Forex Crisis, QE, Bitcoin and a single global currency...... A history of money

I came across an interesting infographic recently that I wanted to share here. Starting with a history of currency crises over the last two decades and ending with an analysis of a global currency future....

Here's the link to the infographic if you are not able to view the image http://dzdl6pubce12w.cloudfront.net/global-currenc...

The Future of Money: A Global Currency

Comments (10)

Jul 13, 2013

What is to prevent some hackers from creating a ton of bitcoin (is that the proper way to phrase this?). I mean if these stuxnet guys can shut down nuclear reactors in hostile countries remotely, then I am sure someone of equal or even much lesser skill can create virtual money without raising any red flags.

I have read similar concerns on media before, but there were never any explanations. Anyone have any ideas how the Winklevi are planning to avoid this problem?

Jul 13, 2013
trailmix8:

What is to prevent some hackers from creating a ton of bitcoin (is that the proper way to phrase this?). I mean if these stuxnet guys can shut down nuclear reactors in hostile countries remotely, then I am sure someone of equal or even much lesser skill can create virtual money without raising any red flags.

I have read similar concerns on media before, but there were never any explanations. Anyone have any ideas how the Winklevi are planning to avoid this problem?

I don't think there's much difference between this risk and the risk of someone hacking into a traditional bank and stealing money that way. While bitcoin security systems may not be as sophisticated (I really have no idea), I'm sure that if/when digital currency is commonplace, security systems will be upgraded accordingly. I'm sure the system can be set up so that every transaction over a certain amount is flagged and possibly reviewed (as is already the case for traditional banks).

One of my friends used to work for Facebook as a digital currency fraud examiner. While the systems might be different, the techniques both for crime and prevention will likely follow familiar paths.

Also, great post OP.

Jul 13, 2013

That graphic is interesting but makes me think of Lyndon LaRouche for some reason (before your time, kids). I have no opinion one way or the other, though curious to hear what other monkeys think of the thesis that speculators are causing currency crises.

Jul 13, 2013
trailmix8:

What is to prevent some hackers from creating a ton of bitcoin (is that the proper way to phrase this?). I mean if these stuxnet guys can shut down nuclear reactors in hostile countries remotely, then I am sure someone of equal or even much lesser skill can create virtual money without raising any red flags.

I have read similar concerns on media before, but there were never any explanations. Anyone have any ideas how the Winklevi are planning to avoid this problem?

Bitcoin can't be duplicated by hackers, because it is based on a virtually unbreakable crypto algo ( SHA-256).
Even detractors of the currency agree on this. I can give a technical explanation, but it would be pretty dense.

Rather, man-in-the-middle attacks could be more likely, for example attacking exchanges (such as Mt. Gox).
The point is: while Bitcoin might have other problems (such as adoption, people hoarding it instead of spending, etc) security isn't one of them.

If someone finds a way to break Bitcoin's security mechanism, basically every other secured content in the world would be broken too (like nuclear plants, confidential state information of all kind, etc)

TL;DR: Bitcoin is secure.

Source: I study cryptography.

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Jul 13, 2013

Interesting post OP. I remember reading some article a while back that mentioned how the average life expectancy of a fiat currency is 27 years. I guess when viewed in that light, the USD had a pretty decent run. As far as a global currency, doesn't the recent Euro issues show that it isn't the best idea? A "TBTF currency" type of problem.

Jul 13, 2013

If anyone is interested in understanding more how Bitcoin works, this is probably the best non-technical primer out there:

http://alvarofeito.com/articles/the-big-book-of-bi...

Jul 14, 2013

zimbabwe's hyperinflation was caused by currency speculators. tmyk

Jul 14, 2013

Switching to a global currency would be absolutely retarded, to use a technical term.

I mean... there's enough negatives to fill a textbook, but just to discuss the biggest problems:

1. Monetary policy matters, a lot, and different economies have different needs. The US rust belt woul be best served by a very different monetary regime than Vietnam's "rice bowl" or Saudi Arabia's oil fields. The more precisely You can target monetary policy, the better. look at the Eurozone right now - the PIGS are grtting absolutely smoked right now, theres what, like 20% unemployment in Spain? They should obviously have an aggressive expansionary policy. but the Northern European natioms like Germany and the Nordics don't require the same monetary expansion. So you've got a problem - if they all had their own currencies, thy could individually pursue whatever policy makes the most sense. They don't though, so it's a big fucking mess. And this is just a part of Europe we're talking about here! They're all basically within a couple hundred miles of each other, and it's a disaster. Germany and Italy are so close that zthey share a border, yet they should have very different monetary policy. Under a global currency it would be even worse. If Germany and Italy sharing a currency is a mess, what is it going to look like if say, the US and Sierra Leone share a currency? It would be a straight up bloodbath. Like... It would be absolutely fucking biblical.

2. The type of crisis mentioned in the info graphic would become a hell of a lot MORE common under a global currency, not less common. "Currency crises" aren't really a thing - currency value is a dependent variable, so it can't in and of itself cause a crisis. They are really debt crises. Specifically the crises mentioned in the info graphic were caused by having large amounts of government debt denominated in a foreign currency. The tequila crisis was the result of the Mexican government borrowing shit tons of money that they had to pay back in USD. Turned out their eyes were bigger than their wallets, and when dollar inflows got dinged they couldnt obtain enough USD to pay their debt. If they had borrowed in pesos, they would have done the sensible thing and just printed more when they needed them. The crisis never would have happened if their debt were denominated in their local currency. Guess who would be borrowing in "foreign" currencies that they don't control under a global currency regime? Fucking everybody. There would be a massive uptick in sovereign defaults, since countrys can no longer print currency to pay debt. So you'd have a fucking disaster. Multiple disasters. On top of that, sovereign debt would become more of a credit product, making it more expensive for sovereigns to borrow... the implications are enormous. Across the board sovereign downgrades, less investment in infrastructure, pension funds shrink, i could go on forever. And then all those things have second order effects - for example sovereign downgrades means there is a lot less AAA paper in the world so guys that have to invest in AAA securities will have to move to ABS/MBS so senior ABS/MBS tranches would price tighter, which in turn would make things like residential mortgages cheaper because the cost of funding them has gone down, so more people buy houses, construction picks up, making oil more expensive, and some airline that didn't hedge gets pushed into bankruptcy. And that's just following one train of thought - there are thousands of these. A paradigm shift in sovereign debt markets would have massive, unpredictable, and completely unintended consequences in every corner of the financial markets.

3. What's the benefit? The downside is enormous, so what's the upside? The benefits they list are stupid as fuck. Let me discuss them one at a time.

- "developed nations due to no currency risk in international trade." Pull a 10-k for a major international corporate that gets paid in several different currencies, and what will you find? Massive fucking currency derivative positions. Currency risk is a joke - we as a society have figured out how to manage it. We've solved that problem. Sure, you have to pay a broker/dealer or whatever to be your counterparty, so there's some transaction cost, but come on - currency risk isn't exactly a major structural issue that demands a complete restructuring of the global financial system.

- "even playing field" are you fucking joking? Moving to a global currency doesn't change anything in terms of the "real economy." People in Norway will still be rich a fuck and people in China will still be desperate. You can still produce a lot more cheaply in some shithole country where people are willing to work for a fraction of first world labor costs. Measuring their income in this global currency instead of yuan or rupees or whatever doesn't change that. Plus there's the whole corporate rates issue - companies in more stable economies have a significant advantage over companies in less stable economies because they can borrow a lot more cheaply just because they're in a more stable country. just look at the euro zone - why can Volkswagen beat fiat on price in Italy? Because money costs Volkswagen a couple hundred basis points less than fiat across the curve. That doesn't change just because there is a global currency. In fact it makes it a lot worse because currency values can't readjust to equalize the rate mismatch. This is Econ 101 shit.

- "developing countries might benefit" yeah that's stupid as shit. As I mentioned above, there is the rates/cost of funds issue which is the elephant in the room. And then you're eliminating the major advantage of developing nations - the ability I produce cheaply. It's been several years now since I've been in an Econ class (I'm getting old...) but I think that this is David Ricardo's theory of comparative advantage. Developing economies have a comparative advantage in terms of producing low margin goods with high labor inputs. Why does India have a massive textile industry? Because weaving is a time consuming task that requires significant human labor inputs, and Indian labor is a hell of a lot cheaper than say, British labor in Manchester where that industry use to be. Part of the reason that they're so cheap is currency driven - cheap currency means cheap exports. If you take the ability to make your currency relatively cheap away from then, you completely smash the export-driven developing economies. Plus they're poor, which means they don't have money to buy a bunch of shit, so their domestic markets can't support them and they rely on foreign markets to drive demand. Also lets go ahead an call a spade a spade - if monetary policy were dictated by some supranational buearacracy, who do you think would control that buearacracy? Developing nations? Yeah. Fucking. Right. Look at the IMF and World Bank - any institution of this type is going to be dominated by US an Western European citizens, and therefore follow a monetary policy beneficial to developed nations.

So yeah. I don't see any benefits and I see catastrophic downsides. In pretty sure this idea can be classified as "fucking retarded."

Jul 14, 2013

Agree with pretty much everything you said except that taking away a country's ability to print currency to pay its debt is a bad thing. You can't print your way out of problems, you have to actually fix them. If the U.S. didn't have this luxury, we'd actually have to balance our budget instead of printing the deficit. It's basically "fix the problem" on one hand, and "cause inflation" on the other. I see no problem with forcing countries into the former. But yea, I agree that a global currency would never work.

Jul 14, 2013
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