You are certainly correct about the implicit need for trust in a currency.
As we move more and more toward an intangible, virtual world we can expect many shallow, unstable, and premature conclusions within the population. We tend to lose respect for the fundamentals when technological advancements bring previously unthinkable opportunities to our doorstep.
Technology can make the average person think they are wise experts because their capacity has moved much closer to that of a highly skilled professional due to the new technology in their hands. Take photography for example. The machines compensate for so many variables that it has made it possible for average people to take great pictures. But does that mean they are experts or just highly dependent upon the assumptions that the technology in their hands currently is stable?
Think about what credit professionals do. We assess each credit request with regards to purpose, repayment capacity, global cash flow, collateral, overall financial capacity of the obligor(s), term and conditions, and pricing before we grant access to funds. When it comes to municipalities, we look at the debt service capacity of the municipality on a global basis and against the aggregate asset base because we know that to meet its obligations the owners of property in that municipality must and likely can generate cash flow from their asset base to cover its obligations.
When the Covid pandemic began I expected that news organizations would professionally explore the medical and actuarial data to help us all objectively and rationally understand the situation. How many actuaries have you heard on news channels explaining what the pandemic has done to mortality rates? Instead, we seem to constantly be presented with mostly superficial assessments that can be shaped to the narrative the broadcaster would like to convey.
The land where I live in the U.S. was once owned by France. The Louisiana purchase occurred so that France could paydown its national debt. A real asset transfer occurred in order to maintain the value of France's currency. No such equivalency exists for the holder of cryptocurrencies.
So, with cryptocurrency we have a highly complicated technology that displays a compelling historical record of compensating the speculator. Where do you turn if something doesn't work as planned? What are the risk mitigants? Where are the secondary and tertiary payment sources? It is worth what a population expects it to be worth and nothing more. Cryptocurrency is not currency. It is stored value that is only valuable because the next person wants it. What does it produce? What is its liquidation value as you look at the sum value of its components? In the virtual world there is no intrinsic value or economic "utility".
To be clear, I am not making a prediction here that the cryptocurrency market is going to become a disaster within days or weeks. Instead, I am questioning how we should assess the dynamics of this marketplace over time.
In the Great Recession when overheated speculative borrowing and investing created a massive value disruption, we knew that real estate was still a tangible asset that would have value/utility regardless of what dollar value was associated. No such equivalent is associated with cryptocurrency. Bankers should not dismiss their professional underwriting skills. They have proven highly valuable through all the economic cycles of history. They are just as applicable in the intangible world. Maybe more so because of the margin for error in the intangible world!
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Neil Stanley
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Original Message:
Sent: 12-13-2021 11:04
From: Barb Rehm
Subject: Tuesday Topic: Can We Trust What's Happening to Money?
The New York Times devoted the entire front page of its "Sunday Review" section to the demise of cash, the rise of cryptocurrencies, and what it all means. I tend to skip a lot of stories about "The Future" because they are often crammed with useless speculation. But not this one. People all over the world, "are abandoning old forms of money and adopting new ones…faster than our brains and customs can process." Cash "is becoming technologically obsolete before replacements have gained the trust of the public and the backing…of governments."
I love cash and credit cards and have no interest in stablecoins or a central bank digital currency. But when I finished reading this story, it made me wonder if I'm vastly underestimating the disruption that's coming to what I consider "money" and what that could mean for our economy. If you finish The New York Times piece and want more, check out "The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance," a recent book by Cornell economics professor Eswar S. Prasad.
Money works because people believe it has value, that it will be accepted by others when you want to buy something. But what if a lot of people decide to put their trust in cryptocurrencies?
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Barb Rehm
Senior Managing Director
IntraFi Network
Arlington VA
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