Wednesday, May 27, 2015

Future of Money

A nickel ain’t worth a dime anymore.
                                     Yogi Berra

The concept of money dates back to the beginning of civilization.  Coins were stamped to certify that they contained the required weight, making trade trustworthy, even among strangers.  

Money was a very efficient way to transact business, much better than bartering, or keeping track by notches on a stick. It was also a useful store of wealth, certainly more convenient than livestock or grains.  These two core functions – medium of exchange and supply of value – still define money today. (1)

Fiat Money

In 1944, most countries tied their currency exchange rate to the US dollar, which was itself pegged to gold.  When the US went off the gold standard in 1971, all currencies essentially became fiat money; this meant that the value was derived from the governments that issued them rather than from commodities.

With fiat money, a country can increase or decrease its money supply at will, which gives it enormous control over its own economy. If the value is too low, it can cause hyperinflation; if it is too high, it limits export.

Black Money

Unreported cash, or “under-the-table” transactions are common in some countries. In India, “black money” is outlawed, but is still widespread. Paying for a home, or any large purchase, is often at least party “black” – the reported price is an acceptable taxable valuation; in addition, extra, off-the-books cash money is offered as additional inducement. (2)

The total amount of black money deposited in foreign banks remains unknown. Some reports claim that black-money stashed by Indians in Switzerland exceeds US $12 trillion, while Swiss Banks themselves claim that it is “only about US $2 billion.”

In the US, a 2011 study concluded that around 20% of total reportable income is either not reported or not properly reported – this was about a half a trillion dollars in 2008. 


End of Cash

Cash is expensive to produce and maintain. Studies show that maintaining the US cash systems – printing new bills, recycling old ones, moving stacks of cash in armored trucks, replenishing ATM machines – costs about 1% of GDP. The marginal cost of a cash transaction is about double that of a debit-card transaction. (3)

The indirect costs of cash are substantial. A 2011 US study found that about a fifth of total reportable income – about U $500 billion – is hidden from tax reporting.  In 2008, it was estimated that secret offshore bank accounts were responsible for about 20% of the tax gap, which suggests that the remaining 80% can be attributed to unreported cash.

The need to move beyond cash has been recognized in many smaller countries. In the Netherlands, some shopping centers are completely cash free. In Sweden, the government and labor unions are cooperating to reduce the amount of cash in circulation because cash is the usual target of robberies.

Credit Cards

Cash is going out of style. For most people, it has become a small but unavoidable necessity. Established alternatives include checks and charge cards: credit or debit.

Credit-card authorization via the magnetic-stripe card was developed in the ’70s and was in wide use by the ’90s. In 2011, 6 billion magnetic-strip bankcards around the world went through card readers some 50 billion times. (4)

Most cards contain a mag stripe that is scanned for identification. In Europe and some other regions the mag-stripe card has been fully eclipsed by the smart card which has a microchip embedded to track activity. About 85% of transactions can be authorized just from the information stored on the chip. Smart cards can also have a hidden PIN for personal identification, entered by the user without being revealed to the equipment reading the card, which is a big improvement in security.

End of Credit Cards

In Europe, ATM theft from skimming and other fraud added up to €23 million in the second half of 2010. In the US, where simple and relatively insecure mag-stripe cards still predominate, ATM fraud and theft is generally assumed to be a far larger problem – at least $1 billion every year.

The end is near for common mag-stripe cards, and even the chip-based credit card. Emerging smartphone-based pay schemes are now starting to catch on and will eventually eclipse the old charge card. Soon people will be able to touch some soft keys on their cellphone to buy something – no credit card needed. This type of completely electronic transaction will steadily shrink the use of cash.

Biometrics

The most ambitious and failsafe identification uses Biometrics – viewing the delicate lattice of branching blood vessels unique to each person, just like fingerprints. Customers can simply flash a hand near the sensor. (5)

Hitachi and Fujitsu have been working for years to commercialize biometric identification by individual vein configurations. The technology has been tested at 80,000 ATMs in Japan and is working so well that it is expected to move into widespread use relatively quickly.

Technology is transforming the nature of trans­actions and altering the way we ­interact with the vast, churning digital economy that already pervades. Finally, in theory at least, the new digital money cannot be counterfeited. 


Mobile Phones – the Ultimate Currency Exchange

The ubiquitous mobile phone is an enabling technology, an attractive alternative to cash. Beyond credit card authorization in business, the mobile phone makes it easy for people to pay each other. (6)

Within a few years all over the world, the mobile phone will be taking over and will change money forever. Switching among dollars and euros and frequent-flier miles and Facebook Credits and Google Bucks and any other form of money will be just a matter of choosing from a menu on a phone.

The cost of introducing new currencies will collapse. The future of money won’t be the science-fiction idea of a single galactic currency, but the ability to switch between and use hundreds or thousands or even millions of currencies.

Bank Transformation

Clearly, the global financial system must be based on more than just manipulation by a small group of central bankers. After centuries of dominance, most banks recognize that they have to change. (7) (8)

Until recently, the banking industry enjoyed comfortably stable revenues. They toyed with new technologies and social trends without really developing a clear strategy around how to harness them. Today, however, banking is undergoing an unprecedented revolution that’s being spurred on by technology. The recent worldwide economic instability and the inexorable rise of the smartphone will force banks steadily to develop innovative strategies and implement different tactics.

Virtual Currency – Bitcoin

This discussion of money is not complete without at least a brief discussion of Bitcoin. This electronic-cash system concept was introduced in a 2008 paper by a developer known only as "Satoshi Nakamoto". (9)

Servers, called bitcoin “miners” process and confirm transactions after adding them to a ledger. The ledger is updated and archived periodically using peer-to-peer file sharing. Each new ledger update creates some newly minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins. To accommodate this limit, each bitcoin is subdivided down to eight decimal places, forming 100 million smaller units called satoshis.

Bitcoin is open-source; its design is public; nobody owns or controls it and everyone can take part. Bitcoins can be transferred through a computer or smartphone without any intermediate financial institution. It has a fluctuating value linked in part to scarcity that is mathematically predetermined. Unlike other forms of digital cash, Bitcoin is truly untraceable and therefore, like cash, cannot be recovered if lost or destroyed. (10)
Bitcoin is a “crypto currency”, not backed by any government. Unlike traditional currencies where central banks decide how much money to print, no central authority governs the supply of bitcoins. It is not backed by physical assets, is not run by any person or group, and its value depends on people's confidence in the currency. The current price of one bitcoin is $237; it went as high as $ 979 in November 2013, compared to about $12 in 2012. The market remains highly volatile. (11)

A small but growing number of stores, travel agents and online merchants are starting to accept this digital currency as a means of payment. One couple recently traveled the world using only bitcoins.

Bitcoin has a credible future as an alternative to traditional payment methods. Momentum is coming from around the world, as investors, venture capitalists and technology enthusiasts keep pumping money into bitcoin-related businesses. The volume of transactions remains tiny, but some think bitcoins could eventually become as omnipresent as email. (12)

Let’s Engage

  1. Do you use cash? Do you always carry at least some cash?
  2. Do you pay your bills on line? Do you still write checks to pay bills? Why?
  3. How many credit cards do you carry in your wallet?
  4. Do you always carry a smart-phone? Do you use it to pay? Would you like to?
  5. Do you own, or are you interested in buying Bitcoins?

..ooOOoo..

References:

  1. A Special Report on the Future of Money: http://goo.gl/Uih4vd
  2. Indian Black Money: http://goo.gl/NWVcly
  3. The Beginning of The End of Cash: http://goo.gl/wirNze
  4. The Long Life and Imminent Death of the Mag-Stripe Card: http://goo.gl/zb9dyi
  5. The Biometric Wallet: http://goo.gl/igsJ4C
  6. There’s No Stopping the Rise of E-Money: http://goo.gl/FVyP3h
  7. A glimpse into the future of money: http://goo.gl/XAlYnc
  8. Three Wild Concepts for the Future of Money: http://goo.gl/rm2yzQ
  9. Future of money: Cashless, Cardless, Paperless: http://goo.gl/W4nIKa
  10. The Bitcoin website: https://goo.gl/yk3mFl
  11. Wired: The Rise and Fall of Bitcoin: http://goo.gl/1rSBmW
  12. Mauldin – Video on Why Bitcoin Matters: http://goo.gl/XzC0eI


Jim Pinto
Carlsbad, CA.
USA
27 May 2015

19 comments:

  1. 1. Do you use cash? Do you always carry at least some cash?
    Yes, and yes.

    2. Do you pay your bills on line? Still write checks to pay bills?
    Still write checks to pay bills.

    3. How many credit cards do you carry in your wallet?
    No more than 2 or 3.

    4. Do you always carry a smart-phone? Do you use it to pay?
    No.

    5. Do you own, or are you interested in buying Bitcoins?
    No, I'm ancient.

    ReplyDelete

  2. Do you use cash? Do you always carry at least some cash?
    Seldom and just a little.

    Do you pay your bills on line? Do you still write checks to pay bills? Why?
    Always online and don't use checks. Why: ease of use.

    How many credit cards do you carry in your wallet?
    3

    Do you always carry a smart-phone? Do you use it to pay? Would you like to?
    Yes, no and yes.

    Do you own, or are you interested in buying Bitcoins?
    Don;t own could be interesting...

    ReplyDelete
  3. 1.Do you use cash? Do you always carry at least some cash?
    Yes and yes.
    2.Do you pay your bills on line? Do you still write checks to pay bills? Why?
    Pay bills using Post Office bill-pay service - it's free.
    3.How many credit cards do you carry in your wallet?
    One.
    4.Do you always carry a smart-phone? Do you use it to pay? Would you like to?
    No, no and no.
    5.Do you own, or are you interested in buying Bitcoins?
    What for?
    Additional comment:
    I also do not use Google in any form as I value my privacy. Recommend DuckDuckGo, the search engine that does not track you to those who are not totally paranoid, but believe that their life is their own to manage.

    ReplyDelete
  4. 1. Do you use cash? Do you always carry at least some cash?
    Yes, but less and less frequently. Yes, because technology is not foolproof and it's always a good idea to have some cash on hand.

    2. Do you pay your bills on line? Still write checks to pay bills?
    All of my bills are paid online, except one. The archaic water company only accepts check or bank draft. I prefer to control the payment date; I never do automatic payments. I had a house payment drafted three times in one month, so this is a painful reminder to avoid automatic payments.

    3. How many credit cards do you carry in your wallet?
    Only one for emergencies. If I can't afford it, I don't buy it until I have saved up enough, exclusive of major purchases like home and car. The delayed gratification is stronger when you realize you truly own something that is not subsidized by a bank or credit company.

    4. Do you always carry a smart-phone? Do you use it to pay?
    Yes, I have the latest iPhone and Apple Pay will change the way payments are conducted. Maybe not Apple Pay, but mobile payments will take over. From buying from a vending machine at the airport, to buying groceries, it's too convenient and much more secure than a debit card.

    5. Do you own, or are you interested in buying Bitcoins?
    Not currently, but am very interested. I started following after the price was too high to buy in. Have even considered setting up a mining operation, but this has become extremely competitive.

    ReplyDelete
  5. 1. Do you use cash? Do you always carry at least some cash?
    Yes. Yes.

    2. Do you pay your bills on line? Still write checks to pay bills?
    On-line for periodic bills; checks for non-periodic ones.

    3. How many credit cards do you carry in your wallet?
    2

    4. Do you always carry a smart-phone? Do you use it to pay?
    No.

    5. Do you own, or are you interested in buying Bitcoins?
    No.

    ReplyDelete
  6. 1.Do you use cash? Do you always carry at least some cash? Yes to both

    2.Do you pay your bills on line? Yes Do you still write checks to pay bills? No Why? It's easier online. I use Quicken.

    3.How many credit cards do you carry in your wallet? Two. Prefer AMEX but have a MC for the few places that won't take AMEX.

    4.Do you always carry a smart-phone? Yes Do you use it to pay? No Would you like to? Yes

    5.Do you own, or are you interested in buying Bitcoins? No

    ReplyDelete
  7. I believe you are talking about Jim Rickard's book, "The Death of Money".

    I shall try and answer the questions as much as possible:

    I used to carry two credit cards, but I cut down to one several months ago. Then when my card was confiscated, I started carrying cash again. At this time I carry one credit card and also some cash. I understand that on or about October 20th , both cash and credit cards may no longer be good.That would probably cause a panic of sorts in a lot of people. Of course, as usual, the government will assure us that all this is for our own good, but I don't believe it!. The fact is that we are being lied to again
    and we owe billions of dollars and can't even afford to pay the interest on what is owed by our Government. Most Americans have their head in the sand like a dumb bird.

    I pay some bills online, write checks for others, and use a credit card as well. I refuse to carry a smart phone as it steals one's privacy. So do the newer credit cards with the 'mark of the beast'. So I use a flip-phone only.

    Bitcoin sounds interesting but I need to understand it better as I really have no idea what it is.

    ReplyDelete
  8. 1. Do you use cash? Do you always carry at least some cash?

    I usually carry some cash but prefer to pay with a credit card whenever possible.

    2. Do you pay your bills on line? Still write checks to pay bills?

    All my bills pay themselves automatically online and I'm not American so I haven't written a cheque in over 10 years.

    3. How many credit cards do you carry in your wallet?

    I have a couple but primarily use only one.

    4. Do you always carry a smart-phone? Do you use it to pay?

    I do carry a smart phone but my bank hasn't enabled the ability to use it for paying for things yet. Once that happens I'll be using it.

    5. Do you own, or are you interested in buying Bitcoins?

    I don't and I don't think I'll be buying any, any time soon... however, I do think we will be using something similar to bit coins in a few years, a generation away at most...

    ReplyDelete
  9. Do you use cash? Do you always carry at least some cash? - Yes
    Do you pay your bills on line? Do you still write checks to pay bills? Why? - on-line wherever possible. Checks - mainly where on-line not accepted (eg individual)
    How many credit cards do you carry in your wallet? - Only One
    Do you always carry a smart-phone? Do you use it to pay? Would you like to? Yes, carry a smart phone. Would like to start payment.
    Do you own, or are you interested in buying Bitcoins? - No, as of now.

    ReplyDelete
  10. Yes, we are going cashless, Europe will be first and it will probably happen around Oct. 2015 as the Euro collapses. They will do this to stop bank runs and also to be able to track every single penny for taxes.

    You should tell all your European friends to pull their Euros, convert to dollars, and open an account in the USA.

    The US will also go cashless but it won't happen as quickly because there is too much US currency (dollars) around the world being the reserve.

    This movement is why you are seeing money moving, for protection, into assets like high end art and real estate.

    Gold is not as attractive anymore because transportability is limited.

    Interesting times we are heading into.

    ReplyDelete
  11. Do you use cash? Occasionally.
    Do you always carry at least some cash? Checked my wallet the other day... 87 cents.

    Do you pay your bills on line? Yes, all of them.
    Do you still write checks to pay bills? Only the bank writes a check on my behalf.
    Why? Payment to an individual not linked with an institution.

    How many credit cards do you carry in your wallet? 2 credit, 1 charge, 2 debits
    Do you always carry a smart-phone? Yes
    Do you use it to pay? Not often.
    Would you like to? Not really, too much fumbling with buttons and connectivity. Compared user experience at Starbucks and I still prefer whipping out my gold card to fumbling with my phone.

    Do you own, or are you interested in buying Bitcoins? No, sounds too volatile and scary.

    ReplyDelete
  12. Do you use cash? Do you always carry at least some cash? Yes. Yes

    Do you pay your bills on line? Do you still write checks to pay bills? Why? Most, Yes, payments I can't figure out to pay any other way.

    How many credit cards do you carry in your wallet? 4

    Do you always carry a smart-phone? Do you use it to pay? Would you like to? No. No. Don't know.

    Do you own, or are you interested in buying Bitcoins?No. Don't know.

    ReplyDelete

  13. Do you use cash? Very little Do you always carry at least some cash? Yes

    Do you pay your bills on line? Most

    Do you still write checks to pay bills? Yes Why? Provider requires immediate payment by check.

    How many credit cards do you carry in your wallet? 2

    Do you always carry a smart-phone? No Do you use it to pay? No Would you like to? Moderate interest

    Do you own, or are you interested in buying Bitcoins? No

    I am a 77 year old white male.

    ReplyDelete
  14. 1. Do you use cash? Do you always carry at least some cash?
    Yes, still use cash. Always carry some.

    2. Do you pay your bills on line? Still write checks to pay bills?
    Some bills are paid on line, some by check. Safety is the concern.

    3. How many credit cards do you carry in your wallet?
    Several, too many.

    4. Do you always carry a smart-phone? Do you use it to pay?
    Always carry phone. Do not use it to pay.

    5. Do you own, or are you interested in buying Bitcoins?
    Not interested until security is better and recognized as legitimate.

    ReplyDelete
  15. I am happy to answer these question, but I have asked some questions of my own below that you may care to answer Jim. Remember that the whole world doesn't live in the US or in other developed countries. Even when we do, the technology that you talk about isn't often available outside of major cities and communities.
    1. Do you use cash? Yes Do you always carry at least some cash? Yes
    2. Do you pay your bills on line? Yes Still write checks (spelt cheques everywhere except in the US) to pay bills? Only very rarely.
    3. How many credit cards do you carry in your wallet? 3 but don't use tap and go.
    4. Do you always carry a smart-phone? Yes Do you use it to pay? Never - not secure enough yet.
    5. Do you own, or are you interested in buying Bitcoins? No.
    My questions:
    1. What percentage of the worlds population has access to a telephone? Fixed line? Mobile?
    2. What percentage of the worlds population has access to the internet?
    3. What percentage of the worlds population has a email account?
    4. What percentage of the worlds population has a bank account?
    5. What are the answers to the above questions (percentage) for trades people and small building contractors in the US? If the situation is anything like it is here in Australia my guess would be that 30 of these small businesses still can't provide quotes electronically with the situation perhaps being a little better in the big cities but far worse in country areas.

    ReplyDelete
    Replies
    1. Bill - here are my quick responses. The best way to get this information is via the Internet.

      1. What percentage of the worlds population has access to a telephone? Fixed line? Mobile?
      The percentage varies by country, of course. Land-lines are costly infrastructure, and so older, advanced countries have more land-lines, usually one per family for the middle-class. Mobile phones have expanded to about 4+ million (out of about 7 million) and growing, because there is no need for the hard-wired connections.

      2. What percentage of the worlds population has access to the internet?
      Same response - varies by country. Wired-Internet requires hard-wired. Wireless Internet is easier and spreading faster. Many companies (notably Facebook and Google) are working to provide more access everywhere.

      3. What percentage of the worlds population has a email account?
      About 85% of the world is email-connected. In poorer countries, people go to Internet cafes to check email.

      4. What percentage of the worlds population has a bank account?
      My guess: Developed countries around 90% of the population. In developing countries around 40% - 70%. In undeveloped countries around 15% - 40%.

      5. What are the answers to the above questions (percentage) for trades people and small building contractors in the US?
      In the US, the numbers are well over 90%. Most businesses cannot function without telephone, email and Internet. Many small businesses use Internet over their phone to provide quotes via email and whatever is needed.

      I expect that in Australia, there is the "outback" which has little or no infrastructure. So, one would expect the numbers to be vastly different from metropolitan areas like Melbourne, Sydney, Brisbane, Perth etc.

      Feel free to continue this discussion, via this blog, or email if you prefer.

      Delete
  16. Great article and views. So Jim, where does Gold fit into the modern picture? China is hoarding massive amounts of gold. Global refiners are working flat out to meet their demand. It looks as though they are betting on gold when the fiat monetary system comes crashing down.

    ReplyDelete
    Replies
    1. Thanks for your comment, Riccardo.

      Gold is a "commodity" and keeps fluctuating. I have invested in gold and silver funds, and after some advances, they have recently been sinking. Some of this may be manipulation by large buyers like the Chinese.

      I know people who have invested seriously in gold bullion - because they feel that gold is the ultimate hedge against the "inevitable" decline in the stock market.

      Delete