Federal Reserve: "Bitcoin ban and taxes are useful for persistent budget deficits!"
The Federal Reserve of Minneapolis, one of the twelve banks of the US Federal Reserve System, has published a new paper on Bitcoin. In this academic paper, the authors examine the extent to which Bitcoin can prevent the state from constantly spending more money than it takes in.
To combat this, they propose taxes and even a ban.
These results suggest that a legal prohibition of bitcoin or a tax on bitcoin are forms of financial repression that may be useful when the ability of the government to use consumption taxes is limited.
From the paper
Shortly after staff at the European Central Bank conceded in a paper that non-Bitcoin holders should crack down on Bitcoin because they are supposedly becoming impoverished in relative terms as prices continue to rise, there are now worrying tones coming from the US Federal Reserve (Fed).
"Unique Implementation of Permanent Primary Deficits?"
The working paper of the Federal Reserve of Minneapolis entitled “Unique Implementation of Permanent Primary Deficits?” was published on October 16. It was written by research analyst Amol Amol and guest visiting scholar Erzo G. J. Luttmer. Both economists work for the University of Minnesota and the Minneapolis Fed.
Primary deficits, which are the subject of the paper, are government budget deficits minus the interest costs on the existing debt burden. This year, the USA is already paying more than one trillion US dollars in interest on its debt of almost 36 trillion US dollars. And even without the interest costs, the USA would not be able to raise more money than it spends - and there is no improvement in sight.
If a state runs a chronic deficit, it has to obtain the money it needs for government spending through government bonds, i.e. borrowing. These debt instruments can be bought by entities that lend money to the state and are remunerated with interest. For a state to be able to raise debt easily, it is important that the national currency and government bonds are perceived as an attractive financial instrument. If there is no demand for the government bonds, the country's own central bank usually steps in by buying the securities with newly created money in a roundabout way. In the past, this was particularly the case when states ran out of money to wage war.
Using model economics, the authors discuss how Bitcoin can make it difficult for the government to consistently spend more money than it takes in.
However, Bitcoin is used here as a metaphor for an alternative to "risk-free" government bonds that pay no dividend. In the paper, Bitcoin is also used as a synonym for "useless pieces of paper".
We use bitcoin as a metaphor for a private-sector security that is in fixed supply and that is not a claim to any real resources.
From the paper
And this alternative, according to the authors, may mean that "despite intending to run deficits, may be forced to balance the budget in some steady states".
Ultimately, the authors come to the conclusion that the state is able to run permanent primary deficits despite "private sector bubble assets" such as Bitcoin - if it resorts to political measures such as taxes. A ban is not absolutely necessary to achieve this goal, the authors explain.
An outright ban is not necessary if the government can tax private bubble assets at a rate of - (r - g) > 0.
From the paper
The Bitcoin tax would therefore have to close the gap created by the difference between the yield on government bonds (r) and economic growth (g) so that, according to the model, a ban would not be necessary.
Central banks in an attacking mood again
Even if the paper by the Federal Reserve of Minneapolis is not quite as direct an attack on Bitcoin as the one by ECB employees Bindseil and Schaaf, it is still very revealing. Ultimately, they draw attention to the fact that Bitcoin could discipline state budgets - even if this is certainly not generally seen as positive by the monetary authorities.
The head of the Minneapolis Fed is none other than Neel Kashkari. He is probably known in Bitcoin circles for his statement "There is an infinite amount of cash at the Federal Reserve". Kashkari is also an avowed Bitcoin critic. In April of this year, he emphasized that the asset has no legitimate use.
Bitcoin has been around for more than a decade, and more than a decade later, there's still no legitimate use case in an advanced democracy.
Neel Kashkari
Perhaps one of the benefits of Bitcoin is exactly what Kashkari's collaborators note in their paper. Bitcoin is an alternative to fiat currencies, or government bonds denominated in fiat currencies, that can help governments manage taxpayers' money more efficiently. Satoshi Nakamoto's creation is there to give people a different kind of money that no central entity can control and inflate at the expense of money users. Overbearing states as we know them today would probably be a relic of the past with Bitcoin as the world's money.
Nevertheless, high Bitcoin taxes, which are indirectly demanded by the custodians of money, could make it significantly less attractive to hold the asset. However, the design of Bitcoin theoretically allows people to leave a country with a disadvantageous legal situation with the private key to their Bitcoin in their head and move to a country where the government is more friendly to them.
It remains to be seen whether the results of the paper will lead to higher taxes or even a ban being discussed on the big stage again. In general, the political landscape is currently showing rather positive developments with regard to Bitcoin. For example, according to the betting markets, the next US president is likely to use Bitcoin in his election campaign. Politician Robert F. Kennedy Jr., who first wanted to become president himself and now supports Trump, has also promised to waive the capital gains tax on Bitcoin - Blocktrainer.de reported. And even in Japan, the leader of the opposition party DPP announced that he would significantly reduce taxes on crypto profits - to 20 percent.
It will be interesting to see whether Bitcoin is widespread enough in society and politics to nip efforts to introduce disadvantageous laws and regulations in the bud. Even if large economies levy higher Bitcoin taxes and even impose bans, Satoshi Nakamoto's creation will not be able to be eradicated.
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