Perry Mehrling on Money and Crypto, 8/5

Interviewed by Allison Schrager

In an interview with Allison Schrager, Perry Mehrling says,

In the money view, which is what I advocate for, the central defining quality of money is that it is a means of payment, meaning a means of settlement. That if you have a payment due, this is the most acceptable form of payment that there is. It may be that your creditor is willing to accept something else or that your creditor is willing to roll over your debt for another day, but not necessarily. If they insist on payment, then they get to choose what it is that counts as payment.

Your paper dollars say “legal tender for all debts, public and private.” If you owe somebody $20 and you “tender” a $20 bill, technically the debt is paid, whether the person accepts the $20 or not.

Mehrling says,

to say, I will pay you today with a promise to pay you tomorrow. Is the elasticity of the system. And in boom times, the system is very elastic. It's very easy to roll over promises. What we're experiencing right now, and we have been in elastic times basically because of the pandemic. You were mentioning that all of these constraints were relaxed by the official authorities, by the Fed, but also by every other central bank in the world. And we are shifting now into a discipline mode where the settlement constraint is binding. And we're finding out where the weak points of the system are. So we're moving from elasticity to discipline. And you mentioned before about crypto. So crypto is now being tested. That's the stress test. In global liquidity, we're discovering that actually the weakest point in the global system is in fact crypto. That's what's failing first.

I take this to mean that when there is very little fear among financial market participants, there is less demand for payment in money. People will take all sorts of IOU’s instead. But when fear rises, people stop taking IOU’s and start asking for money. If crypto were about to replace money, then it should be doing well in times of fear. Instead, it appears that the crypto boomed as financial market fears were low, and when atmosphere of fear began to take over, it crashed more than anything else.

Merhling says,

when Powell is raising interest rates in the United States and we're restoring discipline in the real world, money is flowing out of crypto land, and the asset prices are falling, and stablecoin issuers are going bankrupt, and there's these collateral calls. So it's a wider stress test of the whole crypto land apparatus. The credit that has been supporting these asset prices and the stablecoin-par relation. It's a stress test of the entire thing—this parallel in the cloud banking system that's based on stablecoin, and it's responding to that stress test in a way that makes you realize they’ve got a lot of work to do. It's pretty fragile.

He forecasts that the valid use-cases for alternative finance (I might cite international remittances as one of these) will migrate to the traditional finance world.