fungible thoughts

I’m not sure you could call the following “analysis” per se, but it’s an idea that’s been rolling around in my head for a while.

Some background:

Monetary policy is often times described with the following axiom:

Expansionary monetary policy is like pushing on a string, while restrictive policy is like pulling on a string.

To review, the Fed’s job, as the Central Bank of the US, is to balance economic growth with inflation while minimizing unemployment. To do that, it has two options. It can raise or lower the “risk-free” rate of the market, through changes to the fed funds rate. This is the rate at which financial institutions can borrow from the central bank. They can also engage in open market operations, meaning buying or selling bonds to inject or draw from the available cash in an economy. One prominent example of this is Quantitative Easing.

The “string” quote above describes the sensitivity of economic growth to changes in the Federal Funds rate and the Fed’s open market activities. When an economy is overheating, meaning fast growth and high inflation, the Fed will step in and raise interest rates with the goal of lowering inflation. This is restrictive monetary policy. It incentivizes savings and investment over spending through higher rates of return, simultaneously making things like mortgages more expensive. When it’s more expensive to borrow to start a new business, less businesses get created. When it’s more expensive to borrow to buy a house, less housing transactions take place. This is the “pulling on a string” scenario from above.

When the economy is shrinking or growing slowly with low inflation, the central bank will lower interest rates. The textbook says that’ll incentivize more business creation by making credit more available and cheaper. In reality, no one wants to start a business in a low or negative growth environment. Using the mortgage example from above, no one wants to buy a house in a negative growth environment either. They may lose their job and be on the hook for the next 30 years of mortgage payments. Banks get less aggressive in low growth environments, taking on less risk. They can borrow from the Fed at low rates, but the act of borrowing from the Fed can signal to the market that a bank is stressed for assets. This, in turn, affects the bank’s stock price and reputation. So no one borrows at lower rates. This is the “pushing on a string” scenario.

My idea, if you could call it that, is the following:

We’re moving into a digital currency era. Living in Sweden, my kids have barely seen cash. When we play “cafe” or “grocery store”, they say “blip” when you pay. It’s not an exchange of cash where you pay, then get your change. It’s just a “blip” with the card.

As more cash moves digital, we’ll be able to determine the source of the transfers more readily. For example, if a direct deposit comes from your employer, we know that money is your salary. We know what your job is by a quick search on LinkedIn or through government databases, thus we can determine the source of income, the method by which it was acquired, the industry you work in, and what you do for them. If you win the lottery, that money is easily tagged as “lottery winnings”. If you’re accepting a lot of Venmo payments, maybe you’re a bookie or a drug dealer.

Consider a scenario in which we’ve completed the AI surveillance cycle, where everything we do is data being fed into an AI personal assistant or similar. To provide better services, it’ll need to know, among many other things, our spending habits, travel habits, and our sources of income. It’ll probably have access to making payments for us in the name of convenience. “Hey Alexa, we’re out of milk and bread. Oh and diapers, can you order those please?” Then they show up at your door a few hours later.

The AI will know everything about you, and you’ll love it. It’s a great system designed to make our lives more convenient. We can focus on the fun stuff and the AI can do the forms, ordering, scheduling, etc.

Consider this data being Fed to an institution with the dual mandate of keeping everyone employed and keeping economic growth and inflation around reasonable levels. This institution already has the power to rein in economic growth by raising interest rates. Let’s keep that around, but what about pushing economic growth?

When we know the economic origin of everyone’s income and money is completely digital, all transactions can be tracked. A source is determined and assigned to each dollar in our bank accounts. In order to push economic growth up, the algorithm assigns a rate of depreciation to these dollars based on the source of the income. For example, say we want lottery winnings to be pushed out fast, so they’ll depreciate quickly = high rate of depreciation. $1 become $0.99 over a week, for instance. Salary earnings will vary based on type and sector. If you’re creating value for someone, for example, building a home or creating art, the income is more sticky, i.e. lower depreciation rate. $1 become $0.99 over a year. More desirable sources of income come with lower rates of depreciation.

In my scenario, there’s a broad range of rates for every source of income. Plumbing, science, politics, donations, gambling, tax rebates, health care services, etc. All these have different rates of depreciation.

It’s a known bias in human behavior that losses hurt more than gains feel good. It’s called loss aversion or prospect theory. As we watch the numbers in our bank account fall, we’re more likely to push those assets out of cash and into something more valuable like stocks, bonds, art, physical assets, etc. When these rates of depreciation are higher than interest rates, taking on a loan can even be a store of value as it decreases the rate at which your money loses its buying power, while simultaneously giving you cash. We can take that loan and start a business, buying physical assets like commercial real estate, pizza ovens, desks, computers, etc.

Controlling the Economy

Our best mechanism for determining the value of an occupation is market rates of salary. By controlling the pace of the depreciation of income based on its origin, an algorithmic “Fed” can dictate which industries get incentivized. If an economy has too many experts in Roman history, but needs more electricians, you’ll see the rates of depreciation of each profession’s salary’s diverge. Higher depreciation of salary for Ancient Roman History professors and lower for electricians.

There will also be futures rates for each profession’s rate of depreciation. College students can check the futures markets for rates of depreciation for each profession when choosing which subject to study. What’s the rate going to be in four years, when I graduate. Or 15 years when I’m in the peak earning phase of my life. These rates will fluctuate based on projected supply and demand for different goods and services. An AI with knowledge about an entire economy and its citizens can process this information and provide us with more knowledge about future job prospects, thus effectively controlling the economy in a preemptive fashion.

Assuming, that is…

All this is assuming that we, the consumer, don’t have any choice but to keep our money “in the system”.

One option is to go back to physical money. Sure, but that makes global trade insanely difficult. If we’re constantly shipping cash, gold, or silver back and forth to pay for things, it’s burdensome, inefficient, creates less regulatory oversight, increasing incentives to cheat or steal.

The other option is cryptocurrencies not under Federal Central Bank control. As hard as it is to imagine today, the Dollar doesn’t have to be the common exchange currency of the United States. We can use other ways to transact. Though widely regarded, and in my opinion correctly so, as a speculation asset class, cryptos are used for transactions at the personal and corporate level with increasing popularity.

There are many directions I can take this narrative now, but it’ll all be speculation. There exist better writers with a better understanding of cryptocurrency market dynamics and future technology than I. Reach out if you want to speculate with me. 🙂

In short, my idea is for a Federal Bank Overlord AI which controls the economy not only through interest rates, but by pushing on the economic incentives that actually get us to spend more money, creating a more stable and safer economic environment.

As always, thanks for reading and reach out if have any questions,

/Tommander-in-Chief