I’d rather be lucky than smart…

and these people were clearly both…

For the past year, Google’s car project has been a talent sieve, thanks to leadership changes, strategy doubts, new startup dreams and rivals luring self-driving technology experts. Another force pushing people out? Money. A lot of it. 

Early staffers had an unusual compensation system that awarded supersized payouts based on the project’s value. By late 2015, the numbers were so big that several veteran members didn’t need the job security anymore, making them more open to other opportunities, according to people familiar with the situation. Two people called it “F-you money.”

Scotcoin… I don’t get it?

As Minsky said “everyone can create money, the problem is getting it accepted”. I think I get Bitcoin, not the technology, but the broad idea. I think it suits people who buy stuff in the Dark Web and don’t want the government to see what they are doing, particularly tax wise. Because Bitcoin is an anonymous, and stateless, issuer of currency, it really can’t be taxed; and because its a fringe currency I don’t think governments worry about what is closing essentially a loophole.

But I don’t get Scotcoin that I just discovered the in the FT. Scotland has a tradition of free banking and note issue quite distinct from England and maybe this follows on. But while RBS and Clydesdale note issues make interesting historical relics they sit within the tax system and each note is fully cash collateralised at the Bank of England (hence the difference between legal tender and legal currency).  The old Scottish Free Banking system had no central bank and a number of historical anomalies that I don’t think would be accepted as most people in Scotland seem to be pushing the Euro (again why a small nation with an economy completely divorced from the German economy would want this is beyond me, but it seems so far fetched at the moment I’ll park it). Free banking also had its own credit crisis with the collapse of Ayr Bank in 1772 (Douglas, Heron & Co) which influenced Adam Smith and arguably had a huge effect on modern central banking. Even if you accept the economic logic of non-monopoly issue of free money (and I don’t think I do) it’s dead on arrival at the ECB. So this relies on an independent Scotland and an independent currency (which I think would be the right answer in terms of economic flexibility).

From what I can gather they have limited the issue to 1bn coins permanently and the company seems to make its money from the exchange and over time processing fees. Scotcoin seems to sit somewhere between the Bitcoin and state money and thus I give it a zero chance of success.

The seignorage has been privatised and actually seemingly limited to the initial issue and the processing which negates one of the key advantages of issuing private money, and by necessity this has been done when the currency was at its weakest. I won’t even get into the fact that as with the gold standard replacing fluctuations in the price of goods with fluctuations in the currency is not ideal (a point Ben Bernanke makes here while arguing for the logic of central banking) and this will also have a link to a monetary unit of account which will really confuse people.

Most importantly if it ever became economically important the government would worry about tax leakage. Taxes drive money. Its the most important prerogative of a modern state and the requirement that tax liabilities are settled in the (monopoly issue) currency of the state is vital. Unlike Scotcoin all the government has to do is demand all taxes are paid in its own currency and not accept Scotcoin and this project looks fatally flawed.

But I like innovation and new start-ups so I wish them every success. Apart from the concerns above it looks like a great idea.

 

Macro, gold, and private credit

Like most economic historians I get the gold standard was a bad idea and we shouldn’t go back to it. But I think the hankerings for it really reflect a deeper desire for some sort of control on the monetary base. As Bordo et al ., note:

We find that [financial and banking] crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard periods and is rivaled only by the crisis-ridden 1920s and 1930s. History thus confirms that there is something different and disturbing about our age.

The problem is credit. Specifically privately created credit and frankly clearly linked to housing and commercial property lending.

bank-lending-1870-2013

The Bretton Woods agreement controlled the capital account and acted as a brake on the pro-cyclicality of asset price inflation (unintentionally) by making it harder to fund these transactions from offshore borrowing. In some ways it linked the domestic asset base to a trading value of the currency. Now land values have gone crazy because capital is international and property has simply become an international asset class.

And as part of this change tThe banking system has been transformed:

The share of mortgage loans in banks’ total lending portfolios has roughly doubled over the course of the past century—from about 30% in 1900 to about 60% today. To a large extent the core business model of banks in advanced economies today resembles that of real estate funds: banks are borrowing (short) from the public and capital markets to invest (long) into assets linked to real estate.

The driving force in this has been lending to households as the article makes clear.

In the modern economy fractional reserve banking is a myth although it may have functioned like that under the gold standard. But now we understand that banks create money via deposits and there is no theoretical limit on money supply creation other than the monetary policy of the central bank, and there are questions as to the effectiveness of this given the openness of the modern international monetary system and banks ability to fund themselves in the wholesale market. In a modern economy, where home ownership is exalted above almost all other policy goals, combined with open bank funding on a international scale,  I struggle to see a limit on the creation of private credit to property and thus it is a system with a self-induced propensity to pro-cyclicality with a put option on the state. Anything less would imperil the banking system itself.

To me, the question isn’t whether we should be going back to the Gold Standard but really could the Bretton Woods agreement be improved and tried with Bancors? Like the Chicago Plan for domestic money, I am too cynical to believe an institutional mechanism that requires so much change is likely to occur, but it is clear that the link between credit and the macroeconomy is the crucial variable that needs to be understood better and be the driver of economic models. A fundamental model of understanding the modern macroeconomy needs to be the driver of credit, something Minsky well understood.