MUMBAI: The new global digital currency in Facebook, which Vegas plans to launch as early as 2020, can change the world.
But no one, including the founders of this ambitious economic engineering project, can fully predict the possible consequences of the currency. Investors of monetary policy should be particularly worried because they may find it much harder to control unemployment and inflation in the Libra world.
In the first quarter of 2019, Facebook had 2.38 billion active users monthly. If even some of them start using Libra to make financial transactions, buy and sell products, and transfer money, the new currency will quickly get broad acceptance.
The Geneva-based Weighbridge Association, a non-profit group that will manage the digital currency, counts companies such as Uber, eBay, Lyft, Mastercard and PayPal among the founders. Libra can therefore become a dominant global currency – but managed by a corporation, not a central bank.
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At this stage, you can speculate only about the problems that Libra can cause. For example, if Libra become popular, people will exchange their national currencies – dollars, euros, yuan and rupees – for the new digital coin to buy and sell the many products that will be valued in it.
Many users can then choose to keep Libra instead of exchanging it for their own currencies.
Facebook or the Libra Association will continue to keep their national money and make the most of it by investing the money of Libra users. They will also be tempted to issue extra Libra to earn seigniorage in the same way that central banks make the national currencies they issue.
Inflation – and the diminished ability of politicians to control it – must appear prominently in the list of possible risks. Usually, when inflation rises, central banks take steps to control this. But the effectiveness of these policies can be greatly reduced if one of the biggest money-generating bodies is a private organization. Libra itself may create some inflationary pressure as it is an effective addition to liquidity
Recently, high inflation has been seen only in emerging economies. There is a tendency to assume that developed economies are immune but it is sobering to recall that the two most devastating cases of inflation in history are in relatively rich countries: Hungary in 1946 and Germany in 1923
in the beginning of the inflation leap costing 100 sixty marks (one with 23 zero after it) barely a year later.
Despite these risks, he called for an immediate suspension of Libra may not be the right move.
To begin with, it is not clear which existing law can be used to stop the proposed currency. At one level, Libra does not differ much from legally valid coupons that people acquire with their dollars when they enter an amusement park and then use to pay for food and rides. In a globalized world, a country that rejects Libra
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Politicians must urgently consider what kind of global private digital money they could create. Then we may need new laws and global treaties to mitigate the potential negative consequences and limit the power of the organizations that manage these new currencies. Kashik Basu, a former World Bank chief economist and former chief economist at the Government of India, is Professor of Economics at Cornell University and a non-resident senior associate at the Brookings Institute.