In plastic we l(o)ive!

Whether or not the Euro had become a successful currency or not it at least begun the bold process of integrating multiple currency systems after much delay. But the next step to integrate all the currencies of the world into one system is going to far more easy than inventing Euro, thanks to the electronic currency system we seem to fast adapting to.

Plastic is already all pervasive as a way of denoting the credit worthiness, as a key to accessing our currency resources and as a way of trading currencies across geographies. Even plastic is on its way out with the currencies being represented by a dot or a dash in a remote computer terminal where currencies or the value of the monetary unit may get created, get exchanged, get over or undervalued and remain only in that form.

This system is quite convenient, quite secure against theft and abuse, immensely capable of being transferred in very large values between accounts at astronomical speeds which would increase the speed of the currency exchange system making it more mobile and hence more valuable. The flipside however is that if catastrophe manmade or otherwise should strike the computer consoles, it would be near impossible to reverse the transaction and retrieve your money.

Also Digital currency payment systems have raised macroeconomic questions and concerns regarding their impact on the money supply and government’s control over monetary policy. In the US research has shown however that the FED control of the money supply can be adjusted to reflect the change in the money demand and as such government officials consider the effect of digital currency on the monetary system to be minimal (Blinder 1995).

But it will affect monetary system in two ways. Supply of money by changing money multiplier in the long run and  the velocity of money affecting price levels and interest rates.

Money whether in currency form or in digital form should ordinarily have the same characteristic of liquidity, portability and price elasticity expressed in terms of interest rate changes, except that in the digital form money will rarely have zero velocity ie., being kept idle in a safe or locker or in the wallets of people for long periods of time, which would provide a greater multiplier thrust to the country’s monetary resources which may in the long run bring down the costs of managing money (ie., the interest rates). Apart from money multiplier, there is the second aspect of money becoming difficult for being channeled towards the number two economy which would have its own dynamics in managing the  monetary policy of the country.

The digital currency also unfortunately makes parallel economy flourish with far more ease than  before even though  the saving grace is that the  digital money, by the very nature of its creation, preservation and exchange creates a trail of evidence which is which may be easier for a determined law enforcing authority to trace.

Being highly price sensitive, monetary control by the central bank would become easier under the digital currency regime even though, the central bank’s logic of monetary control as a way of correcting market aberrations would stand to reason in the long run. This is because  digital currency is extremely sensitive to the markets and would correct itself depending upon the fiscal regime of the time without an artificial directive for control by the central bank.  That this would also expose the government to vicissitudes of open market borrowing shutting out  the route for special access to funds through the impounding mechanism of the central bank is for the governments to worry about.

Efficiency therefore would be the result of the digital economy. At every stage of the currency creation, currency movement, currency exchange, currency pricing, currency control and currency use there would be high degree of efficiency. Budget making would be comfortable as the governments would know to the last digit about their currency reserves position on a real time basis. This means there would be less wastage and greater thrust to the monetary multiplier.

Banking  system which gave rise to the digital economy in the first place would be its biggest casuality.  The roadside ATMs would stop spewing out currencies and eventually would even be replaced when people from their WAP phones  and desktops would be able to access their funds and transact business.

Will the digital economy lead us to the pot of gold in the end? Well, we are after all talking about way of denoting value through a currency system but creating value through efficiency and hardwork is still  remains.

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