As a seasoned analyst with over two decades of experience in global finance and economics, I find the recent stance taken by the Federal Reserve Bank of Minneapolis towards Bitcoin intriguing. While it is true that Bitcoin’s presence complicates the implementation of permanent deficits for governments, the idea of banning or heavily taxing this innovative technology seems like a step backwards.
A recent research paper by the Federal Reserve Bank of Minneapolis has suggested that assets such as Bitcoin would need to be taxed or banned for governments to maintain deficits.
In economies where governments persistently run budget deficits by utilizing nominal debt, the emergence of Bitcoin (BTC) poses challenges to effective policy execution, according to a working paper published by the Federal Reserve Bank of Minneapolis on October 17.
Bitcoin introduces a “balanced budget trap,” an alternative state where the government is forced to balance its budget, the Fed claimed.
The team utilized Bitcoin as a model for a “fixed-supply financial asset in the private sector,” devoid of tangible resource ownership rights. Their findings suggested that either prohibition or taxation might be necessary to address this predicament.
“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin.”
A primary imbalance arises when a government’s expenditures exceed the income from taxes and other sources, not including borrowing costs for its debts.
The term “permanent” for the primary deficit is key as it means the government plans to keep spending more than it collects indefinitely.
Here’s one way of paraphrasing the given text:
This year’s record deficit, surpassing any other non-COVID-19 period, was primarily fueled by a 29% rise in interest expenses for U.S. Treasury bonds, totaling $1.13 trillion. The increase stemmed from elevated interest rates and a larger amount of debt taken on to be repaid. According to Reuters, this information was released on October 19th.
On October 21st, Matthew Sigel, who leads digital asset research at VanEck, made a comment regarding a recent paper. In his view, the Federal Reserve Bank of Minneapolis has joined forces with the European Central Bank in their criticism of Bitcoin.
“Fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure govt debt remains the ‘only risk-free security.’”
As an analyst, I stumbled upon a fascinating piece of history: way back in 1996, a Minneapolis Federal Reserve paper titled “Money is Memory” made arguments that, surprisingly, were reminiscent of Bitcoin’s concept – a full twelve years before the first Bitcoin block was mined.
In simpler terms, the paper described money as something that isn’t produced, has a set amount in circulation, and functions like a basic kind of record-keeping system.
On October 12th, the European Central Bank published a report suggesting that seasoned Bitcoin owners are reaping benefits to the detriment of newer ones. The report advocates for implementing regulations to control its value or even outright prohibition as a precautionary measure.
On October 20th, advisor to the ECB’s senior management, Jürgen Schaaf, expressed his support for eliminating Bitcoin in a post on X.
Individuals who don’t own Bitcoin should understand that its increase in value might be coming at their economic cost. He further stated that there are strong arguments for implementing policies aimed at limiting or even eradicating Bitcoin.
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2024-10-21 07:06