ROBERT SHILLER: Forget Bitcoin, Here's The Real Way Technology Can Revolutionize Money

Mark Lennihan/AP

Yale Professor and Nobel Laureate Robert Shiller has a great piece in the New York Times today that shows why he's one of the greatest economic thinkers of our time.

The piece is kind of a about Bitcoin - which he continues to think is a straight up bubble - but actually about how technology and electronic money can revolutionize the financial system in a good way.

Shiller has three inter-related ideas, and surprisingly they all spring forth from something that Chile did in the 1960s, when it created a quasi-currency called the UF that was designed to track inflation. If inflation rapidly accelerated, the UF would become more valuable against the Chilean Peso, allowing UF holders to maintain buying power. Goods (like one's rent check) could be priced in UF, so that the price could stay the same all the time, automatically adjusting with inflation.

Shiller proposes three ideas: First he thinks that other countries should adopt digital versions of the UF. He proposes calling them "baskets" reflecting the fact that their value will track a basket of goods. Then he suggests companies like Square and PayPal (at the forefront of digital money) should allow for automatic payments in these baskets, even across boarders, automatically adjusting for different currencies, etc.. And finally he proposes the creation of multiple baskets in each country, so that there could be one that reflects the needs of senior citizens (who buy different stuff than young people) and one that reflects young homeowners and so forth.

And he also envisions financial assets that are directly linked to a country's growth:

And there could be a "trills" unit - a concept that Mark Kamstra of York University and I have been advocating - that represents one trillionth of a country's most recently estimated annual G.D.P. There should also be a unit that grows or retreats with per-capita daily consumption. This could be used for pension and Social Security payments as a form of intergenerational risk-sharing: The idea is that payments to older people would rise and fall with overall consumption. With many kinds of baskets, it will be easier to set prices and make contracts that are sensible for the long term. With digitization, all of this should be possible, allowing us to keep what works in our modern financial system, and upgrading it to make it even better. None of this will satisfy Bitcoin believers - who believe in a totally different kind of innovation - but this is a good starting point to how the existing system of money can be built upon.