The financial elephant in the room

Three compelling messages on the economy have come through over the past few days. First, neither the United States Federal Reserve nor the European Central Bank (ECB) have imminent plans to end their easy-money policies. Second, the Italian government is considering paying off its arrears to suppliers with new small-denomination bonds instead of euros; the receiving parties would be able to pay with these instruments in Italy. And third, Facebook announced the creation of a new cryptocurrency, the libra, that it hopes will be accepted as a form of payment – one of the critical functions of money. The company issuing the currency, Libra Networks, was registered on May 2, 2019, in Geneva.

One might question the need for cryptocurrencies, as there is an established monetary system in existence – in theory, guaranteed by central banks as institutions of public trust. To resolve this doubt, you may want to take a look at the last 20 years of monetary policy.

Debasing the system

Following the financial crisis of 2007-2008, Mervyn King, the former governor of the Bank of England (2003-2013), wrote a book entitled The End of Alchemy: Money, Banking and the Future of the Global Economy(2016). In it, he accurately described how the neglect of sound monetary and banking practices by governments, central banks and the financial sector – this neglect being a consequence of the wrong incentives created by cheap money – had led the world into the dangerous crisis …

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The financial elephant in the room

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