Facebook Libra – Other people’s currencies.

The vested interests will now be more against Libra than ever.

• The pandemic is substantially weakening the existing financial system meaning that Libra is more of a threat now than it ever was before, thereby ensuring that it will never be allowed to launch in a form that could make it a viable currency.
• The latest change to Libra adds Temasek and a crypto-centric VC called Slow Ventures at as new members, but the real shift happened in the middle of April (see here).
• This was a change to add crypto coins backed by single currencies in addition to coins backed by multiple currencies.
• This is a subtle but crucial difference which I suspect will end up with Libra offering coins backed by single currencies only with the multiple currency option being quietly ditched.
• The issue here is control.
• With Libra backed by multiple currencies (or heaven forbid gold), it becomes a currency in its own right and if widely successful, could compete with the US dollar, Euro, British pound, Japanese Yen and the Chinese Renminbi as a store of value.
• With coins issued backed by single currencies, the sovereign issuer of the backing currency remains in control as Libra is simply offering a digital version of that currency rather than competing with it.
• The pandemic is causing sovereign debt to skyrocket to levels that are even more unsustainable than they were before the outbreak meaning that the day of reckoning when the debt issues have to be addressed is actually far closer than previously thought.
• These countries have also effectively lost control of their interest rates because they are now unable to raise rates to combat inflation because it will create unaffordable interest payments and crashing stock markets.
• Furthermore, the measures that both the Fed and ECB have taken are highly inflationary as in both the Eurozone and the USA money is being printed (the US far more) to finance the pandemic-related spending.
• Hence, if inflation rears its head, there will be very little that can be done about it as interest rate increases will be unaffordable.
• The USA has one ace up its sleeve which is the fact that it is able to print the world’s reserve currency and as long as the world continues to use the US dollar as its reserve currency, it can print as much as it likes without consequences.
• This is why Libra is more of a threat now than it ever was.
• If Libra was to become a viable reserve currency, then there would be nothing to prevent huge pressure on the US dollar from all of the money printing triggering a really devastating financial crisis.
• As long as Libra only issues single-currency coins, it is not competing with the US dollar or anything else thereby delaying the time when money printing becomes a problem.
• I have long believed that the privacy and security concerns raised by regulators are merely a smokescreen aimed at preventing the emergence of a competing reserve currency over which governments have no control.
• This became clear in the early days of Libra when the early backers of the currency (everyone one would need for it to succeed) backed out citing regulatory concerns.
• I have long suspected that the reality was that the banking system which is terrified of real digital competition and governments fearing competition for their printed money leaned on the early backers to pull out (see here).
• The pandemic has exacerbated this situation greatly as fiat currencies are now at much greater risk from inflation and devaluation driven by debt and money printing and the banking sector is under huge pressure from collapsing economic activity and loan defaults.
• Hence, I think that Libra will only be allowed to see the light of day as a digitiser of other people’s currencies rather than a viable currency in its own right.
• Hence, I suspect that its impact will be muted and may really struggle to take-off in any meaningful way given the lack of support by existing payment systems and the hostility of the vested interests.
• It was a good try but I think Libra as a currency is going nowhere through no real fault of its own.