As someone who has been closely following the evolving world of cryptocurrencies for quite some time now, I find myself intrigued by this recent paper from the Minneapolis Fed that suggests Bitcoin could constrain governments. My personal experience in this field has led me to a slightly different perspective.
Bitcoin is often described with various terms, but “a balanced budget trap” might not be among them, unless recently. In other words, this description for Bitcoin may not have been apparent before, but it seems to fit more now.
A newly released report posted on the Federal Reserve Bank of Minneapolis’s site posits that digital currencies such as Bitcoin (BTC) might eventually compel the U.S. federal administration to maintain a balanced budget.
It’s likely that this decision might cause frustration among policy makers and lawmakers due to their desire to maintain flexibility for potential emergency situations such as a pandemic (like COVID-19) or a recession. After all, increased spending can serve as an economic stimulus.
So, how can the US escape this “balanced budget trap”?
As a researcher, I posit that imposing a legal ban on Bitcoin could potentially revert back to a singular, long-term primary budget surplus, while implementing a tax on Bitcoin transactions might achieve the same outcome.
The primary deficit refers to the gap between the amount a government spends (excluding interest payments) and the income it generates through taxes and other sources of revenue.
A red flag for the crypto industry?
Even the suggestion of a Bitcoin ban is bound to chafe the crypto community.
People who successfully navigated the complexities of this extensive 37-page document published on October 17 often expressed feelings that ranged from confusion, anger, and mockery.
The proposal additionally sparked debate on its practicality, and curiosity about how a digital currency worth $1.4 trillion could potentially possess such influence over a government saddled with debt 25 times larger than its market value.
Matthew Le Merle, CEO of Blockchain Coinvestors, stated to CryptoMoon that Bitcoin doesn’t serve as a means to compel the U.S. government to balance its budget. He pointed out that with over $35 trillion in debt, there seems to be an issue with the spending habits of American politicians, and change is needed.
Daniel Lacalle, chief economist at Tressis – a Spanish investment firm – expressed amusement in a witty manner when discussing a paper with CryptoMoon. He pointed out that the paper essentially acknowledges Bitcoin as a safeguard against currency devaluation and potential limit on government debt accumulation. Interestingly, Lacalle noted that if the government acted responsibly to preserve their currency’s value, there would be no such threat in the first place.
The possibility of banning Bitcoin
But what about the notion that the US government could preserve its spending options by prohibiting Bitcoin? Is a ban even doable?
As a crypto investor, I recognize that it’s nearly impossible for any government to eradicate Bitcoin entirely due to its decentralized nature. However, a powerful and anti-Bitcoin government could substantially diminish its usage by implementing stringent regulations or policies that make it less appealing or accessible.
The usefulness of a medium of exchange depends on the size and composition of its user network. “So, if a government can limit the size of the Bitcoin network, it might reduce Bitcoin’s usefulness to those beyond its jurisdiction as well.”
As a research analyst, I found the paper particularly noteworthy due to its publication on the Federal Reserve Bank of Minneapolis’s website. This bank is an integral component of the broader Federal Reserve System, which holds significant influence as the preeminent economic institution within the United States.
It’s important to note that while Amol Amol and Erzo Luttmer may hold certain views, these do not automatically represent the views of the Minneapolis Federal Reserve.
Recent: Harris win unlikely to rock Bitcoin price, but crypto fears persist, say observers
Joshua Hendrickson, an associate professor and head of the economics department at the University of Mississippi, mentioned to CryptoMoon that this study was conducted independently within their research team.
“These research departments are much more like university departments. Everyone is free to write research papers about the topics that they want.”
Besides, the sustainability of government debt — and perpetual primary deficits — is a popular topic right now among academics, he added.
A thought experiment
In my exploration of this topic, I’ve found that the question revolves around when a government can maintain a perpetual budget deficit. Interestingly enough, the feasibility hinges upon the existence of an alternative like Bitcoin.
“When there is no such thing as Bitcoin, the answer is that yes, it would be possible to run a perpetual primary deficit.”
Indeed, there are assets similar to Bitcoin that do indeed exist, and this adds complexity to the situation. The professor went on to say that these types of assets can serve as a safety valve for investors. When people anticipate that their dollar-based investments may decrease in value over time, they might opt to invest in alternatives such as Bitcoin instead.
According to Hendrickson, the researchers proposed that making this replacement would make it impossible for the continuous large spending exceeding income (or primary deficit) to continue being sustainable.
Can governments “hold back the incoming tide”?
However, is it practically possible to enforce such a ban since Bitcoin, being a global cryptocurrency, has users residing in almost every nation across the globe?
According to Chainalysis’s “2024 Global Adoption Index,” a ranking system for countries based on their degree of cryptocurrency use, the United States was placed fourth. It trails behind India, Nigeria, and Indonesia in terms of crypto adoption.
Le Merle stated that trying to prohibit digital currencies is just as futile as attempting to stop the internet, much like the “Stop the Internet Now” campaign of the 2000s was seen as akin to King Canute vainly trying to halt the tide.
Still, a US ban could certainly put a damper on things, even in countries outside its jurisdiction. Luther said.
“If my foreign trading partners don’t want to use Bitcoin out of fear that they will be punished by their government, I am less likely to use it as well — even if I am beyond the reach of their government and my own government is relatively permissive.”
A straightforward answer is that merely enacting a law wouldn’t be enough to outlaw Bitcoin.
To effectively implement a ban on Bitcoin, a government may need to take steps that undermine its popular appeal, often referred to as the “network effect” – where Bitcoin’s value increases as more people use it. This could involve enacting laws that forbid its acceptance and imposing penalties on those caught using it. As Hendrickson points out, our research suggests that such policies could lead to scenarios where Bitcoin is no longer in use or held.
But that’s not the end of it. What Hendrickson and his co-authors also found was:
“If the network effects are sufficiently strong, or if there is a large enough group of Bitcoiners who will accept Bitcoin no matter what, then these policies will not work.”
Furthermore, it’s important to note that Bitcoin isn’t the sole means of restricting persistent budget deficits in the U.S. Other potential options exist, such as currencies issued by foreign governments, like the Euro or Yen, which could also effectively control the spending habits of the U.S. government.
Luther stated, “Prohibiting Bitcoin alone won’t suffice. To truly remove the limitations offered by other options, the government must outlaw all the alternatives as well.
As an analyst, I’d express it this way: Such a policy seems excessively strict, I noted. In truth, only a handful of governments impose restrictions on their citizens holding foreign currencies or cryptocurrencies, and those that do are typically not the type of countries we admire in terms of economic freedom.
As an analyst, I’ve noticed that the topic of government deficit spending has sparked considerable discussion among economic experts, a debate that seems to have been ongoing nearly since the inception of our field.
En route, organizations such as the Republican Party and the Peterson Foundation suggested alterations to the United States Constitution that would require a balanced budget. They advocated for this change on the grounds that future generations deserve protection from debts incurred by previous generations.
Recent: Saylor’s Bitcoin custody debacle highlights growing divide in crypto community
Critics argue that this extreme solution could restrict the flexibility of future decision-makers when it comes to employing fiscal policy, either to mitigate economic downturns such as recessions, or to address unexpected crises affecting the nation.
“Bitcoin constrains governments”
As a crypto investor, I must admit that reading papers like the one on the Minneapolis Fed’s website can stir up feelings of disagreement within our community. It seems like we’re finding it more convenient to focus on changing others’ behaviors instead of addressing our own issues. The truth is, Bitcoin isn’t the one jeopardizing the U.S.’s well-being and potential – this much is evident to me.
According to economist Lacalle, this research indicates that the U.S. dollar has certain economic and fiscal boundaries, and even a minor challenge such as Bitcoin might potentially jeopardize it. He elaborated on this point by saying…
“It is profoundly immoral because it is basically advocating for the suppression of BTC because they know that the government will continue to destroy the currency.”
As an analyst, I find that this paper provides a hint about potential areas in the crypto industry where resistance against Bitcoin as a leading currency might surface in the future. In his remarks, Luther stated that Bitcoin offers people an alternative option, which limits the control of governments over their economies. It’s plausible to envision a time when major governments like the US may seek ways to reduce or eliminate this external influence on their monetary policies.
Read More
- HBAR PREDICTION. HBAR cryptocurrency
- ZIG PREDICTION. ZIG cryptocurrency
- IMX PREDICTION. IMX cryptocurrency
- LDO PREDICTION. LDO cryptocurrency
- FXS PREDICTION. FXS cryptocurrency
- TNSR PREDICTION. TNSR cryptocurrency
- STEEM PREDICTION. STEEM cryptocurrency
- 15 Games Everyone Wants Sequels For
- CRV PREDICTION. CRV cryptocurrency
- XAUT PREDICTION. XAUT cryptocurrency
2024-11-01 18:47