Wednesday, 21 March 2012

A Facebook credit for your thoughts

Mr. Friedrich Hayek, one of the most proponent theorists of the Austrian school would be terribly happy to find out that competition is creeping up on the government monetary monopoly. This is because companies like Facebook or PocketChange, offering virtual credits for their users to use in games such as Farmville, or Mafia Wars, are gaining more and more popularity: revenue generated by the Facebook credits system sky-rocketed to $557 million in 2011, from only $106 million the previous year, according to its most filing prospectus. They are counting more and more on the virtual credits to generate income streams and this could generate a positive effect, depending on the popularity of their currency, of competition on government controlled market. 

Were could this take us ?

Imagine a world in which you can make payments and keep your money in one of the many currencies in circulation: currency A, currency B and currency C. Say currency A is under the control of the country`s central bank and it is stemmed from issued debt (the government creates a debt in the form of a Treasury bond which is subsequently purchased by the central bank by freshly created money through the help of a financial intermediary). In this case the government is interested in lowering the value of currency A, over the medium or long term (depending on the average duration of its debt) through the means of principal cuts (debt restructuring, partial or total default) or devaluation (either through currency effects or through inflationary devaluation).

Imagine that currency B and currency C are issued by companies which have a genuine interest in the reputation of their "virtual credits". This reputation can be assured either by the robustness of their financial position (low leverage, solid asset base, high returns, conservative capital allocation, etc) or by backing the currency with other assets (best option here would be that such credits can be readily redeemable to their products or they can represent a claim on their properties or some easily marketable securities or commodities). On a market in which people are able to choose between their currency of choice, there would be a smaller discrepancy between the value of money and the real purchasing power, and central banks would find it a tad harder to set the price of virtually everything we might own.

There still is the risk of currency dilution in the case of these virtual credits issued by companies, but, arguably, the mechanisms of competitive markets will limit the extent to which they would retort to such monopolistic policies. Remember, only in severe market concentration, such as monopolies or oligopolies, can companies fix the prices, and consequently, only if the money market is controlled by the central bank, can they fix the price of money (i.e. the interest rates or the purchasing power of money).

I`m not in any way advertising Facebook and its credit system, even though its success seems to me staggering. It only serves as an example of a service that fits a more general market development. What is your opinion? Would we benefit from competition on the money market ?

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