrelevant as Facebook did telephones and texting for keeping large groups of people informed of their common endeavors.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

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