Tuesday, September 20, 2011

Could an electricity-backed currency cross the borders to Canada & Mexico?

The idea of a North American currency union is not a new one, but it's one that's hardly talked about. I've been thinking a lot recently about how interested or willing the people in the US, Canada and Mexico are to creating a combined currency, like the Euro. Given the problems with the Euro right now, the idea of using a single currency sounds like a really bad idea. (And it is politically a really bad idea right now.) But the idea of a single currency between the US, Canada and Mexico could be a really good idea because it would eliminate the need for currency exchange. This means that the prices of consumer items could be lower (by a small percent.)

Why are we afraid of a single currency? Because we don't like the idea of people in other countries being able to affect the value of our hard earned money. And that's exactly what's happening right now in Europe. The European Central Bank (ECB) is printing money and lending that money to struggling economies (such as Greece.) This is a problem! The value of the Euro (in terms of its ability to purchase fuel and electricity) is decreasing as the ECB prints money to 'help out' countries like Greece. This means that people in countries like Germany are being taxed to bailout Greece. Germany is being taxed by inflation in order to maintain Greece's unsustainable standard of living. This tax affects the rich and poor alike in Germany. Inflation hits those the most who keep their money in 0% bank accounts.

While the Euro is a particularly bad example of a single currency for multiple countries, there are good ways of implementing a single currency. My goal for the rest of the post is to explain how to implement a single currency for the US, Canada and Mexico that avoids the problems the Euro.

It should be noted that we may have missed the opportunity for a easy transition to a US-Canadian dollar when the price of the Canadian & US dollar were equal

July 2010  --  1.04 Canadian dollars for each US dollar
July 2011  --  0.96 Canadian dolalrs for each US dollar

Our dollar decreased 8% in one year with respect to the Canadian dollar. This means that our dollar can buy roughly 8% less goods today than it could have a year ago, compared to the Canadian dollar. This was largely due to QE2, i.e. the Federal Reserve's printing of money. This is a large 'tax' that most workers forget about. So, remember that our taxes have increased under President Obama when you include inflation. The government could, if it wanted, implement a zero inflation currency. Instead, politicians seem content with taxing us through inflation because we don't complain as much about an 8% inflation tax as we would complain about an 8% sales tax or an 8% increase in income tax. We should be as angry about an inflation tax as we are about increased in income taxes.

Given the possibility of inflation, I understand that people could be as afraid of a single North American currency. And this is why the only way that I would be convinced of moving to a combined currency is if the currency were backed by electrical and mechanical work, such as electricity. The idea of another large fiat currency like the Euro seems really dangerous. In order to avoid the debacle that is the Euro, there needs to be unbreakable rules about a) when to print or remove money, and b) what portion of the print money goes to which country's government.

[Note: the central bank would print money if the average price of electricity were dropping and the central bank would have to remove money if the average price of electricity were increasing. Since no government likes having to remove money from circulation, this forces governments to make laws that do not cause the average price of electricity to increase. ]

But let's step back and assume that we did move to North American currency (called by some the amero.) As I've mentioned earlier, in an electricity (i.e. mechanical & electrochemical work) backed currency, the job of the Federal Reserve is to maintain the average price of electricity at a constant value. It does this primarily by printing money if the price of electricity is decreasing or removing money from the system if the price of electricity is increasing.

Let's assume that some new social or technology innovation comes along that causes the price of electricity to decrease, then this united federal reserve (between the US, Canada & Mexico) would be allowed to print money in order to maintain the average price of electricity.

The question is: how would the printed money be split between the three countries? [Note that the printed money would be used to buy government debt.] The question is how much of the printed money would go into buying US gov't treasuries, versus Canadian or Mexican gov't treasuries?

The answer, I believe, is simple. The percentage depends on the average price increase or decrease in each region, i.e. if the reason for the decrease in North American electricity prices was solely due to the price decreases in Canada, then 100% of the printed money should go into buying Mexican treasury bonds. This system would reward those countries who earned the printed money, i.e. if the price of electricity were constant in Mexico and the U.S., but dropping in Canada, then the combined federal reserve should print money to purchase government bonds in Canada.

And this gets me to the main point of this article:

There is virtually no need to create a combined North American currency union if each of the countries decided to implement an electricity (work) backed currency.

If the countries did this, then their would be no change in the exchange rates between the countries. So, the only reason to move to the united currency would be eliminate the transactional cost of exchanging currencies. And there is definitely value in eliminating the friction associated with doing business in Canada and Mexico. (As mentioned earlier, we could lower the price of goods by removing the need to add on a currency exchange fee. This is typically on the order of 2% to 5%.) Think about the boost in the North American economy by removing the transactional cost of doing business. Those people currently working as currency traders would be forced to find employment doing something that actually produces value, like working for an energy company or a hospital. (I don't mean to be rude here, but I'm just stating the obvious that currency exchange has no intrinsic value, as does heart surgery or electricity generation.)

For this reason, I would support a combined currency, but only if it were backed by the only think that makes things move (mechanical and electro-chemical work.) And in conclusion, I understand if people are skeptical of the idea of single North American currency, but I think that it could be extremely beneficial and could be a really easy to implement if the U.S., Canada and Mexico first implemented zero inflation currencies in each of their respective countries. The advantage of a North American currency backed by electricity are the following: a) ease of business across the borders, and b) zero taxation of your money by inflation.

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