With Amazon minting currency, Fed at risk
Commentary: In future, good money could drive out the bad
Central banks are not exactly short of things to worry about right now.
The euro may well be on the road to a chaotic collapse, taking some of the world’s biggest banks with it. A currency war may break out between Japan, the U.S. and Europe. Printing money has run out of steam, but there is still little sign of the global economy returning to the kind of growth rates it saw before the credit crunch.But in the long term what they should perhaps be most worried about is losing their monopoly on issuing money. A new breed of virtual currencies are starting to emerge — and some of the giants of the web industry such as Amazon.com Inc. are edging into the market.Gresham’s law famously stated that bad money would drive out the good. In the 21st century, it is now possible the law might be turned on it head. Good money might drive out the bad. If so, that matters to investors — for the simple reason that investing in the right currency makes a lot more difference to the kind of returns you can expect than what you actually put your money into.But Gresham’s law applied to the age when it was formulated — Tudor England, where money consisted of the physical metal in the coins. If someone started minting coins with less gold or silver in them, they inevitably squeezed out the coins that had been properly made. But today’s world, dominated by paper currencies controlled by central banks, operates very differently. The money we use has no intrinsic value — so bad money could be driven out by the good.We are starting to see a flurry of new currencies.Amazon Coins: a virtual currency for Kindle Fire.AmazonThis month, Amazon launched its own coins — a virtual currency that can be used to buy stuff for your Kindle tablet. It is a very tentative move to start with: more like loyalty points on a reward card than actual cash. But every river needs to start with a spring — and with the web’s mightiest retailer behind it the coins could grow into something significant.If so, Amazon coins will be far from alone. The virtual web currency BitCoin has already attracted a huge amount of publicity — and is steadily gaining in both circulation and value. After a crash last year — regrettably virtual currencies are just as prone to booms and busts as the real sort — it has steadied at around $25 and has gained acceptance....MORE
Here's the press release:
And a sharp comment from SC Santa Barbara's student newspaper:
...It is safe to say that the word ‘currency’ is not the exact fit to describe what this system is going to mean for users. It is more like a store credit, an idea that has been introduced to the electronic world for quite a while, with companies like Microsoft and Nintendo using their own in-store credit to make it easier for users to purchase goods. The new coin will not function as a currency, that is to say, it will not be exchangeable for other currencies at face value or redeemable outside of the Amazon Appstore....
Finally, one of the old-timers at cnet weighs in:
Why Amazon's virtual coins raise my hackles
Amazon is excited about its virtual currency coming in May. But CNET News' Stephen Shankland is concerned about sacrificing the flexibility of real-world money and other potential pitfalls.When I heard about Amazon Coins, the company's virtual currency for making Kindle Fire app and in-app purchases starting in May, I immediately grew worried.
Amazon's customer focus, something I find sorely absent at money-extraction engines such as airlines and banks, has kept me loyal for years. I'm concerned, though, that the Amazon Coins program is a step in the wrong direction for Amazon customers.
In short, I don't like the inflexibility, costs, changeable rules, and risks that can be attached to virtual currency. I dislike it when there's a special form of money that works only in a limited marketplace, and I dislike it even more when the company operating the marketplace sets the rules for using that currency.
Amazon isn't yet sharing details or answering my questions, so this isn't a final judgement. I'm willing to be persuaded if Amazon's virtual coins are useful and beneficial and if Amazon runs the program sensibly. But my experiences with this idea so far make me leery.
My biggest concern is that Amazon Coins are a way to suck me and my money into the Amazon financial ecosystem and to make it hard for me and my money to leave. Here are three real-world examples showing why.
1. I owe my soul to the company store
Amazon's coins fundamentally are less flexible than real money, with which I can buy haircuts, groceries, and mutual funds. Amazon's coins remind me too much of company scrip, which mining and timber companies used instead of cash to pay employees. Scrip could only be used at the company store, the economically wicked institution immortalized in the song "Sixteen Tons." With real money, people can spend it where they see fit.
If done right, Amazon Coins could be relatively liquid. I'm sure it'll be easy to buy them -- Amazon's FAQ says the exchange rate is one Amazon coin equals one U.S. cent. Amazon's coins should be as easy to convert back into real money, with no transaction fees.
But even a quick and simple conversion process is enough of a hassle that I suspect a lot of people will just let Amazon's virtual coins sit around. After all, of the $110 billion that people spent on gift cards in 2012, 1.6 percent of that amount -- $1.8 billion -- never will be cashed in, according to an annual gift-card report by CEB TowerGroup....MORE