Financial Futures Beyond Money
Deteriorating trust in paper currencies may well usher in a return to a more sophisticated version of the pre-money world of barter
Even Nobel laureates in Economics have had difficulties explaining the economy of late. Witness some of the fathers of the euro, modern derivative pricing, and efficient market theory – Mundell, Merton, Scholes, Markowitz, Sharpe: all ennobled and emasculated.
Perhaps the future can be found in the very distant past – prior to the advent of credit default swaps (CDS), collateralized mortgage obligations (CMO) and double inverse exchange-traded funds (ETFs). This would be a return to the world before money, when barter was the way of doing business; that is, the days when one person was good at numbers, and the second at painting, such that the first did the numbers of the second, and the second painted for the first.
Exhibit one: Witness the informal, but computationally sophisticated bartering system that has emerged among the recent economic ruins of Greece. The fear has been that, upon pulling out of the euro, the government would forcefully convert bank deposits to a greatly devalued drachma. With austerity measures, it seems that Greece is revisiting its ancient roots: barbers trade with accountants, and shoemakers with doctors.
Sound impractical for the 21st century? Perhaps not in a world that is socially networked. In the universe of financial products, one might imagine individuals saving up units of account – for retirement or other purposes – that eventually entitle them to goods and services.
Exhibit two: A few years ago, the US Postal Service – an institution that itself might not be around in a decade – started offering what is called a ‘Forever Stamp.’ Although the cost of mailing a first-class letter in the US is currently 45 cents – and grows by approximately one cent per year – a ‘Forever Stamp’ comes with no fixed monetary value. The stamp – effectively a financial derivative – entitles the holder to one unit of service, in perpetuity. The holder can use the stamp to mail one first-class (one ounce, or 28.3 gramme) letter anywhere in the US, at any time (forever). Pay the 45 cents today, and regardless of what it should cost to mail a first-class letter next year or 10 years hence, the cost of the service is locked in.
For the Postal Service, this is not as big a gamble as one might expect. First, by not having to print new and costly stamps every time that the price goes up, it saves in printing costs for the millions of people who need one- and two-cent stamps to make up the difference. At the same time, the Postal Service gets to keep clients’ money – money it needs – while clients keep the stamps in their drawers for the next decade. All parties are winners, which is critical for true financial innovation to flourish. Other countries, such as Canada, New Zealand and Singapore, offer similar stamps.
Exhibit three: A number of leading private US universities have implemented similar plans – not with stamps, but with academic tuition units. Prospective parents and grandparents are able to lock in the cost of an Ivy League education – years and possibly decades in advance. They pay a fixed price now, and ‘Junior’ – possibly unborn – can enroll at Harvard in 2022. No need to worry about whether the stock or bond market will swallow their education savings account, for the education has already been paid for.
None of this is trivial. Of what use is a dollar, euro or peso when one is not certain what it will actually purchase in terms of goods and services? If one does not quite trust inflation statistics – that is, if inflation indices are subject to convenient manipulation, or if one’s purchasing patterns differ from those of the mythical ‘average’ household – what can an inflation-linked bond really buy? Business schools always teach that a dollar, euro or yen today is worth more than it is tomorrow. And yet, at this moment, we also struggle with what that same currency is actually worth today.
Large transnational producers and manufacturers have long been able to lock in the cost of goods like soybeans, corn or crude oil dozens of years into the future. Why not services? We might foresee a time when nursing homes, assisted living facilities, drug companies, chiropractors, gerontologists and even undertakers will offer future contracts on their services.
Note the emphasis on industries and professions that appeal to an ageing population (a reality most peculiar to advanced countries). An ageing population – that lives or will soon live on fixed-income pensions or, indeed, no pensions at all – has the most to lose from deteriorating confidence in fiat currency and the governments that stand behind them. And this ageing population will push companies and brands to create an alternative medium of exchange, and perhaps to bypass the central banks altogether.
Moshe A. Milevsky is Associate Professor of Finance at the Schulich School of Business at York University (Toronto), and Executive Director of the Individual Finance and Insurance Decisions (IFID) Centre.