Amazon recently announced that it will begin offering a virtual currency, Amazon Coins. This virtual currency will be able to be used with their various stores, but is intended mainly for Kindle Fire users (Amazon’s tablet).
Amazon joins the growing ranks of virtual currency issuers – Facebook, Microsoft, Nintendo and Bitcoin (Bitcoin is a more real-world virtual currency).
Their is nothing really special about the announcement, but I did think it might be constructive to relate it to the real currency world.
Where will Amazon get these new “Amazon Coins?” Out of thin air. Interestingly enough, nobody would dispute this.
Amazon will issue the virtual coins and have the monopoly power to issue these virtual coins. It’s easy to imagine that if Facebook credits or Microsoft Points ever really gain in popularity that users of both Amazon products and Facebook or Microsoft may want to use their accumulated Amazon Coins on Facebook or Microsoft – at which point a secondary or exchange market will develop and people will trade with each other (this is foreign exchange). At no point in time will Facebook however be able to issue Amazon Coins, nor will Amazon be able to issue Facebook credits (though each could use their virtual currency in an exchange market to purchase).
Without getting into the economics of these virtual currencies (a pretty good story is here), is it possible for Amazon to ever run out of Amazon Coins?
It’s a silly question, Amazon issues the coins and they are not backed by anything – so they have no issuance constraint – they cannot run out of Amazon Coins (they could always choose to stop issuing or accepting them).
The United States is also a currency issuer (as well as a user), it issues the U.S. Dollar. The U.S. has monopoly power to issue the Dollar and creates it out of thin air.
Why then, do we continue to hear about the U.S. being on its way to bankruptcy?
Type in the search term “u.s. is bankrupt” into google and you’ll find article after article (I should say opinion piece after opinion piece). Certainly there are restraints to currency issuance (inflation), but running out of Dollars is not one of them. The United States is NOT like Greece, which does NOT issue its own currency, instead it uses the Euro. Greece can run out of Euros, the U.S. cannot run out of Dollars (States can run out of dollars, Facebook could run out of Amazon Coins…but never Facebook Credits).
Next time you hear someone talking about the Bankrupt United States, or the problem with creating money “out of thin air,” you’ll know they are full of hot air.
Scott Dauenhauer CFP, MSFP, AIF