Shao Yu
Privately issued digital currencies represented by Libra are non-commodities and non-sovereign super currencies. If data is the greatest asset in the future, then digital currency must be the ultimate form of currency in the future. Digital currency will eventually become the value measure, payment method, wealth reserve and world currency of the new economy and new (data) assets generated by the new round of technological revolution.
If it develops arbitrarily, its development trend may be to first kill the currencies of small countries, then kill small digital currencies, then kill the (cross-border bank side) payment system, and then kill the hegemonic currency, and the dragon slaying The warrior may become the ultimate dragon.
What is the theoretical basis of digital currency?
We are familiar with various forms of currency before the birth of digital currency, either commodity currency, such as gold and silver, or credit currency , such as legal tender (paper money). If the new digital currency is just Bitcoin, its total amount is limited and its impact is controllable. But if Libra or central bank sovereign currencies are issued on a large scale, the story will be very different.
Are these digital currencies truly new products of trust and knowledge based on algorithms, or are they based on the accumulation of tangible traditions? They are just a digital upgrade. This is a completely different path. . The mainstream currency in the future must be digital currency, but it is not sure whether it is an extension of the central bank's sovereignty, or a commercial one like Libra, or it is all open source or all decentralized, more like the original private currency.
Blockchain only has a history of ten years, and virtual currencies represented by Bitcoin have many problems. Its limitations are similar to those of gold and silver, which are also non-sovereign, in fact. Libra is similar to it, but their derivation systems are different. Libra is a compromise. It must obtain the consent of existing stakeholders before it can develop to a higher level, but one day it will break away from its parent body. Digital currency is likely to be such a development trend.
Every currency must have a theoretical foundation to support the evolution of the entire financial logic. For example, in the Golden and Silver Age, the logic was very simple. With a simple quantity theory of money, coupled with the so-called gold transportation point, we could determine both the exchange rate and the interest rate. But the problem is that starting from credit currency or sovereign currency, the world is completely different. The impact of this mutation is so great that humans have no way to control it now, or they have completely lost control (how the corresponding micro-pricing theory should evolve is also a huge challenge).
Credit money is a dual structure. In theory, high-energy money is controlled by the central bank, but broad money is based on animal spirits. How to create it? M2 is actually endogenous. Once a crisis occurs, the central bank will definitely step forward, because at that time all the animal spirits in the market will be scared away, and you can only follow the Keynesian path. In fact, this is still the case now. Most monetary policies control the total amount of credit (leverage).
Under modern monetary theory, debt and currency have the same origin. Going down, in the case of sovereign credit currencies around the world, what do we see more of? It is a monetary illusion, an asset bubble, and eventually a Ponzi scheme, either inflation (lack of production capacity), bubble bursting (reoccurring again and again), or even national bankruptcy (unless it is too big to fail). It’s just that this Ponzi may be dominated by sovereign economies.
The current state of debt accumulation, and the way to save the crisis in the past decade, is ridiculous. The past crisis was because too much money was released before 2008, and the way to save the crisis was to release More currencies. We all know that now the entire economy is going to enter a new round of recession. What is the only action we have taken? Just keep releasing water. What is madness? It means you keep doing one thing over and over again but expecting different results. The world is continuing to work in this direction.
Theory has also made new panderings, becoming a slave of power and inventing the so-called Modern Monetary Theory (MMT). With MMT, the final bottom line is gone. As long as there is no inflation, there is no need to print money. Extreme. It is because the basis of our current credit theory is that debt and currency have the same origin. Credit creates debt, so the result is either inflation. This is what Germany encountered in 1923 due to insufficient production capacity.
The second is the bursting of bubbles or the bankruptcy of countries. Of course, this is happening constantly, unless you are a global currency, that is, a global reserve sovereign currency like the US dollar. Everyone knows that the current debt of the United States is huge. Why is it okay? Because there is no choice, you can't choose Cosmic Coin. The United States is the largest and last global "lender".
Classic fallacy
Our current problem, frankly speaking, is based on a very wrong famous identity. In a credit economy, broad money M2 = GDP CPI asset CPI, This is a classic fallacy.
For a very simple reason, we feel that most of M2 should be absorbed by our GDP CPI, which is nominal output, and the remaining part will enter the asset bubble field. Look at the samples of the past 30 years. , the blue line represents the ability to create wealth (nominal GDP), and the red line represents M2, which is the ability to create money.
Given the difference between M2 and nominal GDP growth, people generally think that it may enter the bubble realm, but it is not. Because look at it this way, only an additional 5% of the money supply will enter bubble territory every year. There is evidence that 10% of M2 goes into the creation of GDP, 10% goes into CPI, and 80% goes into asset prices. The general understanding is actually a major fallacy.
It is conceivable that when the nominal GDP growth last quarter was 8.5 and M2 became 8, various financial chaos would occur, including defaults and asset price shrinkage. The reason for running away is not because the central bank has issued a digital currency, but because of the rapid tightening of liquidity. The first reaction you see is the reaction of the financial market and the elimination of bubbles. Of course, the real economy is also collateral damage.
So we are trapped in such a wrong credit economic model or formula, and more importantly, we may be living in a huge monetary illusion, and these monetary illusions come from the credit system or its own inflation. At a rapid rate, in the past 40 years, the economy has expanded 240 times, which is an amazing miracle. For everyone to wear and use, we have created these material wealth more than 200 times, and at the same time, the currency we have invested is as high as 1,000 times. This is the dilemma caused by the classic credit currency. The same is true for advanced economies.
Why is the so-called currency neutrality theory wrong from the beginning? It absolutely cannot be neutral. It is not neutral in the short term or in the long term. If currency is really just a transaction As a medium, it was appropriate to talk about currency neutrality at that time, but how could currency be just a medium of transaction? If money is not neutral, what is the basis of macroeconomics? There is no more, and there is no fair rule to judge who can get the most wealth. It will definitely cause differentiation, but will the technical elite or new technology bring a better world? Be especially careful when answering this. If the monetary authorities of various countries are not reliable, then will Internet giants like Facebook be more reliable?
Will Libra be more reliable?
Will Libra pretend to be more reliable? What is the theory based on it? It is based on SDR, which is the so-called ESDR. Does it use distributed technology? It will be used, and it emphasizes that it will be handed over for use in five years. Now it is actually based on its own network, its own users, plus 100 big players (now 24), forming an alliance chain. But its compromise with reality is that it uses real assets as collateral for issuance at a ratio of 1:1.
My personal understanding is that it defines the language of Move, which continuously moves some asset packages, but this movement may bring advantages to the algorithm, that is, it is difficult to have many loopholes. For example, it disappears out of thin air or is attacked. Of course, this depends on how wonderful the computer language written by the 26-year-old programmer is. Now it seems that it may not necessarily be better than the existing blockchain technology.
But is the ESDR based on multiple currencies issued by 100 companies more reliable than the SDR issued by several major countries? Everyone knows that SDR is basically finished. Apart from being used for a small amount of liquidation between the top countries, it was later found that it was of little use. Because when the crisis comes, everyone will simply abandon the SDR and directly engage in swaps with powerful currencies. The US dollar has done swaps, and the RMB has also done the same.
If Libra succeeds, this will be a watershed. It will create the ultimate corporate empire. What it will do is remove the political centralization of sovereignty, but strengthen the commercial center, and it will become the optimal currency for Libra. area (similar to the euro). We believe that it must carefully obey regulatory arrangements at the beginning, but 1:1 replication is only the beginning. Money creation will come sooner or later, and private central banks with good character will also try to obtain seigniorage.
Idealism gives way to practical interests. If it develops arbitrarily, its future trend will be to first kill the currencies of small countries, then kill small digital currencies, then kill the (cross-border bank) payment system, and finally kill the hegemonic currency and become the world's private central bank.
But it is unstable. The instability comes not only from the instability of its architecture, that is, which types it uses to form the SDR basket. More importantly, if Facebook releases it, Google will probably also If you can send it, Tencent and Alibaba will also send it. And it is estimated that the authorities will support their development. This will turn into multiple currency areas constantly competing in cyberspace, just like thousands of blockchain currencies have been seen competing continuously. Ultimately, it depends on the effectiveness of the alliance chain. How big is it, how extensive are the underlying application scenarios, and who is the lender of last resort.
Just like the exchange rate fluctuations caused by changes in the strength of different economies, even the same basic digital currency technology is commonly used. This scene seems somewhat similar to the situation described by Hayek in "The Denationalization of Currency".
Now it seems that Facebook has a market capitalization of US$500 billion and is too big to fail. However, we have also seen companies with a large market capitalization disappear and become zero. Who can we find to cash in at that time? If digital currency will eventually replace physical currencies, gold and silver, and also replace sovereign currencies, in short, it will challenge the existing monetary authorities and the significant distribution of interests behind them.
Of course, we think that maybe algorithm (mathematics) represents a higher-level language that everyone can use. The same is true for the Internet. It is more of a trust mechanism. The trust mechanism is probably It is also an algorithm and a narrative that condenses knowledge.
It turned out that our trust based on the original state of real money and later based on the issuance of sovereign Levitan has obviously failed us. Can digital currency fail us? In fact, all technical elites have their own calculations, no matter how universal or humanistic they pretend to be.
Libra may also succumb to the demands of capital and the dark inner parts of the elite. This requires vigilance.
Where will the key changes occur? Assuming that Libra can pass various regulations in the future and start to slowly operate and start converting users, we feel that the fifth year is the real key, because it promises to abandon centralization in the fifth year and become The non-permissioned chain has handed over control rights and turned into a real Bitcoin or algorithmic currency. This may be the beginning of a huge watershed.
If it really hands over control, its power is not enough to worry everyone, because it has already been made public, and it has no selfish interests anyway. But what kind of problems will arise at such a juncture of transition? We need to carefully observe what major changes will be triggered by the central bank's launch of digital currency.
Our response
How should we respond? First of all, just like SDR, China can ask for more shares because there are 100 nodes, so are you willing to put China's important nodes here. Because it’s 10 million each, you can enter and occupy a pit first. It’s not about universality, openness, and finally moving towards a distributed network. Can it be opened to the Chinese? This makes it a very good litmus test for ideal purity.
Second, of course BATJ can create its own Libra. Why did it cause a fierce reaction from global central banks this time? Including that China has become very open now. In fact, China will definitely add Chinese Internet giants and the central bank to issue a digital currency for China's full social network and all application scenarios. The 24 node companies Libra is looking for are basically non-traditional financial giants in key areas, such as taxi-hailing scenarios, credit card scenarios, and remittance scenarios. Of course, we also have strong e-commerce scenarios, social scenarios, and exchange scenarios. These form a good ecological structure for more applications required by digital currency.
On the other hand, I am in Shanghai and in the Yangtze River Delta. Because this area has relatively sufficient financial infrastructure and real industries, there are many application scenarios where I can learn to create Libra. Choose non-Internet giants, digital currency alliances initiated by companies from the industrial industry, or blockchain alliances between industry and finance. Because it has more practical application scenarios, such as in the supply chain, in bills, in credit reporting, in securitization, in land rights confirmation, etc., it provides sufficient application scenarios so that such a digital currency can be operated. First operate according to the alliance chain 2B method. Suppose that ten years later it is opened to other key players or becomes a completely decentralized digital currency system.
Finally, there is the central bank’s digital currency. In fact, it is the sovereign Libra. It should actually be mainly M0. Why is it mainly controlled by M0 to replace cash? It's very simple. M2 still lets the market decide, leave it to the animal spirits inherent in the economy, and leave it to commercial banks to manage themselves.
M0 already has a lot that can be done, such as peer-to-peer transactions, compliance issues, anti-money laundering issues, and even negative interest rates, which can be solved experimentally. Immediately intervening at a higher level of currency derivation may trigger the central bank to carry out planned economy-style comprehensive point-to-point control over all economies. This is unimaginable and unnecessary, and in fact it does not have the ability to do this.
Therefore, we must look at the issue of digital currency with a more open eye. China often cannot compete with others technologically. In the past, it may have been a strong ship and a powerful gun, but now it is digital currency. Its essence is all about the competition between technology and the power of industrial revolution, so it must make more investment and innovation in technology. Even in terms of global currency competition, for example, the internationalization of the RMB requires not only the overseas application of the RMB, but also its digital application.
You can also consider SDR or ESDR solutions, not just the RMB, but the acceptance of multiple reserve currencies may be higher. Only in this way can the RMB be both internationalized and digitalized, technologically advanced, and networked. Judging from the latest news, the five currencies in the Libra basket, including the US dollar (50), the euro (18), the Japanese yen (14), the British pound (11) and the Singapore dollar (7), do not have the RMB, which is said to be considered When it comes to Sino-US relations, this makes it easier to obtain a "pass" from the US authorities.
Obviously, the issuance of Libra transcends sovereignty. This stable currency complements the existing monetary system. If it supports the US dollar or uses the US dollar as the main pegged currency, it will strengthen the existing currency market structure, that is, It is said that the United States is using the power of technology to strengthen its sovereign currency capabilities, because Libra's implicit lender of last resort is still the Federal Reserve, and currency is naturally a symbol of power.
If you just talk about digital currency, it will not create more value. Finance must be returned to real entities, especially to support the industry. In China's past 70 years of experience, the greatest success should be said to be the completion of the first and second industrial revolutions. So whether China can continue to succeed depends on how to trigger a new round of technological and industrial revolutions and complete the process in the process. In the transformation and upgrading of China's economy, who will become its necessary financial infrastructure in the new round of industrial revolution?
I believe that algorithms, storage, computing power, and bandwidth can all be solved with technological advancements such as 5G and quantum computing. Digital currency will eventually become a new round of technological revolution. The resulting new economy and new (data) asset value measures, payment methods, wealth reserves and world currencies must belong to the new world of digital currency in the future.
(The author Shao Yu is the chief economist of Orient Securities)
Editor of this issue Zhou Yuhua