Author Archives: 10973015

Inflation is scourging the land: Biden’s Fed appointees aren’t the cavalry

Inflation is scourging the land. In January it hit 7.5%, a forty-year high. The Fed is failing in its mandate to maintain “stable prices” and suffers the dangerous conceit enlightened central bankers can direct the economy better than the market. President Biden’s Fed appointees aren’t the cavalry, far from it.

Many Americans are too young to have experienced the scourge of inflation that roiled the country in the seventies. Inflation is too much money chasing too few goods. Thanks to Washington’s binge of money-printing and spending, suffocating regulation suppressing production, and Fed complacency, inflation is back. It’s a stealth tax punishing saving, creditors, and the working poor, and rewarding debtors, the biggest of whom is Uncle Sam.

Congress and the administration look to the Fed to bail them out of destructive fiscal and regulatory policies. Many at the Fed believe they can and should manage the economy. That’s beyond its ken. The Fed does, however, have tools to rein in inflation. That’s what it should focus on. The FOMC needs to find its inner Paul Volcker. If it hikes interest rates and reduces its bloated balance sheet sufficiently, it will curb inflation.

But Biden’s Fed appointees won’t bring a hawkish voice or narrow its focus. They’ll expand and further politicize the central bank and paramount financial-system regulator’s role, raise the fossil-fuel industry’s cost of capital, and racialize credit.

Biden renominated Jay Powell Chairman and nominated Governor Lael Brainard Vice Chairman, law professor and former governor Sarah Bloom Raskin Vice Chair of Supervision, and economists Lisa Cook and Philip Jefferson governors.

Powell has been a dove’s dove and willfully blind to the looming threat of inflation, which were preconditions to Biden reappointing him. On his watch, gorging on Treasuries and mortgage-backed securities, the Fed’s balance sheet doubled, and the money supply increased 403%. When the Fed buys assets it creates money, suppresses interest rates, and, thereby, fuels inflation.

In January yoy gas was up 40% and used cars 40.5%. In 2021 the median existing-home price rose 15.8%. As inflation picked up a head of steam, the Fed played make-believe, stubbornly maintaining it was “transitory.” Joe and Sally Sixpack are paying dearly for the Fed’s dereliction of duty.

Brainard is just as dovish as Powell, supports more punitive bank regulation endearing her to progressive heartthrob and financial-industry foe Senator Elizabeth Warren, and is socializing introducing climate-change considerations into the Fed’s prudential regulation, setting the stage to punish banks financing oil, gas, and coal producers.

Raskin is a climate-change fundamentalist. In “Why Is the Fed Spending So Much Money on a Dying Industry?” she trumpeted her Green faith and desire to preference credit for job-intensive – i.e. less productive, renewables over fossil fuels, decried “surging carbon dioxide,” and warned of the looming “catastrophe of an unlivably hot planet.”

Fossil fuels provide 79% of America’s energy. If the Biden Fed starves the fossil-fuel industry of capital, it will increase energy costs, making consumers poorer and businesses less competitive. Even if it wasn’t horrendous policy, it isn’t the Fed’s place to decide to engage in a Green holy war against fossil fuels. That folly is the politically-accountable Congress’s prerogative.

Cook served in the Obama White House, has a NYT guest column, contributes to CNBC, MSNBC, and NPR, served on the Biden-Harris financial-regulator-agency-review-transition team, and supports “reparations” for black Americans. Cook was nominated not because she’s an estimable monetary economist but rather because she’s a she, she’s black, and she’s a brass-collar Democrat, none of which is a good reason.

By reputation economist Philip Anderson is apolitical. Preternaturally sunny Hoover economist, National Review contributor, and former Trump adviser Kevin Hassett sings his laurels declaring he’s the kind of economist he would’ve been happy with and President Trump could’ve appointed. That may be naïve. Anderson’s commentaries in PBS NewsHour, NPR, CNBC, and Bloomberg Radio suggest comfort in the establishment left. The Biden administration wouldn’t knowingly nominate a man Hassett would be comfortable with.

The Fed’s statutory monetary mandate is stable prices, i.e. zero inflation, maximum employment, and moderate long-term interest rates. Stable prices support maximum sustainable long-term employment and wealth creation.

The central bank takes an expansive view of its remit. In 2012 the Fed on its own prerogative declared it would target 2% inflation, prices doubling every 35 years. While lawless, there was nary a peep of protest from Congress. In 2020 the Fed went a step further, announcing it would inflation-average,” allow inflation higher than 2% to catch up for prior inflation below its target.

Interest rates are the economy’s most important price, the price of present versus future consumption and investment. The Fed influences them. Its real benchmark interest rate is now a mind-boggling negative 7.5%. Keeping interest rates artificially low causes systemic malinvestment and risk.

Milton Friedman warned concentrated power, no matter how well-intentioned, is dangerous. The Fed embodies unchecked concentrated power at the heart of the financial system.

Who’s on the Fed board matters so much because of the enormous power it wields and license it takes. Until Congress circumscribes its mission, the Senate must be extra-vigilant ensuring hawks with a narrow view of its role, run the central bank, rather than partisans keen to use the Fed’s monetary, regulatory, and operating powers to try to manage the economy, preference credit for favored sectors, and advance a political agenda.

Should President Biden keep Jay Powell? Americans have cause to worry who leads the Fed

Because of its outsized impact on the economy the choice of Fed leadership is enormously consequential. If the Fed were less powerful, if it exercised less discretion in monetary, fiscal, regulatory, and operating policies, it would matter less, much less.

President Biden’s upcoming Fed appointments should concern every American. It’s up to him whether to replace Chairman Jerome Powell, Vice Chairman of Supervision Randal Quarles, and Vice Chairman Richard Clarida, and to fill an open governorship. The decision to reappoint or replace Powell in February will be the most consequential at least since President Carter replaced Bill Miller with the legendary inflation fighter Paul Volcker.

The looming dangers of inflation, deficit monetization, and accelerated pollicization of regulation and credit allocation, underscore its importance.

The Left wants the Fed to continue the gusher of easy money and monetization of the mushrooming Federal deficit, use regulation to starve the fossil-fuel industry of capital, further racialize banking, and, as a totem of progressive piety, flail banks. Centrist Democrats and many Republicans have accommodated themselves to forever-easy money, if not to hyper-politicized regulation.

The Senate should reject nominees who it suspects aren’t serious about crushing inflation, want to expand the Fed’s fiscal footprint, or intend to politicize credit allocation and banking. In the movie ‘Ronin’ Vincent, played by Jean Reno, asks Robert DeNiro’s character Sam how he knew they would be ambushed. Sam replied “When there’s doubt, there’s no doubt.” That’s the test senators should apply to Biden’s Fed nominees.

Ideally the central bank would narrowly hew to its mandate: to pursue stable prices, maximum employment, and moderate long-term interest rates. A stable price regime is the sine qua non of maximum long-term employment and wealth creation. Clinton appointed former Vice Chair Roger Ferguson observed “a stable level of prices appears to be the condition most conducive to maximum sustained output and employment, and to moderate long-term interest rates.” Dovish former Fed Chair Ben Bernanke wrote “In the long run, the central bank can affect only inflation, not real variables such as output.” Stable prices send the clearest signals, facilitate optimal decision-making to consume, save or invest, enabling maximum sustainable wealth and job creation.

Republican Powell was originally appointed to the Fed board by President Obama. President Trump elevated him to Chairman. Powell has tried to maintain the Fed’s assiduously-cultivated – and not entirely deserved, reputation for apolitical, technocratic competence. To Powell’s credit he’s resisted efforts to politicize regulation.

While Powell wasn’t dovish enough for Trump’s taste, he’s a dove. He’s repeatedly promised the administration and markets easy money for the foreseeable future, and been stubbornly blind to inflation’s danger.  Paraphrasing Upton Sinclair, it is difficult to get a man to understand something when keeping his position depends upon him not understanding it.

There are eminent and more hawkish alternatives to Powell who would stick narrowly to the Fed’s statutory mandate. Stanford economist John Taylor, former Philadelphia President Charles Plosser, former Fed governor Kevin Warsh, and former House Financial Services Committee Chairman Jeb Hensarling, would be superb Fed chairs. Biden, however, isn’t going to nominate any of them.


Democrat eminence grises and eponymous sponsors of Dodd-Frank, Barney Frank and Chris Dodd, and Senator Jon Tester have called on Biden to renominate Powell. He is likely the least-bad politically-viable option.

If Biden instead decides to replace Powell, woke Fed Governor Lael Brainard would be the odds-on favorite. While Powell and Brainard have been of one mind on monetary policy, Brainard’s urged a harder line regulating banks, endearing herself to progressive heartthrob Senator Elizabeth Warren. Warren’s blasted Powell for putting the economy at risk by being too protective of big banks. But banks aren’t underregulated. Thanks to Dodd-Frank, quite the contrary. And under Powell no major bank has failed. They’ve increased their capital. The point seems to be, one must ritualistically bash banks, to attest to one’s progressive virtue.

Brainard wants to advance policies progressives have been unable to legislate, by regulatory diktat. She’s urged the Fed to weigh anthropogenic-climate-change risks in bank regulation. Banks have been pricing the risk of hurricanes, floods, and droughts for centuries. By making energy more expensive Fed climate-change regulation would genuinely put the economy at risk. Powell rightly holds that whatever one believes about the climate-change bogeyman, it’s a matter for Congress, not the Fed on its own prerogative.

Brainard is also keen for a retail Fed digital dollar.  The US payments system is already largely digital and works well. A Fed digital currency would compete with commercial banks and stifle private-sector innovation in money and payments. Quarles and Governor Waller have suggested there’s no compelling case for one. Powell has remained neutral and insisted it would require Congressional authorization.

While since its 1913 creation the Fed’s been a masterful political actor, it’s avoided appearing political. If progressives score a quadfecta of appointees, the Fed will become a brazenly political and more dangerous actor.

The Senate can and should reject any nominee inclined to act beyond the Fed’s statutory mandate.

China fires a shot across the bow of King Dollar

China’s pilot of a digital yuan is a shot across the bow of King Dollar. Domestically it will displace anonymous physical cash and compete with China’s card-network monopoly China UnionPay, and its PayPal analogues Alipay and WeChat Pay. Abroad it will help it bypass the dollar-dominated global financial system, facilitating China’s Belt and Road Initiative, which is being used to ensnare vast swaths of the world in its economic dominion.

Hopefully, it’s a wakeup call for U.S. policymakers.

It’s high time for digital dollars, dollars that could be carried by consumers in digital wallets and used online and in-person at casinos, bars, cafes, and barbershops, worldwide.

Digital greenbacks could be public, private, or both.

The Fed issues physical dollars to banks in exchange for reserves. It could do the same with digital dollars.

Former CFTC Chairman and Director of the Digital Dollar Project Chris Giancarlo shared his vision for modernizing the dollar’s architecture in the  Senate Banking Committee’s June 30th hearing “The Digitization of Money and Payments.” He envisions Fed e-dollars distributed through banks and regulated money transmitters. The central bank would issue e-dollars to banks against reserves, that would in turn issue them to consumers and businesses.  The Fed would serve rather than compete with banks.

Distributing digital greenbacks through banks is politically practical as they‘re a powerful interest group. It also preserves the dynamicism and accountability of competitive private-sector banking and payment systems.

Fed e-dollars would be supported by a permissioned distributed digital ledger, hopefully, unlike China’s digital yuan, with U.S. values like privacy designed in.

They wouldn’t be the first digital greenback. In 2015 Ecuador’s central bank launched an account-based digital dollar. It failed, not because Ecuadorans don’t like dollars – they do, but because of distrust of the central bank and the state MNO having a monopoly providing mobile payment services.

Competition between Fed and private-sector e-dollars would be healthy.

Facebook’s Libra stablecoin – “the Zuck buck,” will be a de facto digital dollar, used with its wallet Novi within Facebook and WhatsApp, and via third-party e-wallets.

Chase’s JPMCoin and Signature Bank’s Signet are electronic dollar-backed tokens, facilitating payments between their domestic business clients.

And, the world’s largest payment network Visa has applied for a digital fiat currency patent. It could deliver digital dollars through its bank licensees.

In the U.S. digital dollars will help the un- and underbanked more fully participate in the economy, displace dirty physical cash, and compete with credit and debit cards, PayPal, and money-transfer systems like MoneyGram and Western Union.

But digital dollars’ impact will be felt worldwide.

The dollar is the world’s preeminent currency, enjoys trust and powerful network effects. It dominates foreign-exchange reserves, foreign-currency-denominated debt, foreign-exchange turnover, and cross-border interbank payments.

The dollar accounted for 61% of the world’s foreign-exchange currency reserves as of the fourth quarter of last year, far surpassing the euro’s 21% share and the Chinese renminbi’s paltry 2%. An enormous 74% of the $16 trillion in foreign-currency debt is denominated in dollars, and most international trade, including oil, is invoiced in dollars.

While Beijing resents its dominance, foreigners planetwide love dollars. They circulate widely outside the U.S., for licit and illicit purposes. About 60% of U.S, currency and 75% of $100 bills are held abroad. Dollars are used officially in Ecuador, El Salvador, Panama, the Turks and Caicos Islands, and Zimbabwe. In Costa Rica, the greenback circulates in parallel with national currency. Hong Kong, for the moment, pegs its currency to the dollar.

In November, 2019 Zimbabwe’s central bank introduced a new Zimdollar, attempting to displace the U.S. dollar. However, it’s quickly returning to binge money-printing. In May, 2020 inflation hit 786%, though that’s still a far cry from Zimbabwe’ November, 2008 peak monthly inflation rate of 79,600,000,000%. Civil servants have started demanding to be paid in dollars.

Since its 1913 creation the Fed’s massively debased the dollar. Nonetheless today, relative to most fiat currencies, the dollar is a Rock of Gibraltar and trusted as a store of value, unit of account, and means of exchange.

Zimbabweans, people the world over, prefer currencies they can trust. Electronic greenbacks they can access from mobile phones will make it easier for them to dollarize and avoid debased domestic currencies.

Digitizing King Dollar will make it more attractive at home and abroad, and fortify its global dominance.

Will Covid-19 sound the death knell of cash?

In January NYC lawmakers banned merchants banning cash. Last year SF mandated merchants accept cash. They may rue the day.

Covid-19 is hammering vulnerable populations and the economy. It’s also making consumers and merchants increasingly leery of transacting in dirty, potentially contaminated cash. On Visa’s April 30th earnings call CEO Al Kelly warned “Currency is a germ-carrying mechanism.” While the coronavirus will be vanquished, the economy recover, and Americans return to a semblance of normalcy, diminished cash use will be a lasting legacy of the coronavirus pandemic.

The payments industry has battled cash since Diners Club’s 1950 inception. In 2018 15.1% and 24.6% of US consumer-payment volume and transactions, respectively, were in cash, excluding mortgage payments. In most countries cash is still the leading retail-payment system.

To fight the coronavirus in March France’s storied Louvre museum stopped accepting cash. In the US Amazon’s Whole Foods has started restricting cash payments.

ATM withdrawals in the UK fell 60% yoy in the month ended April 27th.

Short-term demand for cash in some markets, however, has surged, not for transacting but as a hedge.  In Russia, about 1 trillion rubles ($13.6 billion) was withdrawn from ATMs and bank branches since the beginning of March, more than during 2019. Withdrawals spiked after President Putin extended self-isolation measures and imposed a tax on bank deposits over 1 million rubles. In the Eurozone circulating banknotes rose by €41.2 billion to €1.33 trillion, the largest increase since the 2008 financial crisis.

Fear of Covid-19 will spur greater interest in digital currencies.

Facebook and the Libra Association scaled back ambitious plans announced last year to launch a global digital currency and payment system, which provoked a din of hostility from regulators and politicians. Their rethink will keep Libra’s transaction ledger permissioned, making it less likely bad actors will get access. And Libra stablecoins will be backed by each jurisdiction’s national currency – dollars, pounds, euros, et al, rendering them akin to electronic banknotes. That won’t threaten government monopolies creating money. The coronavirus has created a signal opportunity for the social-media giant’s ambitions in payments.

Signature Bank and Chase already have digital dollars for business-to-business payments. Wells Fargo Digital Cash will launch this year. Banks could repurpose their digital dollars to replace physical cash at grocery stores, restaurants and barbershops.

The Peoples Bank of China is rolling out a digital-currency pilot in 4 cities:  Shenzhen, Suzhou, Chengdu, and Xiong’an, a satellite city of Beijing.

Fear of touching will change the familiar experience of swiping or inserting credit cards and signing, to pay for goods and services.

For a quarter of a century the US payments industry half-heartedly tried to spur contactless payments. In 1996 Mastercard in Manhattan and Visa at the Atlantic Olympics ran pilots. The experience wasn’t compelling for consumers or merchants. Swiping cards was habit and nearly frictionless.

Google Wallet, Apple Pay and Samsung Pay launched in 2011, 2014, and 2015, respectively. Mobile-wallet evangelists enthused they would usher in an era of contactless payments at NFC-enabled merchants. Joe Cardholder and Jose Merchant, however, didn’t bite.

Covid-19 is more persuasive. Cardholders and merchants don’t want physical contact. Banks are rushing to put contactless credit and debit cards in consumers’ leather wallets and purses. Mastercard’s contactless payments increased 40% in the first quarter.

Time-honored signatures at the physical point of sale will disappear. March 23, 2020 Mastercard reminded merchant processors that payments at the physical pos by card or mobile phone don’t require signatures.

In the lockdown online retailers like Amazon are booming. In April, 2020 e-commerce surged to 50% of Mastercard’s transaction volume. While vaccinated Americans will return to bars and restaurants, fly to Europe for business and holidays, and again take cruises, e-commerce will continue its multi-decade trajectory, taking share from in-person commerce.

The Covid-19 pandemic will pass, having put a damper on consumers’ and merchants’ appetites to handle cash, and changed the experience of paying face-to-face.

Covid-19 Black Swan batters the payments industry

In the Black Swan: The Impact of the Highly Improbable former options trader and NYU Professor of Risk Engineering Nassim Nicolas Taleb looks at the outsized impact of unexpected outlier events. The coronavirus pandemic that’s locked down the world and battered the payments industry is a classic Black Swan. It’s easy to see in retrospect but was outside the experience, and therefore off the radar, of Western policymakers.

The economy is nosediving into a depression because of Covid-19-induced government business closures. Counties representing 96% of US national production are locked down. JPMorgan forecasts 2nd quarter GDP will fall 40%. Bearish fund manager Crispin Odey says “The fall in global gross national product for this year will echo 1931-32.” Former Trump economist Kevin Hassett also warns the coronavirus could cause another Great Depression.

Borders worldwide are closed. International travel has ground to a halt. Consequently highly-profitable cross-border payments at the physical pos have disappeared. Covid-19 has however had a salutary effect, curbing merchants fleecing unsuspecting cardholders with Dynamic Currency Conversion.

Domestic payments in many but not all sectors have plummeted.

The number of people flying in the U.S. on Tuesday April 7th was down a whopping 95% yoy.

Hospitality has been hard hit. Shift 4’s hospitality and restaurant transactions April 2-8 in California, Nevada, New York, Texas and Florida against February 2-8 were down 94%, 96%, 91%, 91%, and 90%, respectively. For like-for-like-merchants ACI Worldwide reports April 1-8 global online ticketing and travel transactions down 98% and 92% yoy, respectively.

Millions of SMEs are closed. Many won’t recover.

Department stores like Dillard’s, Kohl’s, Belk, Macy’s, Saks, Neiman Marcus, JC Penny’s and Sears are closed. Covid-19 will cull the already struggling herd.

Closed businesses means no payments, no transaction fees for acquirers, networks, issuer processors, and issuers.

However, select sectors are booming in the crisis.  ACI Worldwide reports like-to-like merchants’ online gaming and retail payments April 1-8 up172% and 58% yoy, respectively.  March gun sales were up a whopping 85% yoy.

The strong are becoming stronger. Walmart’s March sales were up 20% yoy.  Amazon’s hiring 100,000 workers. While Costco March sales initially surged midmonth they ebbed because of social-distancing measures and closing departments such as optical.

The coronavirus pandemic will have lasting effects on the payments industry.

It will accelerate the global migration from cash to electronic payments. Merchants and consumers are increasingly reluctant to handle potentially contaminated cash. NYC lawmakers may rue banning merchants banning cash.

Fear of the virus will spur greater interest in digital currencies.

Facebook pivoted from its plans announced last year, to launch a global digital currency and payment system, which provoked a din of hostility from regulators and politicians worldwide. The Libra Association’s rethink will keep Libra’s transaction ledger permissioned and back its stablecoins with each jurisdiction’s national currency, rendering them akin to electronic banknotes. That won’t threaten government monopolies creating money.

Signature Bank and Chase already have digital dollars for B2B payments. Wells Fargo Digital Cash will launch this year. They could be repurposed for retail payments.

Fear of touching will spur further reductions in payments friction at the pos.

Since the mid-nineties Mastercard and Visa have tried in vain to interest US banks, merchants, and consumers in contactless payments. Covid-19 is more persuasive. Banks are rushing to put contactless cards in consumers’ leather wallets.

Pos signatures will disappear. March 23, 2020 Mastercard reminded acquirers payments at the physical pos by card or mobile phone don’t require signatures.

The Wuhan virus is stoking protectionist sentiment. Borders and control of critical supply chains for ventilators, masks and drugs, are at the fore. Many nations and the supranational EU view payments as critical infrastructure.

The EU wants a pan-EU payment system to take resented American Mastercard and Visa down a notch. Playing to Brussels’ sentiment, the EACB, EBF and ESBG decry intra-EU cross-border payments only being possible because of “a few global, non-European market players,” i.e. Mastercard and Visa, and hail policymakers’ call to create European pan-European payment solutions.”

Mastercard and Visa will face increased protectionist headwinds worldwide.

Washington raining trillions of dollars on the economy may mitigate the immediate pain, albeit at a dangerous long-term cost. However, the economy and payments industry can’t fully recover until there’s a vaccine(s) and/or effective treatments. As of April 6th there were more than 200 clinical trials of coronavirus treatment or vaccines in process or recruiting test patients. Covid-19 will be vanquished.

Vaccinated, Americans will return to bars and restaurants, fly to Europe for business and holidays, and again take cruises. And a battered and changed payments industry will return to growth.

Facebook’s cryptocurrency Libra provokes a firestorm on Capitol Hill

Facebook’s cryptocurrency Libra has the potential to increase currency and payment-system competition globally. Not surprisingly it’s provoked a firestorm of concern and protest from regulators, politicians, and a medley of activists.

Addressing the House Financial Services Committee July 10th Fed Chairman Jerome Powell declared Libra potentially a “systemic risk” raising “serious concerns regarding privacy, money laundering, consumer protection and financial stability.” Bank of England governor Mark Carney warned it wasn’t going to start unless it was “rock solid.” French Finance Minister Bruno Le Maire thundered he would prevent Libra from becoming “a sovereign currency that could compete with the currency of states.”

Governments protect their currency monopolies. Liberty Dollar founder Bernard von NotHaus was prosecuted and convicted of making and distributing coins resembling U.S. coins. The North Carolina Western District U.S. Attorney lambasted Liberty Dollar as “a unique form of domestic terrorism” attempting “to undermine the legitimate currency of this country.”

Facebook has managed to attract political ire on both sides of the political aisle.

Senate Banking Committee Ranking Member Sherrod Brown mocked Libra as “monopoly money.” House Financial Services Chair Maxine Waters worries it might be intended “to establish a parallel banking and monetary policy system to rival the dollar.”

The day after Powell’s comments President Trump weighed in tweeting “We have only one real currency in the USA,” “it will always stay that way” and that “Facebook Libra’s ‘virtual currency’ will have little standing or dependability.”

Friends of Earth-US, U.S. PIRG, the powerful public-sector union SEIU, et al demanded a moratorium on Libra pending addressing a laundry list of concerns. Some contended Libra was “too dangerous to be permitted to proceed.”

Few argue against more payment-system competition. Currency competition, however, doesn’t square with monetary economic orthodoxy, and, is alien to most Americans. But, the dollar circulates in countries like Ecuador, Panama and Zimbabwe. Hong Kong’s currency is tied to the dollar through a currency board. In Denationalisation of Money: The Argument Refined, Nobel-Prize-winning economist Friedrich Hayek advocated permitting private currencies to compete with government fiat money.

Designed as a global digital currency Libra could do just that. It will be a “stablecoin” backed by a reserve of fiat currencies deposited at banks and short-duration government securities. Tying it to a hard asset like gold would have been bolder but also more threatening to central banks. In contrast, Bitcoin is backed by nothing more than the hope there’s a greater fool willing to buy it for more. Cryptocurrencies Tether and Pax promise to redeem each token for a dollar. Libra, however, is designed more like a mutual fund than demand-deposit liability, perhaps to reduce the risk of being regulated as a bank.

Libra’s manifesto recites a litany of do-good pieties. One doesn’t have to be a cynic, however, to understand Facebook’s commercial motivation. Libra could enable the social-media giant to increase engagement, advertising effectiveness and commerce velocity. It could pay users Libra to watch ads and discount ads and payment fees paid in its digital currency.

Notwithstanding for the moment often weak smart-phone penetration, emerging markets with weak currencies,  banking and payments systems present an enticing opportunity to boost commerce.  In Venezuela with a million-percent-plus inflation Libra might be an attractive store of value, unit of account and means of payment. Activists worry about Libra’s impact on developing countries’ monetary policies. One of the best things that could happen to countries with debased fiat money would be robust currency competition and losing control of their monetary policy.

Libra will be controlled by a Geneva-based association, not directly by Facebook. Geneva conveys neutrality. Washington prevents US-headquartered Visa, Mastercard and PayPal from operating in North Korea, Iran, Syria and Crimea. The governance model is intended to allay fears it’ll be controlled by the social-media Gargantua and create a broad ecosystem of support and participation.

Authorized resellers will buy and sell Libra, supporting processing exchanges and institutions. In the US resellers and processors at a minimum are likely to be regulated as money transmitters.

Facebook will have its own digital wallet for Libra Calibra, integrated with Messenger and Whatsapp. If Libra gets traction Google Pay, Apple Pay, Samsung Pay and PayPal will likely support it.

The two genuinely global retail-payment networks Mastercard and Visa joined the Libra association. While a new currency per se wouldn’t hurt them, a widely-adopted electronic-payment system would. In the tent they signal they’re open to payments innovation and give a di rigueur nod to Facebook’s litany to more financial inclusion. Attaching Mastercard and Visa debit cards to Libra accounts would give it instant global acceptance, albeit in fiat currencies. But, if several billion Facebook users used Libra for retail payments and to transfer funds to friends and family, it’d be catastrophic for traditional retail-payment and money-transfer systems.

If Libra runs the regulatory gauntlet in enough jurisdictions, it still faces an enormous challenge. Unless and until Libra achieves network critical mass it offers little value to anybody. In payments finding a path to critical mass isn’t easy, particularly in markets well-served by established systems. Most new payment systems, notwithstanding being putatively more secure, cheaper, or in some other respect superior, fail.

Libra threatens and stresses existing systems. No bad thing. A credible, lightly-regulated, new global currency and payment system would force existing currencies and payment systems to perform better.

Putting sunlight on currency-conversion fees to protect consumers from being fleeced

March 19, 2019 the EU mandated enhanced disclosure requirements on currency-conversion fees for banks, merchants and ATMs. The landmark pro-consumer reform will take effect in April, 2020 and should reduce the number of consumers fleeced by Dynamic Currency Conversion (DCC).

Competition and inadequate disclosure requirements have fueled an explosion of DCC, a service permitting cardholders for a fee to pay in their familiar home rather than the local currency. Between 2013 and 2017 the number and value of DCC transactions in the EU increased 118% and 65% respectively. The average EU DCC transaction declined from €128 to €85, reflecting it’s becoming increasingly mainstream.

DCC is a scourge for unsuspecting consumers. The Norwegian Consumer Council blasted DCC as “of hardly any value or benefit to consumers.” Its survey of DCC users found 99.7% were worse off (paid more), with the highest DCC markup being a whopping 12.4%. If there’s a scintilla of consumer value, it’s in the momentary false comfort consumers may take immediately seeing payment in their native currency, not knowing the markup over what they would have paid in the local currency.

With most payment products and services sufficiently transparent market competition ruthlessly polices the industry, continually reallocating resources to those delivering more value. The market self-corrects, purging products consumers don’t value. However, under the current DCC-disclosure regime, competition renders the problem worse, rewarding payment processors, merchants and ATMs for fleecing consumers and punishing those that don’t. DCC payments are quick one-off transactions. Cardholders are fleeced and none the wiser.  Consumers don’t know they’ve been gouged. Consequently, merchants and ATMs not offering DCC leave money on the table, typically 400 to 500 basis points, but often considerably more, as much as merchants think they can get away with. Acquirers not offering it would lose merchants and forego profits.

Behavioral nudges like highlighting the preferred DCC option in green encourage use. Presenting a payment option in consumers’ native currency is a behavioral shove.

DCC preys on consumers’ greater comfort transacting in their familiar native currency, and ignorance of the economics of their alternative, paying in the local currency. Paying in merchants’ currency they would enjoy close to the wholesale exchange rate through networks like American Express, Mastercard and Visa, and then, depending on their issuer, possibly, pay a disclosed foreign-exchange markup or cross-border fee.   When DCC is offered the price in both the cardholder’s and the local currencies and the exchange rate are displayed at the point of sale or ATM.

Most regulators haven’t been interested in DCC because it’s foreigners being fleeced and national merchants and processors profiting. The supranational EU took an interest because with 11 currencies millions of EU consumers are fleeced by DCC by merchants and ATMs in the EU every year.  Plus, DCC increases the cost of intra-EU payments, and, is thereby a deadweight loss for its economy.

The EU will require DCC markups be disclosed as a percentage over the ECB’s benchmark foreign-exchange rate, and, that issuers, separately, notify cardholders of any foreign-exchange markups as percentage over the central bank’s benchmark rate. It’s an improvement. Better yet however would have been to insist on side-by-side markup disclosures of bank and DCC markups before payment. Banks contended providing their foreign-exchange fees at the point of sale would be burdensome. Fair enough. But just disclosing markups as percentages – arguably more useful for comparison purposes – would be a relatively modest effort. Tables with issuer markups, kept at the networks and/or merchant processors offering DCC.

Consumers have relationships with their banks. Cross-border fees and foreign-exchange markups are disclosed on statements, and subject to considered review. Issuing banks outside the EU substituted cross-border for currency-conversion fees on payments abroad to avoid being disintermediated by DCC. Some issuers offer and advertise no cross-border fees. Within the EU some but not all issuers charge foreign-exchange fees. For its Freedom Rewards Visa credit card Barclays charges a 2.99% fee for nonsterling transactionsClydesdale’s B Mastercard credit card charges no foreign-exchange fees. Santander’s Zero Mastercard credit card similarly has no foreign-exchange fees. Cardholders have choices.

While the EU has taken a step to protect consumers from DCC, industry self-policing is the only viable global solution. Only global networks Mastercard and Visa can protect cardholders worldwide.

Mastercard banned DCC on multi-currency prepaid cards issued for use abroad loaded with the merchant’s currency. April 13th Visa went a step further banning DCC on all consumer travel prepaid and debit cards, including multi-currency prepaid cards, no matter the currencies loaded. Nonetheless, the global payment networks have been reluctant to use their market power to ban DCC, fearing it would provoke anti-trust complaints. It would however be well-nigh impossible for regulators to object to their mandating pricing-transparency for consumers.

The more sunlight put on DCC on both sides of the network the fewer consumers will be gouged. Sufficient sunlight will destroy the DCC industry.