What is Stability?
The Time of Alternative Money*
Dick Bryan and Akseli Virtanen
‘Stablecoins’ have claims to legitimacy because they avert the supposed principal flaw of cryptotokens: their price volatility. But whose stability is stable? What is the appropriate benchmark for ‘stability’?
We would like to challenge the conventional understanding of monetary ‘stability’ and reconsider its significance for the role of stablecoins.
By the beginning of the third decade of the 21st century, it is clear that something is not working about a conventionally-conceived fiat money system, centered on the role of the state. There is scarcely an economic commentator who hasn’t already proclaimed that conventional state monetary policy, centered on the use of central bank interest rates as a lever to manage inflation and the level of economic activity, is losing traction if not run its course. They may differ in their recommendations for new policy direction, but we are in a period where the conventions no longer work. Ben Bernanke just came out (Jan 4, 2020) with his new tools of monetary policy at the 2020 American Economic Association meet.
It looks to us that the state monetary policy is rather out of tools. That is why he must readjust the definition of what “normal” means in monetary policy (hence our choice of rainbow colors in the image).
The symptoms are many and in many countries:
‘Official’ interest rates have been cut so frequently in an attempt to trigger economic growth that they have gone negative. Borrowers are, in effect, being paid to borrow and savers are paying for the privilege of housing those savings in a bank. According to data collected by ICE (Intercontinental Exchange, which owns the NY Stock exchange, LIBOR and a host of other world-wide financial indices, markets and clearing houses), there are now $US14 trillion of bonds trading at negative yields around the world; 80 percent of them in government bonds.
Second and concurrently, governments proclaim the need for austerity for the population but continue to stand ready to pump liquidity into financial markets. Popular focus here on ‘neo-liberalism’ too readily frames this as an ideological choice of the state, as if it has the capacity to choose otherwise. But, with capital markets as they currently operate, it is clear that the profitability of financial institutions must be secured. The 2007–2008 financial crisis didn’t show the weakness of financial capital, but how its need to be profitable will dictate what policy agendas the state will enforce. ‘Austerity’ is required not so much to pay for bank bailouts but to display to both finance and to the population at large that the power of financial capital is absolute.
Third, and closely related, central banks, which bought financial assets in the years after the global financial crisis (Quantitative Easing) to pump up deflated asset markets, had promised to release those assets back into the market as conditions ‘normalized’. Now they can’t release these assets, for fear of crashing asset prices. The US Federal Reserve started to initiate ‘normalization’ in October 2017 — by selling $US 50 million per month of treasury bonds and mortgage-backed securities — but by January 2019 the Fed’s FOMC minutes reported plans to “stop reducing the Federal Reserve’s asset holdings later this year” in the light of the impact of ‘normalization’ on “prices of risky assets like stocks and corporate bonds”. They are now saying this is the new “normal”.
The effect is that central banks in core countries/regions (notably the US, UK, Europe and Japan) now face the next economic crisis with massively inflated balance sheets, and no new strategy for dealing with crises except for buying up more assets to inflate asset prices (Bernanke’s new tools). They are so committed to guaranteeing liquidity to financial markets that they can do little else. This makes central banks hostage to financial institutions which generate illiquidity either via ‘distortion’ in market processes — such as the repo market crisis of mid 2019 — or by willful misrepresentation of risk, as happened in 2007.
Fourth, the world’s ‘base’ interest rates (overnight rates thought to be risk free) aren’t working. In the US, the repo market hit sudden illiquidity late in 2019, and required a massive liquidity injection from the Fed. LIBOR (the overnight inter-bank rate quoted in London), said to be the most important number in the world, was found to be corrupted (gamed) by participating banks, leading legal prosecution and requiring regulatory intervention to rebuild the management and reputation of LIBOR. By 2021 LIBOR will be abandoned, and not because of the corruption (which has been effectively remedied), but because markets don’t treat a borrowing rate as core, for borrowing itself is not the critical process in short-term markets. Financial valuations are more based in overnight derivative prices which trade spreads on borrowing rates. LIBOR will soon be replaced by a derivative index. These derivative-based indices are already being adopted to determine fixed/floating rate spreads in bond and swaps markets: the US Fed has the Secured Overnight Financing Rate; the Bank of England the Sterling Overnight Index Average, the ECB the Euro Short-term Rate, etc..
This list of historic shifts in the foundations of fiat money could go on, especially if it were to address strategic policy failures in particular countries and regions. But it already embodies enough signals to challenge some key conventions of money in advanced capitalist countries.
First, central banks are not controlling money systems: their avowed agenda is to generate stability, but their capacity to deliver stability is diminishing, reduced to bailouts for liquidity-challenged financial institutions.
Second, the core change is that big finance is no longer centered on borrowing and lending (debt). Of course, borrowing and lending to generate interest rate spreads is a necessary part of finance, but it is not the site of the big action. The big action is around volatility, with debt just the trigger for volatility. Debt is a long position, but profits come more from positioning on the future. It is default rates in loans rather than interest rate payments per se that provide for the most innovative, short-term positions and issues that arise with volatility that comes from an unknowable future.
These two points — central banks struggling to secure financial stability and financial institutions profiting from volatility — are not at odds. In markets conceived in volatility, the central bank’s stated goal of securing stability provides a ‘fixed position’ against which volatility traders can take positions. Central bank policy is both market fodder and market bailout when volatility reaches beyond an anticipated range.
So how does the future of the world’s leading fiat currencies look? It would be too extravagant to announce their demise, but we must ask about their presumed inherent stability. What happens when there is a critical mass of opinion that the value of US Treasury bonds is unknowable and the ‘assets’ of the Fed are worth way less than they claim? What happens when we have a protracted period of negative interest rates: where there is no ‘safe’ way to save, and where negative yields become the norm? Fiat money requires that the population ‘believes’; so what happens when people start doubting? From our current vantage point we don’t have to proclaim a ‘crisis!’, but we can surely conjecture a trend towards financial insecurity and popular fear.
It is in this context — where the state’s capacities for creation of stability are stretched beyond policy capacity, and financial institutions are relishing the incapacity of the state to provide stability for anyone but themselves — that cryptocurrencies and new cryptographically enabled economic-organizational forms find their new role.
Often castigated for being ‘unstable’ and ‘volatile’ cryptotokenization opens up new framings of ‘stability’. They invite the question of: Stability with respect to what? Of course, if the benchmark is the state’s fiat currency then indeed anything crypto is volatile. But what happens if we focus on the emerging potential for the state’s money to be seen as ‘unstable’, by its own historical conventions? Who makes the call on what is ‘stable’ and in whose interests do they make that call?
Perhaps we need to rethink the role of ‘stablecoins’ in this light: being stable with respect to a fiat currency (or a basket of fiat currencies) is one take on stability, but it embeds the primacy of fiat over crypto, and leaves the stability of fiat currencies unquestioned. In this context, stablecoins are being styled as the acceptable face of crypto because they are a crypto version of fiat: the US dollars you hold when you don’t hold US dollars. But where do you go when you want to dissent from fiat, when you want to take a stand against fiat by betting against it (shorting it) and finding new stability from a different set of economic and social relations. For make no mistake, money is a social relation.
We think the latter is the real social potential of cryptoeconomy. It provides an opportunity to re-think the social role of money, and the social incentives that are embedded in fiat currency — money as a series (protocols) of social relations. And if and when fiat currencies face their next future crisis, we want to be talking already about what new stabilities — new social relations, processes and goals that we believe should be constant; new metrics of stability — we are advocating.
This is the issue we should pose of every aspiring token: what is its own notion of inter-temporal stability that it claims to secure?
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*The subtitle of here could also be “The Financial Time that Remains” — as ECSA member Erik Bordeleau once brilliantly noticed — referring to Giorgio Agamben’s well known book The Time That Remains on political theology (Stanford University Press 2005 [Il tempo che resta. Bollatti Boringhieri 2000]). Agamben develops there a strategy — to question the logic of sovereign powers — which does not seek to destroy the established order of social and political relations, but deactivates and moves beyond them by re-framing and re-potentializing our experience of “now”. Political theology works always with the change of experience, opening the field of the possible, and thus, with the creation of subjectivity. That is also the business of Economic Space Agency.
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Dick Bryan, Prof. (emer.) of Political Economy (University of Sydney) and Chief Economist at Economic Space Agency. He is one of the key theorists of the derivative value form, and the author of Risking Together and Capitalism with Derivatives (together with Mike Rafferty).
Akseli Virtanen, PhD, is a political economist and Co-founder at Economic Space Agency.
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See more on our take on stability:
Reframing Stability in Cryptoeconomy
Towards Post-Capitalism. A Language for New Economic Expression
ECSA Vision: An Economic Grammar for the Information Age (podcast)
Crypto-Political Economy. Transcending Hayek and His Digital Disciples (podcast)
