The quest for a global e-currency

Everyone has been talking about money and e cash for years, it's finally all coming true, but did anyone ever stop and think about the consequences?

First of all the basics, what is money? It may seem like a daft question, but the answer surprises most people. Money is an idea. It does not actually exist except in the minds of the beholders.

It is the BELIEF in money that allows us to use it. In one sense money is like God. Without getting into an argument about whether or not he exists, we can agree that the fact that many people BELIEVE he exists has had a profound influence on their behaviour. Indeed if you know that a person believes in God you can predict their reaction to certain circumstances, whether or not you believe yourself.

So it is with money. Belief in money, when widespread , allows great benefits to accrue to most of the population, and so the belief is sustained until most people are not even aware that it is all a mutual self deception.

But, I hear you cry, what about gold and diamonds etc.? What about cash and credit cards? Symbols, purely symbols. A convenient way to express and use the underlying belief.

If in doubt imagine that I give you a pound coin. A lump of common metal, but also a symbol that is useful to you because you are believe that if you give it to someone else later on they will also accept its symbolic importance.

Am I just playing with words? Examine what happens when that belief is shaken or weak. If you think that passing the coin on tomorrow is fine, but are not so sure how things will be in a years time you might ask for more, just to be safe. That's inflation. As confidence falls you get hyperinflation. Eventually you simply fail to give the coinage any symbolic value at all. (Why can't I buy goods with Weimarks and Confederate Dollars? Because no one believes in them any more).

You can't spend roubles in the UK because we don't believe in them.

In another example a population that loses belief in its own local currency may decide to use someone else's. Any number of developing countries governments have been hit by local use of the dollar, even when illegal. Such use of a "hard" currency is simply a matter of belief in the hard being stronger than that in the local. In extreme cases a currency may be ditched completely and a new one created, (Brazil and Argentina have done this recently).

Speaking of new currencies we can also discuss Acorns and other local systems of exchange. These are simply very local forms of money used by those who agree to believe in them. They show that money does not have to be issued by a government or nation.

So if money is simply a matter of belief and currencies do not need to be linked to nations, what are the implications of Ecash?

First of all Ecash is with us already. (How else would you describe a credit card and cash machine?, and when did you last hold your wealth as a wad). Also free use of currency is with us. The international capital markets already impose rules on governments, (at least those that borrow), but even an individual can run his life in any currency he likes. (Set up a Euro account and run your cheques, DDMs and plastic against it, and you are free of Sterling, except for timing the conversion of your paycheque).

However looking to the future we can see anon Ecash that could easily break free of localised currencies and become a global currency INDEPENDENT OF GOVERNMENT.

Now for some crystal ball gazing. Why will it happen, and what does it imply?

It will happen because if any single country allows the use of anon Ecash then the banking world is blown open. In the short term you have a money launderers haven. (This will probably lead to "can't beat em join em " legalisation of most drugs, just as prohibition failed in the US).

Then those countries with weak currencies due to fiscal mismanagement will find their citizens using Ecash rather than the local. They will then have no choice but to behave prudently.

As people start to use it it will become possible for financial transactions to be hard to follow and tax will become hard to collect. Taxation will shift to sales taxes.

Taxes will also be driven into global equilibrium as spending takes place in low tax areas. While buying material items will always be taxable the situation for services could be very different. E.g. a tour operator could invoice all clients out of a tax haven.

It is very unlikely that the legal framework will evolve fast enough to cope with this as only internationally enforced rules will be enforceable. Bearing in mind that this means EVERYWHERE the chances are that very little in the way of legislation will ever have real teeth, and citizens will only ever pay what they as individuals consider fair and reasonable.

Governments will therefore face a fiscal crisis from two sources, first of all their room for action will be constrained by international markets that will increasingly comprise individuals using their favourite currency, or Ecash, and secondly from taxes becoming almost voluntary on anything that is not material. High spending governments will not be able to sustain their position.

If taxing to spend is not an option then the government will have no choice but to get out of vast areas of life. But before you jump for libertarian joy realise that this will affect you. IMO wise governments will abandon the welfare state , health and pensioners and concentrate on education. The reason is that an independent global currency will make the world a much more equal place, and as we have benefited from past inequality, there will be some levelling down for us.

Bleak? If you are an Asian Tiger you are going for the brain work and have little social security etc. You have invested in education and your people are hard working, (partly because of the lack of the security net). You are chasing a developed country that pays its dole people more than some of your workers earn, and also relies on brains work. The result is that the going rate for most jobs will hit a global level with much less local variation. Those currently getting more than that rate will have to accept less. I.e. the West will continue to become relatively poorer, (though hopefully this will not involve any absolute reduction in living standards), and eventually labour will become pretty well international. If the emerging economies decide to avoid build welfare states there is no way that the West can retain theirs.

My advice? Whack money into savings for the future, avoid big mortgages, get private health cover and sickness insurance.

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