big dumb buckets of money programmed to blindly buy and sell at predictable points.
Well, that's exactly what a
currency board is, and there are many in the world which have managed to keep operating for decades now. Even Hong Kong, considered the freest economy both by the Fraser Institute and the Heritage Foundation, uses a currency board to issue HKD.
The biggest difference, tough, is that currency boards normally have reserves in the same asset they tie the exchange rate of their currency to. So, if your currency board wants a fixed exchange rate with the dollar, it will hold dollar reserves, if it's with the euro, it will hold euro reserves and so on.
Here, the reserves are in one asset (mastercoin), while the exchange rate is supposed to be pegged to another asset (gold, fiat, whatever). I know no example of a currency board operating this way and I ignore whether it's feasible or not.
I would say fixed exchange rate is a better term than currency board [currency board is really a euphemism for fixed exchange rate. The term has its roots in attempts to re-brand South American currencies, i.e. they renamed fixed exchange rate to convince people to expect a different outcome than the last ten episodes; just wait another twenty years and they'll tarnish the name currency board and introduce another neologism. I stick with currency board because it is much much better than "escrows,")
Several Comments on caveden's points:
a)
http://www.scmp.com/article/683788/soros-praises-hk-blocking-his-dollar-attacks http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20130424000046&cid=1502The HKD is a bit of a hard target because Hong Kong can get credit from mainland China to defend the HKD and mainland China has very deep pockets. Hong Kong is special because of its link to China. You are highlight an unusual case that makes currency boards seem more sustainable than they usually are.
In most cases, this is what currency boards in developing countries look like to speculators
http://www.youtube.com/watch?v=fS3Z8Xv-vUc b) There are examples of currency boards that hold reserves in third-party currencies. Countries almost always hold reserves in very stable currencies/commodities such as Euros, Yen, gold, and first and foremost USD. The USD is the most common target for a fixed exchange rate. Sometimes, however, countries peg their currencies to neighboring economies that are major trading partners. For example, the Brunei dollar is pegged to the Singapore dollar:
https://www.google.com.sg/search?q=1+brunei+dollar+in+sgd&oq=1+br&aqs=chrome.1.69i57j69i59j0l2.3117j0&sourceid=chrome&ie=UTF-8 But the Brunei central bank holds reserves in gold and USD rather than SGD. (I can't document this because this info is typically secret. You just have to trust me.) Why?
1) Because the SGD is not very volatile against the USD (the Singapore central bank regular intervenes to ensure this). To allow for this volatility, the Brunei central bank needs to hold a larger stock of reserves than if it held SGD. However, the difference in reserve requirements is not that big.
2) If Singapore goes belly up and Brunei holds SGD reserves, then Brunei gets screwed too. Small economies are much more volatile than large economies, so linking your fortune to Singapore is risky relative to linking it to the US. If Brunei holds USD, then it can readily abandon the SGD peg and move to a USD peg. It is worth holding reserves in USD to allow for this option.
c) Developing countries also have credit lines from the IMF (essentially the US + some help from allies of the US). It's not just reserves that back the currency. Even if reserves run out, they can be replenished via IMF bailout. This makes it much easier to maintain a peg then it would be if the IMF didn't exist. (I'm not justifying the IMF. This is just how it is. Whether it is desirable or not is another matter entirely.) There will be no IMF bailouts for mastercoin and that makes it harder to maintain a peg.
d) In general, peg's are successful for countries that hold large war chests. If you have 1 USD backing every unit of USD value you issue, then you can never be forced off the peg. If you have 10 USD in gold, for every USD in value you issue, then you can only be forced of the peg in theory if gold drops by 90% vs. the USD and in practice it would need to drop by much more than that maybe 98%. Taiwan for example has a big bag of money set aside to fund war with the mainland. (I guess the hope is to take some mainlanders out before the island is over run. More money means more casualties for the CCP.) Singapore taxed a whole generation of workers at 50% of their annual wage. The opposite of a normal gov't but just as bad for national welfare, the Sing gov't is completely crazy about saving money. They hold an ever-growing rainy day fund. Mainland China has maintained an
undervalued Yuan for about two decades now, accumulating a vast war chest of USD. Should the Yuan ever become overvalued, the war chest can defend against any conceivable speculative attack. The big oil exporters often have war chests too, so-called sovereign wealth funds.
Implications: The main implications come from (b) and (d). (b) tells us that currency boards fail more often than they succeed. (d) tells us that currency boards can be sustained if gov'ts act like Scrooge McDuck (either out of insanity [Singapore] or because they anticipate a lead role in WWIII [Taiwan]) A currency board in mastercoin will have to implement Scrooge McDuck in order to be credible. This begs the question of where the funds for Scrooge McDuck's gold pile come from. Who gets to play dictator and tax to fund public savings? If there's no dictator how do private parties profit from sinking their savings in the war chest?
