Over the last several weeks global financial markets have experienced what amounts to some really stomach churning volatility and though this seems to have stabilized or even reversed for the moment as players deem assets oversold, the turmoil has revealed in much clearer way what many have suspected all along; namely, that the idea that the Federal Reserve and other central banks, by forcing banks to lend money could heal the wounds caused by the 2008 financial crisis was badly mistaken.
Central banks were perhaps always the wrong knights in shining armor to pin our hopes on, for at precisely the moment they were called upon to fill a vacuum left by a failed and impotent political system, the very instrument under their control, that is money, was changing beyond all recognition, and had been absorbed into the revolutions (ongoing if soon to slow) in communications and artificial intelligence.
The money of the near future will likely be very different than anything at any time in all of human history. Already we are witnessing wealth that has become as formless as electrons and the currencies of sovereign states less important to an individual’s fortune as the access to and valuation of artificial intelligence able to surf the liquidity of data and its chaotic churn.
As a reminder, authorities at the onset of the 2008 crisis were facing a Great Depression level collapse in the demand for goods and services brought about the bursting of the credit bubble. To stem the crisis authorities largely surrendered to the demands for bailouts by the “masters of the universe” who had become their most powerful base of support. Yet for political and ideological reasons politicians found themselves unwilling or unable to provide similar levels of support for lost spending power of average consumers or to address the crisis of unemployment fiscally- that is, politicians refused to embark on deliberate, sufficient government spending on infrastructure and the like to fill the role of the vacated private sector.
The response authorities hit upon instead and that would spread from the United States to all of the world’s major economies would be to suppress interest rates in order to encourage lending. Part of this was in a deliberate effort to re-inflate asset prices that had collapsed during the crisis. It was hoped that with stock markets restored to their highs the so-called wealth effect would encourage consumers to return to emptying their pocket books and restoring the economy to normal.
It’s going on eight years since the onset of the financial crisis, and though the US economy in terms of the unemployment rate and GDP has recovered somewhat from its lows the recovery has been slow and achieved only in light of the most unusual of financial conditions- money lent out with an interest rate near zero. Even the small recent move by the Federal Reserve away from zero has been enough to throw the rest of the world’s financial markets into a tail spin.
While the US has taken a small step away from zero interest rates a country like Japan has done the opposite and the unprecedented. It has set rates below zero. To understand how bizarre this is banks in Japan now charges savers to hold their money. Prominent economists have argued that the US would benefit from negative rates as well and the Fed has not denied such a possibility should the fragile American Recovery stall.
There are plenty of reasons why the kinds of growth that might have been expected from lending money out for free has failed to materialize. One reason I haven’t heard much discussed is that the world’s central banks are acting under a set of assumptions about what money is that no longer holds- that over the last few decades the very nature of money has fundamentally changed in ways that make zero or lower interest rates set by the central banks of decreasing relevance.
That change started quite some time ago with the move away from money backed up with gold to fiat currencies. Those gold bugs who long to return to the era of Bretton Woods understand the current crisis mostly in terms of the distortions caused by countries have abandoned the link between money and anything “real” that is precious metals and especially gold way back in the 1970’s. Indeed it was at this time that money started its transition from a means of exchange to a form of pure information.
That information is a form of bet. The value of the dollars, euros, yen or yuan in your pocket is a wager by those who trade in such things on the future economic prospects and fiscal responsibility of the power that issued the currency. That is, nation-states no longer really control the value of their currency, the money traders who operate the largest market on the planet, which in reality is nothing but bits representing the world’s currencies are the ones truly running the show.
We had to wait for a more recent period for this move to money in the form of bits to change the existential character of money itself. Both the greatest virtue of money in the form of coins or cash and it’s greatest danger is its lack of memory. It is a virtue in the sense that money is blind to tribal ties and thus allows individuals to free themselves from dependence upon the narrow circle of those whom they personally know. It is a danger as a consequence of this same amnesia for a dollar doesn’t care how it was made, and human beings being the types of creatures that they are will purchase all sorts of horrific things.
At first blush it would seem that libertarian anarchism behind a digital currency like Bitcoin promises to deepen this ability of money to forget. However, governments along with major financial institutions are interested in bitcoin like currencies because they promise to rob cash of this very natural amnesia and serve as the ultimate weapon against the economic underworld.
Though some economists fear that the current regime of loose money and the financial repression of savers is driving people away from traditional forms of money to digital alternatives others see digital currency as the ultimate tool. Something that would also allow central banks to more easily do what they have so far proven spectacularly incapable of doing- namely spending rather than hoarding cash.
Even with interest rates set to zero or even below a person can at least not lose their money by putting it in a safe. Digital currency however could be made to disappear if at a certain date it wasn’t invested. Talk about power- which is why digital currency will not long remain in the hands of libertarians and anarchists.
The lose of the egalitarian characteristics of cash will likely further in trench already soaring inequality. The wealth of many of us is already leveraged by credit ratings, preferred customer privileges and the like, whereas others among us are charged a premium for our consumption in the form of higher interest rates, rent instead of ownership and the need to leverage income through government assistance and coupons. In the future all these features are likely to be woven into our digital currency itself. A dollar in my pocket will mean a very different thing from a dollar in yours or anyone else’s.
With the increased use of biometric technologies money itself might disappear into the person and may become as David Birch has suggested synonymous with identity itself.The value of such personalized forms of currency- which is really just a measure of individual power- will be in a state of constant flux. With everyone liked to some form of artificial intelligence prices will be in a constant state of permanent and rarely seen negotiation between bots.
There will be a huge inequality in the quality and capability of these bots, and while those of the wealthy or used by institutions will roam the world for short lived investments and unleash universal volatility those of the poor will shop for the best deals at box stores and vainly defend their owners against the manipulation of ad bots who prod them into self-destructive consumption.
Depending on how well the bots we use for ourselves do against the bots used to cajole us into spending- the age of currency as liquid robot money could be extremely deflationary, but would at the same time be more efficient and thus better for the planet.
One could imagine much different us for artificial intelligence, something like the AI used to run economies found in the Iain Banks’ novels. It doesn’t look likely. Rather, to quote Jack Weatherford from his excellent History of Money that still holds up nearly two decades after it was written:
In the global economy that is still emerging, the power of money and the institutions built on it will supersede that of any nation, combination of nations, or international organization now in existence. Propelled and protected by the power of electronic technology, a new global elite is emerging- an elite without loyalty to any particular country. But history has already shown that the people who make monetary revolutions are not always the ones who benefit from them in the end. The current electronic revolution in money promises to increase even more the role of money in our public and private lives, surpassing kinship, religion, occupation and citizenship as the defining element of social life. We stand now at the dawn of the Age of Money. (268)