Climateer linked to a post by Phil Pearlman here which pondered the merits of Google launching its own currency.
The logic is basically that Google, being an experimental tech company is in a better position to launch a private currency than a bunch of anonymous coders.
But the piece misses a fundamental point. Google already has a currency in issuance. That currency is Google equity.
When you swap national currency for an investment in a particular corporate stock you are effectively swapping an investment in the general wealth of the country, which is taxable by the state, for concentrated exposure to a particular corporate (i.e one very small segment of that economy). You are doing that because you think that stock will outperform the general performance of the country.
That corporate then ends up holding your dollars like central banks of foreign countries hold foreign reserves. The corporate — just like foreign central banks — can choose to invest those reserves in dollar denominated securities and basically receive dollar interest (aka Paypal) in which case its currency is effectively pegged to the dollar, or it can spend (invest) those reserves on tools, infrastructure, know-how and resources that allow it to deliver ever more value/output/return to holders of its equity.
A non-profit company essentially covers its costs. As long as it can make enough stuff to satisfy the demands and wants of its workforce, and it doesn’t have to borrow from others, it doesn’t need to worry about creating a surplus for its shareholders. Its shareholders can be its employees but they don’t have to be — just like with sovereign currency holders who can be domestic or foreign.
A for-profit company focuses on creating a surplus beyond the needs of its dependents, which it either trades in return for further investment in the company — and thus gets larger and better, employs more people and grows — or sells to external parties in exchange for external equity rights (namely dollars). These dollars can be reinvested again either back in the company, or invested in the yield bearing DEBT securities of the country in question (a la Paypal).
The other alternative is that it just gives out a dividend to all the shareholders. If most of its shareholders are employees this is a bit like a payrise, or a right for them to decide how to monetise/redeem/distribute the surplus themselves.
Either way, if a concern is viable and is producing or providing a service people want, it stands to create an ongoing surplus.
How it chooses to deploy that surplus depends entirely on its agenda with respect to the circulation of its shares and the distribution of the wealth it generates. The greater the surplus, the greater the market cap of the company. The greater the market cap, the more concentrated the wealth of its primary shareholders.
This is good for existing shareholders, but not so good for the corporate’s equity economy. A few high valued shares will not have much liquidity and will not be very currency like. With an IPO or a share dilution (debasement) the corporate stands to spread the wealth it has created to more people, and has a better chance of becoming a reserve currency elsewhere in its own right.
It can also split its shares equally in order to make it more tradeable. Alternatively it can distribute some of the surplus by means of a dividend, which creates a natural rate of return (related to its growth) for its shareholders. This is akin to the natural interest rate.
I say “natural” because this is the interest needed to keep the return to investors consistent with the growth created by the company. This interest can theoretically be distributed in newly created share units, which offer a redemption right for the surplus output in question. In our world, however, the surplus has mostly already been monetised into dollars and it is dollars (reserves) which are distributed instead. But the point is either to encourage the surplus to be redeemed (in exchange for foreign currency, namely dollars), or to trade it for goods and infrastructure which are needed to improve the performance of the company and to create even more surpluses, and more wealth for shareholders and employees.
If too much return is distributed relative to the actual output the company creates, there can be an oversupply of outstanding equity relative to value that can be redeemed, and the price of the stock in external denominated terms has to fall. On the other hand, if the corporate doesn’t distribute enough of its surplus, the economy of its shares becomes deflationary in some sense. The shares rise in vale in relative terms, and the company begins to hoard demand. (This is because it fails to redeem available output elsewhere, which is bad for the wider economy, and in the end bad for itself as well because of the negative feedback loop.)
The former is the equivalent of having too much money supply relative to output, meaning the company has an interest in doing a share buyback (so selling reserves in return for shares — so the opposite of QE), the latter is the equivalent of having too little money supply relative to output, meaning the company has an interest in issuing more equity in exchange for more reserves (so like QE).
The debt factor.
A corporate can of course run a deficit.
This probably means its output is insufficient to meet the complete needs and demands of its employees/shareholders/dependents. It must fill the gap by borrowing from others, external to its economy.
So theoretically if a company fails to produce enough to keep its dependents entirely self sufficient, and they are forced to import the difference external sources, it has two ways to cover that hole.
One way is to ask its dependents to just go without. (This is the equivalent of an economic contraction and its shares would go down in value.) Alternatively it can plug the hole by borrowing, and paying for the output that comes from sources outside its economy in IOUs. These are securities that formalise the fact that the corporate owes its trade counterparties the equivalent of what it borrowed plus interest. If these debts are paypable in its own equity no matter what (which it itself issues), it can never really default.
In that scenario the risk lies with the lender.
The lenders hope that one day they will get back at least as much output from the corporate as than they lent it, if not more (a rate of return). Of course, in the worst case scenario, their debt is repaid with equity that has redemption rights over a much smaller level of total output.
In reality, a company generally issues debt in externally denominated terms (dollars) and not in its own shares, meaning it isnt in a position to “print” its way out of trouble. In fact printing more when liabilities are externally denominated would only collapse the value of the shares, and make the external debt bigger in relative terms.
Remember equity is ultimately redeemable for the assets of the company in question. If a company fails to create successive surpluses, fails to attract lenders to fill the deficit void (because it’s clear its output is lacking or somehow not valuable), and fails to make debt interest payments because it can’t raise the external money against its own shares, it stops being a going concern. Its remaining assets are then distributed according to the rules of insolvency. Shareholders get whatever is left over after satisfying all other claims.
Long story short equity really is currency. High levels of debt are fine providing the liabilities are denominated in your own shares or there is enough output when payments fall due. This means debt is fine providing it is being used to bridge temporary periods of insufficient output (scarcity) with wise investments designed to create surplus in the long run. Debt is also fine if it’s effectively being issued not to bridge output deficit on home turf but to satisfy demand from external parties who want exposure to the stock itself.
But the question then becomes why issue interest bearing debt at all? Why not just issue more stock and payout more dividend? Probably because you want to offer foreign holders less of a return (because debt is cheap) relative to real shareholders, who relatively get a much bigger potential return if output outperforms expectations
In short it makes sense to issue debt if debt is cheap, and your lenders do not realise they would actually be getting a greater return from buying equity directly (the returns of which are not capped like the returns associated with debt).
And I believe this is what is happening in the case of the US. The US is like a corporate that is issuing debt because the alternative would be more expensive and would reward foreigners disproportionately to domestic shareholders. This way, however, domestic shareholders become better off as output rises. Not only that, stock dilution allows for greater participation in that specific wealth pool. Given the US pays its debt off in its own shares, this also reduces its debt liability.
APPLE
Apple is an interesting example of a corporate whose shares are almost money-like.
In fact Apple is in some ways like a sovereign state which has collected a helluva surplus and reinvested it entirely in foreign reserves made — mostly the debt securities of its primary trading partners ( the US and Europe).
Just like China, Apple is refusing to spend or redistribute that surplus, because the flows favour ongoing accumulation. Unless it issues more stock (as china is doing) its currency (equity) will get ever more valuable relative to the dollar.
In that sense it behaves a lot like gold, since its supply doesn’t change relative to consumption or demand. It also doesn’t pay a dividend (offer a return) — or at least didn’t until very recently.
All of which makes it a pretty deflationary type of money. Much of its value is also related to the value of the reserves it holds, which effectively link it to the dollar in much the same way gold’s value has been linked to dollar because of the gold reserves the fed holds. There is also the fact it has become a store of value in its own right and that the supply of its equity relative to dollars has been diminishing, much like gold.
But unlike gold Apple actually does have something fundamental backing its shares: reserves and output. And in some ways it is doing investors a big favour by storing dollar reserves — which would otherwise be negative yielding — on their behalf.
You could say it is transforming a negative yielding security into a zero yielding (and now even a slightly positive yielding) security, much like the Federal Reserve offers free yield to banks with IOER.
Except unlike the fed it’s offering that rate directly to everyone (not just banks with access to reserves).
I’m not sure that there is anything very original in the above article. It has long been accepted that there is no sharp dividing line between money and non-money. You can use a bottle whiskey as money if you really want. You owe someone £20, you have a £20 bottle of whiskey, your creditor is a whiskey drinker – hey presto . . . just give them the bottle in payment. Same goes for equity in some corporation.
Though obviously using whiskey or equity as money could be classified as barter.
The observation is not really that anything can be money, but that money at its fundamental basis is equity, and a stake in something. An obligation or a favour, represented by our current capacity to fulfil that favour.
Dollars, euros etc are national equity.
And I agree it’s not a new observation, but there are plenty of people who don’t see money that way, but view it as exogenous, And as commodity money. Not a social construct but something with permanent intrinsic embedded value rather than relative value.
The post is pointing out that the suggestion for google to issue its own bitcoin money is missing the point that google equity is already google cash. It’s just it’s less money like than national equity because miney itself has other characteristics, such as transaction ease, fungibility and shared interest.
Google equity could become liquid money, but probably won’t because it will always be compromised by Google’s own liability to pay taxes in government money.
Hence government money trumps all.
Btw – i didnt realise it was a crime to point something out, whether known or unknown. You are implying that I am somehow misleading the reader or misrepresenting myself as original. No. I’m just trying to spell out the reason why a suggestion for Google to issue currency misses a fundamental point about what money is.
A better suggestion would have been for Google to try and encourage trade settlement in its uncollateralised perpetual liabilities (equity).