Every developing technology has the potential for unintended consequences. Blockchain technology is an example. Although there are many possible uses of blockchain as a generally trusted and useful distributed approach to storing data, its most visible application has been virtual or crypto-currencies, such as Bitcoin, Ethereum and Litecoin. These once-obscure crypto-currencies are on a collision course with another trend that in its own way is based on technology — mostly digital government-issued money.
Although there are many possible uses of blockchain as a generally trusted and useful distributed approach to storing data, its most visible application has been virtual or crypto-currencies, such as Bitcoin, Ethereum and Litecoin. These once-obscure crypto-currencies are on a collision course with another trend that in its own way is based on technology — mostly digital government-issued money.
In particular, another once-obscure idea about government money is also moving more into the mainstream — modern monetary theory (MMT), which I mentioned few weeks ago in my reference to Stephanie Kelton’s new book, “The Deficit Myth”. In doing a bit of follow up on the subject, I came across many articles that were critical of MMT. Some were from mainstream economists. Many more were from advocates of crypto-currencies, especially Bitcoiners.
Although I doubt that Professor Kelton would agree, many Bitcoiners feel that governments have been using MMT since the 1970s — merely printing money. They forget about the tax and policy stances that Kelton advocates.
Moreover, there is a significant difference in the attitude of public leaders when they think they are printing money versus borrowing it from large, powerful financial interests. James Carville, chief political strategist and guru for President Clinton famously said, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
For Bitcoiners, the battle is drawn and they do not like MMT. Here is just a sample of the headlines from the last year or so:
- Bitcoin vs. Modern Monetary Theory
- Bitcoin, The Alternative to the Modern Monetary Theory
- Satoshi’s Rebuttal of Modern Monetary Theory examines the origin of the century-old economic ideology and how bitcoin invalidates many of its core principles, saying, “The decentralized nature of Bitcoin meant that even if the State wanted to shut it down, it would be an incredibly difficult project to kill at a certain scale. This new form of money was able to exist out in the wild, allowing for the first time the possibility of a true competitor to fiat money.”
- This more balanced article still portrays a contest of Modern Monetary Theory Versus Bitcoin.
It is worth noting that MMT raises very challenging issues of governance. Who decides how much currency to issue? Who decides when there is too much currency? Who decides what government-issued money is spent on and to whom it goes? This is especially relevant in the US, where the central bank, the Federal Reserve, is at least in theory independent from elected leaders.
However, it also gives the government what may be a necessary tool to keep the economy moving during recessions, especially major downturns. Would a future dominated by cryptocurrencies, like Bitcoin, essentially tie the hands of the government in the face of an economic crisis? — just as the gold standard did during the Panic of 1893 and the Great Depression (until President Roosevelt suspended the convertibility of dollars into gold)?
This picture shows MMT as a faucet controlling the flow of money as the needs of the economy changes. If this were a picture of Bitcoin’s role, the faucet would be almost frozen, dripping a relatively fixed amount that is dependent upon Bitcoin mining.
Less often discussed is that cryptocurrencies, as a practical matter, also end up needing some governance. I am not going to get into the weeds on this, but you can start with “In Defense of Szabo’s Law, For a (Mostly) Non-Legal Crypto System”. The implication is that cryptocurrencies need some kind of rules and laws enforced by some people. Sounds like at least a little bit of government to me.
Putting that aside, if Bitcoin and/or other cryptocurrencies succeed in getting widespread adoption, then it would seem that they would limit the ability of governments to encourage or discourage economic growth through the issuance of money.
Of course, some officials do not seem to worry too much. This attitude is summed up in a European Parliament report, published in 2018.
Decentralised ledger technology has enabled cryptocurrencies to become a new form of money that is privately-issued, digital and that permits peer-to-peer transactions. However, the current volume of transactions in such cryptocurrencies is still too small to make them serious contenders to replace official currencies.
Underlying this are two factors. First, cryptocurrencies do not perform the role of money well, because their value is very volatile and they are thus not very good stores of value. Second, cryptocurrencies are managed in ways that are very primitive compared to what modern currencies require.
These shortcomings might be corrected in the future to increase the popularity and reach of cryptocurrencies. However, those that manage currencies, in other words monetary policymakers, cannot be outside any societal system of checks and balances.
For cryptocurrencies to replace official money, they would have to conform to the institutional set up that monitors and evaluates those who have the power to manage money.
They do not seem to be too worried, do they? However, cryptocurrency might eventually derail the newfound freedom that government economic policy makers have realized they have through MMT.
As we have seen in the past, new technologies can suddenly grow very fast and blindside public officials. As Roy Amara, past president of The Institute for the Future, said, “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”.
© 2020 Norman Jacknis, All Rights Reserved