The Economist is cute but wrong

Tim Harford is guest-blogging over at Marginal Revolution, and he links to a partially tongue-in-cheek Economist story (subscription required) that opens with the following:

In December, we warned that the dollar’s role as the world’s main currency was under threat if America continued in its profligate ways. Yet the dollar has been dethroned even sooner than we expected. It has been superseded not by the euro, nor by the yen or yuan, but by another increasingly popular global currency: frequent-flyer miles.

Harford goes on to observe, “frequent flyer miles are now the world’s dominant currency, with outstanding balances at $700bn.” I’m embarrassed to say I haven’t gotten around to having an online subscription, but I think the Economist‘s claim of frequent-flyer miles collectively functioning as a single currency is wrong. Why? Because collective frequent flyer miles are denominated with different units of account (some airlines use segments rather than miles). They also don’t work terribly well as mediums of exchange — e.g., exchanging United miles with American miles. UPDATE: Well, exchange is possible but incredibly costly, according to this MSN Money report:

Ten airlines, including American and Hawaiian, participate in the HHonors Rewards exchange, allowing the points-to-miles-to-points conversion among all 10. However, these exchanges come at a price. For the most part, 5,000 miles earn 10,000 HHonors points. (Kilometers from Lan Chile and miles from Virgin Atlantic are exchanged at a 1-to-1 ratio.) Converting the points back to miles erodes the value considerably. For all but Lan Chile, you get 1,500 miles for every 10,000 HHonors points. Essentially, you’ve traded 5,000 miles for 1,500 miles…. “Consumers can convert miles with United and American at a 1-to-1 ratio into Club Rewards points,” says Ashley Miller, the program’s North America director. The points can be converted back into miles with the program’s 24 other partner airlines, but at a 2-to-1 ratio so that 10,000 Club Reward points become 5,000 miles. There’s also a handling fee for converting points to miles. Miles in those other 24 partner programs can’t be converted to Club Rewards points.

The problem is that this makes the HHonors points the currency, not the frequent flyer miles themselves. Individually, I can think of each frequent-flyer program as creating money, but together they don’t form a single currency, but rather another six or seven. It’s been a while since I thought of how to define a currency, so I’d appreciate a correction if I’m wrong on this. I never feel completely comfortable contradicting the Economist. UPDATE: Several commenters have suggested that I didn’t detect the irony in the Economist piece — au contraire, I was aware of the lighthearted one. If the logic underlying the humor doesn’t hold up, however, then I’m not sure how funny it is.