clusion is illustrated in Figures 1 and 2 (shown on right). Figure 1 shows the normalized series for each individual currency (i.e., EUR, GBY, JPY, and USD) as well as basket currencies SAC and XDR. Figure 2 provides a comparison of the basket currencies SAC and XDR. Over an extended period of time from June 1, 2006 to September 30, 2010, the basket currencies SAC and XDR are much more stable than the individual currencies. Also, SAC is clearly more stable than the IMF’s SDR. The stability of SAC in the test period suggests that it is a reasonable contender as a measuring stick for money. Student readers may want to construct their own stable money. Can a stable basket of Asian countries currencies be constructed? What about African countries? With over 150 currencies in the world today, what is the most stable currency basket? Also, can a stable basket of commodities such as gold and silver be developed that is more stable than currency baskets?

Figure 1: Normalized Values of EUR, GBP, JP Y, USD, XRD, and SAC from June 1, 2006 (060101) to Sept. 30, 2010 (100830).

Figure 2: Normalized SAC and XDR Values from June 1, 2006 (060101) to Sept. 30, 2010 (100830).

PO TENTIAL APPLICATIONS OF STABLE MONEY

Given the stable money basket of currencies SAC, it is simple to compute the exchange rate of say USD/SAC on a daily basis. With this exchange rate in hand, all prices denominated in dollars can easily be converted to SAC prices (i.e., USD price × SAC/USD = SAC price). In turn, SAC prices can be used to determine how the price or value of any stock, bond, house, currency, or other asset changed over time. Taking the difference between the change in prices in dollar terms minus the change in prices in SAC terms tells you how much of the change in an asset’s dollar prices is due to changes in dollar values, as opposed to changes in the asset’s value itself. What could we do with such information?

One application is to better understand how our investments are performing. Did their values change due to changes in dollar values or due to changes in the values of the assets themselves? It is conceivable that in the future stock exchanges will quote stock values in local currency terms (e.g., dollars) as well as in stable money terms. Bond prices, house prices, and

 

other assets could similarly be quoted in these two denominations.

Another application of stable mon-
ey is international payments. Business
firms could maintain basket currency
accounts that would be used to make
payments for goods and services in
other countries using different curren-
cies. Little currency risk would exist in
such international payments, as the
value of the stable basket does not fluc-
tuate over time to any great extent. Sup-
pose that you were to pay 1 million eu-
ros 90 days from now to a foreign firm
for some goods you bought. If the dol-
lar declined in value over time, the cost
of the goods would rise in dollars (e.g.,
from say $1.2 million to $1.4 million).
If you instead paid in stable money
units, this kind of exchange risk would
be mitigated for the most part. Banks
should welcome stable money, as they
could earn fees from business firms for
setting up stable money accounts.