Facebook's stablecoin and interest

Per Matt Levine, Facebook is setting up a cryptocurrency backed by a variety of low-risk assets, but they're not stabilizing it the way I would.

Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions.

If one were to use Libra as a unit of account, and ask what the "risk-free" interest rate in Libra would be, the answer should be more or less equal to the average return on the assets being used to back it.  I would propose that instead they retain all returns in the reserve, take out a fixed fee (say 2% per year) to manage the ecosystem and pay out returns to investors, and allow the value of the coin to follow the pro-rata share of the reserve.  This fixes the "risk-free" interest rate for Libra at 2% — if it takes off and becomes a significant unit of account for long-term transactions, this will increase its suitability for that purpose by eliminating interest rate risk.  In particular, even if some of the currencies in the basket start to hyperinflate badly, and their interest rates go way up, the coin remains stable in a more absolute sense, and the rate at which it depreciates compared to risk-free investments is relatively unaffected.

Note 1:  I would like to see a fixed interest rate; I use 2% in the example, but another number might be better.  It should be high enough that the costs are covered, which might be a tricky number to come up with if those costs don't scale linearly with the size of the pool; probably you should pick a conservative size and expect that the early backers may have to subsidize it while it's small.  Conditional on its being "large enough", though, I'd rather it be as small as possible, though of course my money's not on the line here.

Note 2:  If the interest rate is close to 0, and you're in a society in which "interest" is repugnant, then denominating transactions in this currency allows you to avoid the problems this creates for positive interest currencies.  This note highlights that "interest" isn't some absolute economic phenomenon; it's a property of the unit of account, and in particular of its failure over time to capture the true market rate at which value at different points of time are being traded.

price changes

I'm interested in markets, and one of the complicated things about markets is that they involve people. Netflix has gotten itself some flack recently for revamping its price structure, breaking apart (as I understand it) for sale separately (and without a joint discount) two services that were previously bundled, such that the total price of the original package, for those wishing to replicate it, has gone from $10 per month to $16 per month. One of the comments I saw was "this is too big a price change to implement all at once"; if we take this complaint at face value, it might have created less of a stir if they had offered a $3.50 discount on the bundle for a period of time. This is similar to something I heard at the annual meeting of my cooperative apartment; we're being hit with some big expenses in a year or two, so the board decided to increase our monthly maintenance payments this past year so that the increase next year won't be one big jump.

I'm curious as to what kinds of price changes strike people as "unfair" and what kinds don't. Stock prices change quite frequently, but the buyers and sellers are very dispersed and anonymous; I think people have less of an emotional "fairness" response to stock price moves than to other kinds. Gold, at least as traded on financial markets, is similar; so, though, is oil. Most people purchase their oil distillates, though, from recognizable brands, and even though they're usually mercenary about it themselves — most people, choosing between Exxon and BP, will go with whichever is cheaper on the given day — seem to object to higher prices than they're used to. This is likely also a function of the fact that people build their habits around consuming oil distillates at a constant rate, and don't like responding to prices; demand elasticity of gasoline, especially in the short run, is very low (which is precisely why the price is sometimes so volatile).

If the shop on the corner raises its prices, my understanding is that people tend to regard this more favorably if the retailer's costs have recently gone up than if it's simply an attempt to ration rising demand in the face of potential shortages. (It's worth noting in this context, though, that part of Netflix's decision seems to have been related to costs.)

And, as suggested at the beginning, it may be that increases of a certain size produce a certain amount of sympathy, especially in the face of rising costs, but that there are certain breakpoints where the customer would respond less viscerally if the change were phased in. What interests me in particular here is to what extent it's an abrupt change in expectations rather than an abrupt change in prices that creates the angst. If Netflix had announced this change 18 months ago, would it have produced as much complaint then as it is now, or as much complaint now as it is, or would it have spread it out or even reduced it? If the old rates had been (credibly) portrayed, as soon as the bundled items were being sold together, as a special, trial offer, would the new price structure have been more readily accepted? (If you give away an item for free for two months, any increase in price will exceed 60%, but would presumably be more accepted; there would be an expectation that this was a limited-time offer.) I note in this context that O'Hare airport some years back raised its parking rates by announcing, at the beginning of the holiday season, that it was offering "special holiday rates" that equalled the rates in October; they actually raised the rates at the beginning of January by allowing the "special rates" to expire.

Another anecdote: about ten years ago, I was a regular in a sandwich shop, and recognized as such; they increased the price of a sandwich by 10 cents at one point, but comped me a free sandwich when they made the change. I imagine them imagining me thinking, "They're nice people and they like me, so I understand that they have to raise their prices once in a while."

I'm not offering grand theories, but my speculative observations are that upset increases when

• demand for the good is inelastic
• price increases result from cost increases, rather than shortages
• price increases are "big"
• price increases are unexpected
• markets are less anonymous.