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Tuesday, August 13, 2019

Facebook’s Libra Is a Reaction to Growing Currency Instability

Money’s sole purpose is to facilitate the exchange of actual market goods.

Image Credit: geralt from Pixabay

Money does not pay for anything, never has, never will. It is an economic axiom as old as the hills that goods and services can be paid for only with good and services.

– Albert Jay Nock

Albert Jay Nock’s pithy statement of what should be obvious came to mind recently while reading Financial Times columnist Rana Foroohar’s failed takedown of Facebook’s proposed Libra currency. Somehow Foroohar’s editors forgot to delete her question about whether “easier cross-border financial flows are what the world really needs now.” She plainly knew not what she was asking, or writing.

Money Is a Medium of Exchange

Missed by the journalist is that money crosses borders solely because real goods and services do so with wondrous regularity. Money’s sole purpose is to facilitate the exchange of actual market goods: I’ve got bread, I want your wine, but you have no interest in my bread; the object of your consumptive excitement is the butcher’s meat. Money is an agreement about value among producers that enables the exchange of actual market goods.

With Libra, Facebook is thankfully aiming to enhance the ability of individuals to exchange with other individuals.

Looked at through the prism of a question asked by Foroohar, and that she plainly didn’t understand, “easier cross-border financial flows” have been the sole purpose of capitalist production for as long as the world’s inhabitants have been able to specialize, and in the process exchange the fruits of their own labor for the fruits of others. For one to work is for one to express a powerful desire to import. The importing could be from across the street or from the other side of the world, but import it is. The “cross-border financial flows” that Foroohar so naively disdains are merely happy evidence of a world that grows more connected by the day.

With its proposed introduction of the Libra, Facebook is thankfully aiming to enhance the ability of individuals to exchange with other individuals. Will it succeed? Who knows? Foroohar thinks not, so she dismisses the very notion of the Libra with misplaced and misinformed contempt. She misses the point. To see why, please read on.

Technology is a boom or bust business, but it’s mostly busts. I’ve always assumed 10% of my technology investments will succeed – and succeed wildly. The other 90% I expect to fail.

Those are the words of Microsoft co-founder Bill Gates.

Failure Is a Part of Entrepreneurship

They’re words that Foroohar would be wise to internalize, but that this most conceited of journalists probably won’t. In her narrow view of the world, failure is to be avoided. By extension, risks of the entrepreneurial variety should be avoided. Figure that an entrepreneur is someone who believes something deeply in the face of enormous skepticism. Foroohar believes in what’s known, or what she thinks is known. This arguably explains why she’s a columnist at the Financial Times, and not overseeing the development of new ideas at innovative companies like Facebook.

As Foroohar sees it, the Libra “threatens to take us in the wrong direction, at exactly the wrong time.” Ok, but if it does then it will surely vanish as a measure of value for it taking us in the wrong direction. Foroohar is against the Libra given her expressed view that it will fail, but then every innovation the world has ever known (from the tractor to the airplane to the Apple iPhone) was met with the nose-turned-up superciliousness of the kind that Foroohar is directing at the Libra. Missed by Foroohar is that innovation is all about failure. Maybe the Libra won’t work, but even if so, currencies and commerce will be more attractively situated for better future effectiveness thanks to Facebook’s efforts to meet the needs of people now.

A good currency is neither strong nor weak; rather it just is. This basic truth seemed to elude Foroohar.

But wait, says Foroohar, it’s apparently not just that the Libra is allegedly a bad idea. It will supposedly cause “bubbles.” “Speculators are always looking for the next big thing,” according to Foroohar, and one “of the most painful side effects of the past 10 years of unconventional monetary policy has been the tendency of investors looking for yield in a low-rate world to pile into the latest bubble…” You get the picture. Of course, the picture Foroohar aims to draw has nothing to do with what Facebook is looking to do. The Libra is a consequence of “10 years of unconventional monetary policy,” not an instigator of worse, or more laughably, “bubbles.”

By Foroohar’s own admission, the Libra will be issued with the stability of the unit in terms of value top of mind. If we ignore how incredibly simplistic is the endless use of “bubble” by financial journalists possessing very little market experience, the Libra is anti “bubble,” and anti-speculation. Those behind it aim to maintain its integrity as a consistent measure of value (though it should be said baskets of fiat currencies aren’t the ideal way to maintain the stability of the unit), which means speculators would have no reason to pile into it. A good currency is neither strong nor weak; rather it just is. This basic truth seemed to elude Foroohar.

Just as she couldn’t see how primitive sounding was her rejection of increased “cross-border financial flows,” it went over Foroohar’s head that money, if good, is just a medium of exchange. It’s a stable, low-entropy measure meant to facilitate individual specialization through trade, and also the allocation of market goods and services to more productive uses (investment) with enhanced production the end result. Good money is once again anti “bubble.” It’s a measure that helps economic actors put prices on the world’s plenty; prices the way that market economies organize themselves.

Is Libra Libertarian?

All of the above rates prominent mention in consideration of Foroohar’s assertion that “libertarians” are the ones “who dreamt up Libra,” and who “see it as a decentralized force for good in a world in which large, centralized institutions have failed.” In this case, Foroohar was half right. No doubt the Libra is a response to the failures of global monetary authorities, their unstable money failures are easily the biggest drivers of corrupted prices that those of Foroohar’s ilk would mistakenly refer to as “bubble” prices, but it can’t be stressed enough that the Libra is not a libertarian response to persistent errors committed by global monetary authorities. To suggest otherwise is for Foroohar to insult the vast majority of the world’s population that isn’t libertarian, meaning probably 94 percent of it as libertarians painfully discover every time there’s a vote.

Libra and other private forms of money are a global market reaction among individuals to decades of currency instability, not a libertarian one. Precisely because so many producers of actual goods and services around the world don’t trust money issued by government authorities, private money forms are increasingly attractive. If Foroohar doubts this, she might try an experiment whereby she brings bolivars to Venezuela, rials to Iran, and won to North Korea with an eye on exchanging them for actual market goods. She’ll have little to show for her offering of the local currency in the country which issues each. That she won’t speak to the why behind the Libra. It gives those who’ve had the fruits of their labor routinely taken from them by devaluation and other monetary mischief a chance to exchange equal value for equal value.

A stable Libra represents opportunity for billions of workers around the world who’ve suffered the capricious ways of monetary authorities.That the people who make up any economy don’t trust government money is hardly a new, libertarian-ish thing. Going back many, many centuries to China’s Song dynasty, the Confucians at the time supported private money over what government would issue because “the market would compel private issuers of money to maintain its value.” Remember, no one ever trades money. Though “money” is exchanged with blinding regularity, the latter is an expression of a desire to move actual goods and services. The problem has long been that floating, unstable money forms issued by governments have corrupted what is always and everywhere about products for products. It’s created winners and losers despite trade logically being about each side of a transaction having been improved after the fact.

Floating money values have been the cause of trade not enhancing one or both parties, and the reason is basic: so long as money fluctuates in terms of value, those who take money in return for tangible goods and services will sometimes get less than they brought to market in return. Libra is a market response to money that no longer lives up to its singular purpose as a measure that facilitates the exchange of products for other products of roughly equal value.

The good news is that in her response to what will improve the trade that is the basis of all economic activity, Foroohar didn’t lay a glove on Facebook. If we ignore her embarrassing dismissal of “cross-border financial flows,” Foroohar was reduced to worrying that crime would increase if governments were replaced by private issuers of money. Please. Let’s try to be serious. Those in the large—and growing—gambling and drug spaces could and would easily dismiss what some PR person relayed to Foroohar.

Back to reality, a stable Libra represents opportunity for billions of workers around the world who’ve periodically suffered the capricious ways of monetary authorities on the way to the evisceration of their work. Basically, Facebook can’t err in the way that governments have and still remain in business. Thank goodness for the Libra. Foroohar might agree had she not grown up in the U.S. and as such, had she not always been able to earn dollars that, despite their own periodic instability, have always been exchangeable for goods and services around the world.

This article is republished with permission from Forbes. 

  • John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.