The Pokémon Theory of Money and How to Stop Bank Runs

From gold to paper notes to digital currency, the abstraction of money has reached a whole new level. Pokémon cards offer a good example of how the current monetary system works. In the world of social media, this system faces unprecedented threats and policymakers need to act now to stave off a looming crisis.
Pockemon card

Bangkok, Thailand – January 27, 2021 : A man playing Pokemon Trading Card game. © Wachiwit /

May 06, 2023 09:52 EDT

Our current monetary system is a complex network of institutions, policies and practices that enable the circulation and exchange of money. At its core, the monetary system is designed to ensure enough money is in circulation to facilitate economic transactions while keeping the value of money stable over time. To better understand our system, we can illustrate its functioning with the example of Pokémon cards.

What is money?

Money is defined as a medium that fulfills at least three conditions:

  1. Medium of exchange. Instead of bartering chicken against wheelbarrows, we can use the money for intermediation, which reduces friction and facilitates trade.
  2. Store of value. Money should not be perishable. Ice cream would be a terrible store of value. Same for air since air is abundant. Gold is a good store of value.
  3. Unit of account. A collector of classic cars might boast about the number of vehicles he owns, but it might not mean much to a farmer who measures his wealth in acres of land. However, most can relate to the value of things expressed in dollars.

Before the advent of paper money, people used gold coins as a medium of exchange. Unlike paper money, which is just ink on paper, a gold coin has tangible value and is easily understood. However, carrying around heavy coins was inconvenient and risky. The introduction of paper money was a game-changer as it provided a lightweight and convenient alternative to gold coins. In 1971, the gold standard was abandoned, and paper money became detached from its physical backing. Today, money is merely a social construct, and its value is based on our collective agreement. Despite being intangible, it is a powerful tool that enables trade and economic growth.

The rise of electronic banking has brought about the concept of digital money, which takes the abstraction of money to a whole new level. While we traditionally associate money with its physical representation as cash, the truth is that most of the money exists purely in digital form, represented by strings of zeros and ones stored on computer servers. In fact, only a tiny fraction of the money supply in the United States is in the form of physical cash, with estimates suggesting that only around 1-2% is available domestically. The sheer scale of digital money is staggering, with the total amount outstanding in the US amounting to a staggering $93 trillion, compared to just $2.3 trillion in physical cash circulation.

Pokémon Theory of Money

To illustrate how our monetary system works, let’s use an analogy with Pokémon cards. Pokémon trading cards were first introduced in 1996 in Japan and have since been sold more than 43 billion times worldwide. Let’s assume all Pokémon cards are equally common and different designs equally distributed. While the production cost of each card is just a few cents, they are sold to the public for $1, much like how our paper currency is printed at a very low cost but has a much higher face value. These cards have almost zero material value, being made of cardboard and ink, just like our dollar bills. In this analogy, the company that produces the Pokémon cards represents the central bank, whose role is to serve the public by supplying currency. The central bank manages the production of cards so that the market isn’t flooded with them, which would cause the value of each card to plummet. Instead, they aim to produce enough cards for new players to accumulate, while maintaining the overall value of each card.

Pokémon exist in the digital world, too. Players can collect Pokémon through an electronic game by either finding them by chance or completing in-game tasks. Motivated by the game’s popularity, certain private companies have entered into a license agreement with the CPC (“Central Pokémon Company”) to produce digital Pokémon. These companies function like commercial banks, creating only digital representations of the Pokémon. However, players can still exchange their digital Pokémon for real cards if they wish. Private banks hold a certain stash of physical cards in their vaults for this purpose.

Some players wish to borrow digital Pokémon for business purposes. The creation of those Pokémon happens via double-entry in the bank’s books – as an asset and a liability. The bank records Pokémon on loan to the customer as an asset. Simultaneously, the bank records the same Pokémon as a liability since it was also credited to the customer’s online wallet. The customer can now either exchange his Pokémon into a real card or send it from his account to other players in digital form.

Private banks create additional digital Pokémon out of “thin air” with a keystroke on a computer. Most players do not understand this feature, wrongly believing the bank was dependent on other players depositing their Pokémon cards first.

As a result, digital Pokémon exist in two forms – as an asset and as a liability – each complementing the other like yin and yang.

No money without debt

This is exactly how our monetary system works. It is impossible to create money without creating the same amount of debt at the same time. This has various important implications:

  1. Growing the amount of money available requires growth of debt.
  2. For someone to save, someone else must go deeper into debt.
  3. Your savings are only as good as the corresponding debt.

What does that mean for your money in the bank?

Your bank deposit – what we call “money” in the bank, represents a liability for the bank. In case the bank becomes insolvent, you are only entitled to what is left over after liquidation. Which in many cases would be little. Therefore, deposits are usually guaranteed by some form of insurance ($250,000 per account in the US).

Players know that they can individually exchange their digital Pokémon into real cards at any time. They are (mostly) aware that, in aggregate, not enough real cards exist in case every player tries to exchange at once.

The bank keeps a limited stash of real cards on hand based on estimates of average customer requests for exchange. In case of larger exchange requests, the bank orders a shipment of additional Pokémon cards from the CPC, which arrives in armored trucks. The bank pays for the shipment by having the amount deducted from its account with the CPC.

Social media accelerates bank runs

A bank run can occur when customers rush to exchange their digital Pokémon into real cards simultaneously. In such a situation, the bank might not have enough real cards to honor all requests, leading to potential losses for customers. Customers with deposits below the insurance limit need not worry as they are protected by some form of insurance, such as the FDIC in the US, which insures deposits up to $250,000 per account.

In the event of rumors regarding a troubled bank, customers with large deposits might withdraw funds immediately and transfer them to a supposedly safer financial institution or purchase government-issued securities. Failing to withdraw large deposits could result in financial losses due to lack of insurance coverage. There are almost no negative consequences to withdrawing immediately, while there could be a considerable downside in not doing so. This asymmetry is what often leads to a dangerous and self-fulfilling acceleration of bank runs.

In recent bank failures, such as with Silicon Valley Bank and First Republic Bank, large deposits have been covered even when they exceeded the insurance limit, despite no obligation to do so. While this is a benefit for customers, it weakens the insurance fund, and surviving banks might have to pay higher insurance fees, which they could pass on to their customers.

Deposit insurance guarantees the “peg”

The Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC) had $128 billion of assets at the end of 2022. Insured deposits amounted to $10 trillion compared to total deposits of $17 trillion. The DIF covers 1.3% of insured and 0.75% of total deposits.

Think of a bank deposit as a stablecoin, with the FDIC guaranteeing the “peg” (making sure the exchange ratio of 1:1 from bank deposits into central bank-issued cash holds). In a bank run, that “peg” gets challenged.

As more US regional banks are running into financial trouble, the cost of making depositors whole rises. A significant decline in assets of the DIF could cause savers to question the “peg” even for insured deposits, which would trigger a bank run on institutions previously deemed safe.

Act now to stop the spread of the banking crisis

To prevent the situation from getting out of control, policymakers must act, and soon. One solution would be to guarantee all deposits regardless of size. This should stop the deposit bleeding at regional banks. However, insurance fees would have to be increased.

A further spread of the banking crisis would make it necessary to cut interest rates, drastically. This could help reduce banks’ losses on fixed-income securities on the asset side and relieve funding stress on the liability side.

Capital markets are already betting on significant cuts in interest rates. The Fed Funds Rate, the US central bank’s main refinancing rate, currently has a target range of 5-5.25%. Futures markets see this rate in a range of 4-4.25% by the end of the year, with further cuts to 2.75-3.00% by the end of next year.

Large rate cuts could undermine the ability of the Federal Reserve to combat inflation. The central bank might not be able to maintain the stability of both the financial system and the value of money. If forced to choose, it is likely that the survival of the system is more important than tolerating higher inflation.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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