A Black Market is not so much illegal as it is, extralegal. Extralegal means that a condition exists outside of a legal system. Street vendors in LA, Garage Sales across the US, some family transactions, alternate currencies, and increasingly, social media, are operating in an extralegal sector. It can be argued that most businesses probably started as an extralegal enterprise where extralegal “value” was exchanged in a simple brain-storming session.

This is only a problem depending on what side of the deal you are on. There are few liabilities, high anonymity, no lawyers, contracts, or licenses. You have a certain independence from government currencies, regulations, and oversight … and you don’t pay taxes, etc.

Tax evasion – the scourge of racketeers worldwide

However, if things go wrong, there is no legal recourse. You cannot engage the department of commerce if the garage sale item is defective. You cannot go to a bank to borrow money to finance an extralegal enterprise. You cannot sell an extralegal business in mainstream markets. If your extralegal enterprise infringes on a legal enterprise, you are liable – and vice versa. You also are vulnerable to obscure tax laws that may, or may not, eventually catch up with you anyway.

Modern Black Market

The difference with the modern black market is that social media inherently rewards high integrity and punishes low integrity. This effect makes the need for laws and law enforcement less essential in protecting business interests. If someone does dirty deals in social media, there is a form of community recourse that can take place to punish trolls and crooks. Social media does not always have physical, visible, or involuntary infrastructure to impose on the legal rights of others.

The “Little House on The Prairie” effect

The Last Mile of Social Media is an emerging condition where social media applications act in a community much as they did before all mass media. One example is Craigslist – if you sell me a dodgy lawn mower, well, I know where you live. I can “ask a neighbor” and conduct a social media search on anyone that I encounter. As communities form in close proximity, anonymity goes away and people work with people they know and trust.

Social Engineering

As governments and industries increase their usage of social media applications – this black Market becomes a grey market. Employers check backgrounds. Courts hold employers to public information usage laws in discrimination suits.   Anyone can be financially impacted by TMI on social media networks.

However, as long as it stays in the extra-legal sector Social Media will remain intangible in the eyes of the current financial system. This gives rise to two options: Government should regulate social media OR social media will operate in an alternate financial system.

My bet – and indeed the objective of the Ingenesist Project – is that an alternate financial system will emerge which will fully capitalize and securitize a social currency.   Then, and only then, it will become a relatively simple task to convert social currency to any financial currency much like currency exchanges legally operate around the world.

Editor’s note; The following analysis by Daniel Indiviglio from The Atlantic regarding a NYT article is foreboding of an unknown future.  Half insightful synthesis and half tongue-in-cheek, this article suggests that virtual currency may impact the current monetary system.  The conclusion is brilliant suggesting that the national debt could be paid in virtual currency.  It seems quaint now, but what would happen if the dollar fails?  During the Mexican Crisis, citizens emptied WalMart because today’s peso would be buy fewer Levies tomorrow – and it happened very fast. Get this and get it well: currency is a social agreement. People will trade what ever people agree to trade.

by Daniel Indiviglio

Is Virtual Currency A Real Problem?

All that time spent playing video games may finally be paying off. Literally. According to a fascinating New York Times article today, virtual currency — credits to buy stuff in video games — is being taken very seriously. China worries that make-believe video game money could affect its ability to control its money supply. As a result, it’s slapping limits on virtual currency. I’m not kidding.

From the NY Times:

Some people have even traded virtual currencies in China, and exchanged them for clothes, cosmetics and other goods. Last year, nearly $2 billion in virtual currency was traded in China, according to the China Internet Network Information Center. Some experts say they believe there is a much larger underground economy in the virtual world.

And it gets wackier:

Some smaller gaming companies have even set up what are called virtual sweatshops, cramped quarters where young people play online games to earn credits that the companies then sell at a profit to overseas customers in Taiwan, South Korea and even the United States.

So what’s the threat? The Times asks a telecommunications professor from Indiana University.

“This action shows that at least one government is concerned about the way virtual worlds challenge its control of society,” Professor Castronova said in an e-mail message Tuesday. “As virtual currencies take over more and more purchasing power, control over the effective money supply shifts from the central bank to the game developers.”

Interesting theory, but I’d rather someone whose background is a little closer to economics weigh in. Because currency isn’t my specialty, I consulted an economist far more qualified to talk on this than me: Randall S. Kroszner. He is a professor of economics at the University of Chicago’s Booth School of Business. He’s also a former Fed governor, so he knows a thing or two about central banks and money supply.

He couldn’t speak to the specifics regarding China as he is not familiar with the details. But I asked him whether virtual currency could really be a threat to money supply, in general. He said:

It could have an impact on currency demand and the so-called velocity of money.
It can complicate the task of a central bank in trying to anticipate what currency demand will be, but much like with other innovations (ex: credit cards, etc.) that hasn’t led to an undermining in the ability to control the money supply, but it does make the task a more challenging one for the central banks.

So virtual currency could make managing money supply more difficult, but so do other things like credit cards, which we probably think are okay.

I also think virtual currency seems like any other good — just more efficient as a means for exchange. For example, there’s nothing stopping people from trading ounces of gold for products. An exchange rate exists between gold and real currency. Wouldn’t a similar kind of exchange rate hold for virtual currency and real currency? Kroszner agrees:

In principle, it’s exactly the same thing as an exchange rate between a particular commodity, wheat, gold, television sets, and the local currency.

In theory, virtual currency could affect money supply. But that it would affect money supply in a very significant way seems like a stretch. As a result, China might intend to limit virtual currency for reasons more important to it than money supply concerns. Such reasons might include censorship aspirations or a dislike of black markets.

Whatever China’s rationale, I’ll be interested to see if similar controls turn up in other countries. I suspect it’s just a matter of time before Uncle Sam decides to slap some virtual taxes on virtual transactions here in the U.S. Maybe we can close the deficit with virtual money!

I have been hearing a great deal about an inevitable collapse of the dollar.  Not today or tomorrow, but more likely over the course of the next 10 years.  The failure will probably not be a stupendous crash since politicians would avoid this as a means of self-preservation.  Rather, it would simply be a slow and grinding inability to “afford” many important things using cash.  Note that this has little or nothing to do with your human ability to produce important things.

Few people disagree that a 50 Trillion dollar debt obligation cannot be paid back without at least 50 Trillion dollars in increased human productivity.  Traditional productivity usually means taking stuff out of the ground, air, ocean, or the forest and making things that eventually wind up back in the ground, air, ocean, or the forest. Today, we are encountering constraints on the planet’s resources.  Something has got to give.

The ONLY technological change that is happening at anywhere near the rate that can conceivably deliver a substantial amount of “increased productivity” is Social Media. But how do we turn it into dollars?  Maybe we shouldn’t.

Here is the problem; the trends for monetizing social media actually slow it down.  People use social media only because of the prospect for increasing their long term productivity as relationships prosper. Entrepreneurs trying to get paid for their innovations invariably need to introduce “friction” by attempting to convert “short term” user productivity into cash.  There is no business case on short term productivity making their innovation nonviable.  Therefore, the monetization problem introduces a threshold over which most great innovations simply cannot reach.

The purpose of this article is not to instill fear or label myself as a “death panelist” – the objective is to simply to consider what people will use for trade if the currency becomes ineffective AND their productivity does not.   If the dollar does fail, people will attempt to meet their daily needs until a financial system is corrected.  Many countries that have experienced currency problems and the most common result are the emergence of a black market where Levi’s, Cigarettes, or other commodities serve as a de facto tax-free currency.

While on-line gaming industry is pioneering virtual tax-free currencies with extraordinary results, back in reality, people will begin trading services.  Plumbers will find dentists, farmers will find laborers, and teachers will find landscapers.  Matchmaking will become a financial instrument. People will use Facebook and Twitter, Linkedin and many others in new ways in order to keep the game in play.

In fact, perhaps they already are.

“Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished”.

– Barak Obama

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The gloves are off:

Mr. Obama’s statement is profound; in a single stroke, he liberated social capital, creative capital, and intellectual capital from the oppressive arm of the financial markets.  This sends a strong message to entrenched and corrupted financial operatives that they no longer hold a monopoly on American productivity.

The factors of production carried over from the last century; land, labor, and capital, can be now be challenged by social capital, creative capital, and intellectual capital as factors of production for an Innovation Economy.

The third option:

Q. So how exactly does a country meet a 50+ Trillion dollar obligation?
A. It depends on the social agreement.

First, we could default and let the system crash. Second, we could endeavor to pay it back by committing the next several generations to servitude of the debt.  Or, there is the third option that nobody talks about.

Create a new currency.

Almost every country has done it.  Mexico replaced the old “Peso” with a “New Peso” (worth 1000 old Pesos).  Europe created a new common currency.  Chinese Yuan is a “bridge currency” that gets them from point A to point B. Each of these examples is different, but they have one very important element in common; they are utterly dependent on a social agreement.

People must agree to exchange the new currency on the streets.  Social agreement, creative agreement, and intellectual agreement drives entrepreneurship and all must be achieved completely or “black markets” will form undermining the entire system.

The Tipping Point

We know a few things about currency outcomes.  If inflation occurs, people with “cash” will lose it, while people with “debt” will see it deflate.  The US can erase the deficit by inducing inflation and deflating the debt if production capacity remains undiminished. People, organizations, and governments that have exactly as much cash as they have debt will see no net loss or gain.  In fact, the entire world’s financial system is worth exactly as much as it owes to itself – minus the value of social capital, creative capital, intellectual capital and natural resources – now, set free. 

Social Agreement

As inflation progresses, there will be a point where a critical mass of the “social agreement” will hold the same amount of cash as they hold debt – their net loss will be zero.  That’s when the system can reboot.  obviously there will be serious consequences to any of the options, but this time, unlike any other time in history, social media will be the vehicle upon which the social agreement is catalyzed and not necessarily mandated by policy makers.

The Obama Factor

“Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America”

Mr. Obama is right – the outcome depends on us. We cannot expect government or corperations to attend to all of our needs because we are the ones who individually and collectively own and control the factors of production that will support the next currency. The road to opportunity has been cleared and the invitation has been cast.  We must now reach deep into our imagination and define the new business system where social capital, creative capital, and intellectual capital are directly tangible in a new global economic imperative; the Innovation Economy.