Caption: James Gillray, The Old Lady of Threadneedle Street, 22 May 1797, public domain, courtesy of the Bank of England By Stephen Moore, Sam Kazemian and Ralph Benko On a New Prophecy From The Oracle of “The Old Lady of Threadneedle Street” The Kansas City Fed held its annual central bankers’ conclave at recently. Mark Carney, the governor of the Bank of England, had something very interesting to say there. Jackson Hole Call Gov. Carney the Oracle of “The Old Lady of Threadneedle Street," long the BoE’s nickname. Carney whispered in delicate central-bankerly terms of the potential overthrow of the dollar as the world’s ruling currency. The coup’s leadership? Cryptocurrency. Governor Carney: “While the likelihood of a multipolar IMFS [International Monetary and Financial System] might seem distant at present, technological developments provide the potential for such a world to emerge. Such a platform would be based on the virtual rather than the physical. “History shows that the rise of a reserve currency is founded on its usefulness as a medium of exchange, by reducing the cost and increasing the convenience of international payments. The additional functions of money – as a unit of account and store of wealth – come later, and reinforce the payments motive. “Technology has the potential to disrupt the network externalities that prevent the incumbent global reserve currency from being displaced. “Retail transactions are taking place increasingly online rather than on the high street, and through electronic payments over cash. And the relatively high costs of domestic and cross border electronic payments are encouraging innovation, with new entrants applying new technologies to offer lower cost, more convenient retail payment services. “The most high profile of these has been Libra – a new payments infrastructure based on an international stablecoin fully backed by reserve assets in a basket of currencies including the US dollar, the euro, and sterling. It could be exchanged between users on messaging platforms and with participating retailers. “There are a host of fundamental issues that Libra must address, ranging from privacy to AML/CFT [Anti-Money Laundering and Countering Financing of Terrorism] and operational resilience. In addition, depending on its design, it could have substantial implications for both monetary and financial stability.” Indeed there are a host of issues and implications. We respectfully suggest that Libra already has stumbled upon these. Other stablecoins, however, may clear these legitimate hurdles. Follow along. Governor Carney clearly grasps what central bankers used to call “ .” Those rules prevailed back when the central banking game had rules rather than operating by an arcane “Calvinball” discretion. the rules of the game Carney went on to hint at the possibility that private sector innovation, rather than wise regulators, might prove the engine of progress. “The Bank of England and other regulators have been clear that unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch. “As a consequence, , perhaps through a network of central bank digital currencies. [Emphasis added.]” it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector An open question indeed. Full disclosure: Frax, a stablecoin company which we, with several others, cofounded is set out to accomplish nothing less. Facebook fielded an extraordinarily gifted team of coders and designers proficient in to fashion Libra. Bravo. First rate! Move Its team’s grasp of monetary economics? Not so much. Libra has incorporated some crippling conceptual design deficiencies. Some are severe and, we believe, fatal. Where Libra Went Wrong As former Fed governor Henry Wallach once said, “Experience is the name we give to our past mistakes, reform that which we give to future ones.”   Let’s consider three of Libra’s “reforms.” A Tisket a Tasket, a Green and Yellow Basket Libra’s designers chose to back their token with a basket of currencies rather than with the reigning dollar. This likely was done with an eye toward catholicity. That said, the use of a basket is extremely problematic for a unit of account. A Libra will wobble against the dollar. Indeed, it will wobble against every other currency in the world. Irksome. The Libra-denominated price of everything will vary daily, even hourly. When we pull up to the pump the price of gasoline might be 3 Libras per gallon. It might be 3.01 Libras per gallon by the time we top off the tank. This is hardly catastrophic. Yet this is almost certain to prove chronically annoying. It is not optimal for commerce. Consumers do not like uncertainty in pricing, even ones of a modest order. John Wanamaker made a tidy fortune by inventing the concept of the retail price tag in 1861. This practice has since become . Departing from it is a great leap backward. The use of a currency basket, rather than the dollar, surely was well intended. It presents as a gesture of respect to a new world order chosen in preference to Americacentric. de rigueur That said, called the basket of currencies' precursor, the IMF’s SDR, the  "Esperanto” of currencies which “lacks a natural constituency.” Eichengreen and Frankel A basket of currencies may in theory be superior to the dollar. Yet as Yogi Berra taught us, “In theory there is no difference between theory and practice but in practice there is.” Libra violates Berra’s law. One can never violate this law with impunity. Our own offering, Frax, tracks the dollar. This provides the Frax immutable stability in the world’s most powerful economy, America, which with less than 5% of the world’s population generates over 20% of the world’s income. America is the world's dominant economic power. It is unwise to ignore this fact. Also, not immaterially, the dollar is the world’s legal reserve asset against which other nation’s currencies are held. The dollar is, in fact, the world’s money. It is comparable to how English is the world’s commercial lingua franca. Peter S. Goodman observed in the last February: Don’t fight the ticker. New York Times “The dollar has in recent years amassed greater stature as the favored repository for global savings, the paramount refuge in times of crisis and the key form of exchange for commodities like oil. … In a clear indication that the American currency has been gaining power, dollar-denominated lending to borrowers outside the United States, excluding banks, soared between late 2007 and early 2018, according to the . It increased to more than 14 percent of global economic output from less than 10 percent." And as neatly summed up recently by David Beckworth at in The Challenges of Dollar Dominance: “The dollar is now a truly hegemonic currency and, as a result, creates challenges not only for other countries but also for the United States. Bank for International Settlements Mercatus.org “The dollar’s dominance is evidenced by the of international trade being invoiced in dollars, the of relatively liquid, dollar-denominated debt held outside the United States, and the of the world economy’s currencies anchored in varying degrees to the dollar." 50 to 80 percent $28 trillion 70 percent Economically speaking it was a tyro error for Facebook to go with a basket of currencies. By contrast, Frax will provide a stablecoin that tracks to the dollar. This avoids the ongoing distortion of this token as a unit of account. This virtue applies domestically for American retail and business consumers. It applies internationally thanks to the dollar’s status as the world’s international reserve currency making the dollar the world’s base money. Meaning? Frax, unlike Libra, is to be a stable stablecoin. Full Reserve vs. Fractional Reserve Frax will also enjoy the suppleness (and profitability) of the fractional reserve. Libra’s reliance on 100% backing by the basket of fiduciary (or as they put it, fiat) currencies is another design flaw. The idea that there is something unsound about fractional reserve is a discredited fallacy perpetrated by the late economist Murray Rothbard. Just to, in passing, dispose of the misconceptions harbored by any remaining Rothbard diehards… Adam Smith, the canonical authority on free markets, observed in in : Wealth of Nations “When, therefore, by the substitution of paper, the gold and silver necessary for circulation is reduced to, perhaps, a fifth part of the former quantity, if the value of only the greater part of the other four-fifths be added to the funds which are destined for the maintenance of industry, it must make a very considerable addition to the quantity of that industry, and, consequently, to the value of the annual produce of land and labour.” Libra’s insistence on 100% reserve backing rather reminds us of a trope used in the Beverly Hillbillies. Jed and Granny would pop into the bank to see and count their money. As Leslie Dale Feldman writes in : Rustics and Politics: The Political Theory of the Beverly Hillbillies “[Granny] gets a paper bag for the money and goes to see Mr. Drysdale. Jed says, “Just give her the money and we’ll go” and they think that Mr. Drysdale doesn’t have the money, or, if he does have it, it will fit in the paper bag.  Granny says, “I don’t want no check. I want my money—cash.” Mr. Drysdale says, “I’ve got all of your money” and Jed asks, “Where is it?” to which Mr. Drysdale replies, “It’s invested—in stocks, bonds.” At this point Jed, who does not know what “invested” means, says, “Mr. Drysdale, you always told me I have $45 million in cash” and Mr. Drysdale says, “Well, you have—but not cash cash—like I said, it’s invested.”  Jed says, “Maybe you better start getting’ it together—it would ease my mind considerable to see it” to which Mr. Drysdale says, “You don’t understand.” “Granny and Jed transfer Granny’s money, in a check, to Mr. Cushing’s bank—but then ask him to see the money. “Dogged if he didn’t go through it quicker than Mr. Drysdale,” says Granny when he can’t produce it and she puts the money back in the Commerce Bank with Mr. Drysdale. In “Lafe Lingers On,” Lafe Crick, from back home, gets a job as a night watchman at the Commerce Bank so he can “watch” Jed’s money. When he gets to the bank he looks around Miss Jane’s office for the money—but he doesn’t see it and Mr. Drysdale explains, “Mr. Clampett’s fortune isn’t actually here.” Like the Clampetts, Lafe thinks the money is actually in the bank building. “The Clampetts, with their fortune, do not understand the concept of “interest” or the fact that you cannot take $11 million dollars out of the bank in a paper bag, or the fact that the bank cannot give you $11 million dollar—it would be like asking for the money in the form of barter—in goats, pigs, and chickens—which is something they might also do. … “John Locke describes the move from barter to money in The Second Treatise of Government….” No hillbilly elegy here. Libra’s designers appear intent on moving us backward. Intent or not, it is unthinkable that the world will retreat to pre-Lockean economics, even with the help of the blockchain. It is unnecessary – and retrograde – to maintain a 100% reserve. As monetary commentator Nathan Lewis ( by Steve Forbes “the world’s foremost monetary expert”) observed at upon an analogous matter: recently called Forbes.com “The amount of metal piled in a vault has little relationship to the value (or quantity) of paper banknotes. In 1779 the Bank of England held 953,066 ounces of gold in reserve. In 1783 it had fallen to 339,261 ounces. A year later, in 1784, it had grown to 1,683,724 ounces. The gyrations had no effect on the value of the British pound, pegged to gold at 3.89375 pounds per ounce. “Nor did banks ever have a 100% reserve of gold. In 1888 U.S. banks had a bullion-to-banknote ratio of 34.86%. By 1895 it had fallen to 12.33%. In 1906 it had grown again to 42.42%. It did not matter to the value of the dollar, which was pegged to gold at $20.67 per ounce. “A gold standard does not place some artificial limit on the supply of money, nor is the supply of money constrained to the output of gold mines. Between 1775 and 1900 the U.S.' base money supply increased by 163 times--in line with an expanding economy and a population that went from 3.9 million in 1790 to 76 million in 1900. Over this 125-year period the amount of gold in the world increased by about 3.4 times due to mining.” We can only look upon Libra and cry, with Mr. Drysdale, “You don’t understand.” We believe reliance on this model has crippled Libra right out of the gate. Central Planning vs. Decentralization Much of the 20th century was a cold war between central planners – epitomized by the USSR and Mao’s China – and the decentralizers, epitomized by President Ronald Reagan’s Supply-Side economics (of which two of the authors here were junior principals) and Chairman Deng Xiaoping’s “Poverty is not socialism. To be rich is glorious.”  推行“一个国家两种制度”，谁也不好吞掉谁。 Decentralization has both political and economic virtues. It is inherently democratic. The body of users makes governance decisions. Because of “invisible hand” dynamics of human nature the incentive of the owners is to maintain the integrity, and thus value, of the “product,” in this case the token. Economically, as James Suriwiecki observed in , it harnesses the power of “group intelligence.” “Consider an experiment that the financial analyst Jack Treynor did. First Treynor had the students in his finance class guess the number of jelly beans in a jar. Not surprisingly, the average guess was within 3 percent of the number of beans in the jar (there were 850 beans in the jar, and the mean guess was 871), and only one person in the class did better than the group as a whole.” The Wisdom of Crowds Despite its stated aspirations to evolve beyond central planning Libra is centralized. Moreover, its governance body is as convoluted as that of the United Nations and likely to be similarly unable to govern capably. In our view there is irony to how very antithetical Libra’s governance protocols are to Facebook’s lithe and market-dominating ethos, “Move fast and break things.” Libra presents as the MySpace of cryptocurrencies. Libra has forgone the power of group intelligence for an indefinite period, perhaps forever. In our view, whether indefinite or forever, this is a crippling mistake. Free markets are far less patient with defective products than are governments. Frax has opted for decentralization in its governance. It is harnessing the power of group intelligence. It uses smart contracts to open up an entirely new taxonomical category of financial instrument. Immunized from manipulation, the Frax model (which has straightforward KYC and AML procedures) may prove immune to the abuses for which federal regulators are otherwise needed to protect the public. Frax thus may even prove outside of the jurisdiction – and onerous compliance costs – of such regulation. If so, this will pass great cost savings on to Frax’s user base by providing comparable protection at far lower cost. Is Libra or Frax the Better Candidate for the Prophesied Synthetic Hegemonic Currency? We submit that Libra’s designers have made three fatal design errors. The Frax team, by contrast, has seized upon several powerful design advantages which should give it pole position in the race to become the Synthetic Hegemonic Currency. To reiterate, Bank of England Governor Mark Carney observed at Jackson Hole that: “While the likelihood of a multipolar IMFS might seem distant at present, technological developments provide the potential for such a world to emerge. Such a platform would be based on the virtual rather than the physical.” Meaning, presumably, stablecoins. The world is manifestly moving from a Cold War bi-polar geopolitics to a Post-Cold-War American unipolarity to an emerging multipolar geopolitical order. This may well have implications, sooner or later, for the dollar’s hegemony. What might come next? Gov. Carney: “As a consequence, , perhaps through a network of central bank digital currencies.” [Emphasis added.] it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector Both Libra and Frax contend for the status of the genesis block of the coming Synthetic Hegemonic Currency. Libra: A wobbly unit of account. Fully reserved. Centralized. Frax: A stable unit of account. Fractional reserved. Decentralized. Choose one. May the best cryptocurrency win. +++ The authors are among the co-founders of Frax. Stephen Moore is the chief economic officer, Sam Kazemian is the chief executive officer, and Ralph Benko is the general counsel to Frax, a stablecoin provisionally scheduled for release in Q1 2020. Moore, a leading economic policy expert, is co-author, with Dr. Arthur B. Laffer, of an influential economic policy advisor to President Trump, and was recently named by as the 32nd most powerful figure in global finance; Trumponomics: Inside the America First Plan to Revive Our Economy, Worth Magazine Kazemian, an Iranian-American software programmer, is co-founder and president of Everipedia, a for-profit, wiki-based online encyclopedia founded with Theodor Forselius in 2014; Benko, the founder of the Prosperity Caucus, is a former Reagan White House deputy general counsel and former senior counselor to the Chamber of Digital Commerce, the largest trade association representing the blockchain ecosystem.

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Making Good Money: The Coming Synthetic Hegemonic Currency

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