The National Debt and Cryptocurrency
By: Block Society
To build on the previous publication, more articles are forthcoming that allude to cryptocurrencies’ economic potential – starting here with the federal debt., a few articles will be written about the other factors alluded to in that article – starting here with federal debt.
The national debt has all but fallen out of common discourse in the USA. 10 years ago, Presidential candidates actually commented on the national debt. Today, it is rare to find a politician who acknowledges that the debt is a problem. Federal debt is taken as a normal piece of the national economy. We have been successfully running a country with high debt levels for decades; why would we bring up its potential ruinous nature? In fact, it is unfashionable to talk about the impending debt cliff. People are laughed at when they speak of the debt. A school of thought called Modern Monetary Theory, MMT for short, has invaded the dialogue and assured the general public that the debt is nothing to worry about. In short, it posits that debt is not a problem because the government can print money without large side effects such as short-term inflation. MMT offers circular answers to the problem of extensive debt. A dive into MMT and how it intersects with blockchain technology is in the making.
However, there are still proponents of sound money and finance. Earlier this year Ron Paul famously said:
“With a national debt approaching $23 trillion and a trillion-dollar deficit for this year alone, Congress last week decided to double down on suicidal spending, passing a two year budget that has the United States careening toward catastrophe.”
The national debt clock website sets the scene with a few key statistics. The national debt has reached roughly $22.5 trillion. Spending is around $4.4Tn/year and tax revenue is $3.4Tn/year. The United States Government is spending $1Tn more than it is taking in. This deficit has been growing year by year. As mentioned earlier, tax revenues per year are roughly $3.4Tn. The government’s debt to revenue ratio is 7:1. Comparing these numbers to your average corporation that exists in the market, Microsoft’s revenue is $125Bn and the debt is around $86Bn. This is a healthy range around 0.69:1. GE is probably one of the most debt ridden companies in the world. Their revenue is $120Bn while their debt is $110Bn. A 1.1:1 ratio. The Federal Government has an astronomical debt to revenue ratio that is 7x the highest company and 10x of a healthy company. This does not seem natural and it does not bode well for the future.
Trillions of dollars are a tough concept to fathom. Billions of dollars are even a difficult idea to understand. For comparison, M2 represents all of the money supply of the whole world including money markets, small CDs, and savings deposits. It currently equals roughly $90 trillion. The national debt is ~⅕ the size of the global money supply – an eyepopping figure. As another perspective, the global stock market’s capitalization is roughly $73 trillion. This means that the national debt is ~¼ of the size of the aggregate global publicly traded companies. These numbers are outrageous enough to give anyone anxiety!
As aforementioned, debt on these levels are unnatural in a free marketplace. They cannot occur through the mechanisms of market competition. Unnatural debt levels arise from a couple of systematic differences that come from running a government. Governments are inherently coercive organizations in which they have the authority to force their citizens to act against their will. If they played according to the rules of the free market, debt levels would not become so high because the lenders would quit lending to them. On top of this, the government would not be able to earn high revenues in the free market because it would have to convince citizens to donate funds instead of being able to tax. The artificial debt levels are primarily caused by the government’s taxing power and control over the currency.
Taxing power, besides the exchange value, is the root cause of value for the USD. In the early 1900s, the USD was pegged to a weight of gold. If $20 was brought to the bank, it could be exchanged for $20 worth of precious metals. The weight to price ratio did not fluctuate. The reason why precious metals were used to back currency is that precious metals are very difficult to counterfeit, they are easy to transport, they do not degrade, they are fungible, and people trust that they will retain value.
The United States federal government instituted the income tax as well as the federal reserve in 1914. These two new institutions gave complete control over monetary supply and some control over demand for USD to the federal government. Focusing on the demand side first, the income tax was denominated in federal reserve notes. This meant that everyone had to have USD at the end of the year to pay their taxes. Moving forward in time, withholding taxes, sales taxes, capital gains taxes, social security, and all other federal taxes were all denominated in USD – giving a price floor to the dollar. There will always, so long as the US Government continues its tax policy, be a demand for the USD.
The supply side is where things get a bit trickier. The US Government, as administer of the USD, can buy government bonds (increase) or sell bonds (decrease) to manage the money supply. They can “print” money and inject it into investments as they did during the QE years after the ‘08 crisis. As an aside, recently the Federal Reserve had a mini QE to offset a spike in the overnight rate where they injected $50Bn into the market within hours. The USD is no longer tied to precious metal prices. It derives value through nothing other than the regressive trust value.
The power over the supply of money is something that can only arise through monopolizing the monetary supply through coercion. As with all coercion based monopolies, massive inefficiencies rise to the surface. One such inefficiency is debt. The Government has become the demand driver and the supplier of USD, a product which is used in roughly 60% of all global transactions. The issuer of the money is also the user. When the citizens rise up against taxes, the federal government will instead borrow money. If the borrowing begins to falter, they can print more money to pay off debts or to pay for current/future endeavors. And as mentioned in the first few paragraphs, the debt has reached outrageous levels. The Federal powers may need to get their printing press out soon.
This tangled mess of an issue is very difficult to fathom. There are many incentive systems and tradeoffs of borrowing, printing, and taxing. Yet without being an economics PhD anyone can begin to see that it will surely lead off a fiscal cliff. America has been feeling the beginning effects of that cliff in the form of the ‘08 crisis and the lackluster recovery over the past 10 years.
Great, what does this have to do with cryptocurrency? Cryptocurrency is built on an axiomatically different system by which supply and demand come into existence. On the supply side, no entity has a set control on the supply (except for stablecoins and some other types of coins). The supply grows at a well-defined rate over time. Currently there are 12.5 new BTC minted roughly every 10 minutes, for example. Soon there will be 6.75 new BTC minted every 10 minutes. It is physically impossible to tamper with this supply schedule.
On the demand side, demand is generated not through some coercive taxation power, but rather through natural rises in usership and subjective value of the asset. This means that demand is not dependent on the taxation power; it is instead only dependent on the social value and network effects of the currency. Network effects in cryptocurrency are growing deeper and extending further as time progresses. Demand over the long-term will rise.
Within the realm of cryptocurrency, supply and demand are unaffected by centralized, top-down powers. It is very difficult with most cryptocurrencies to co-opt them. They are intentionally built to disincentivize this. Instead of being administered they are agreed upon by all of the individual actors in the system. This creates healthy incentives for growth and value generation without the stumbling blocks that centralized fiat currencies have.
No single actor could amass such debt as that debt would have to be voluntarily lent to that actor. Anyone who understands business would not be so reckless with their lending powers. A government can mandate purchases or their bonds through their central bank.
The cracks within the foundation of the global economy are beginning to emerge. Everyday people are feeling the effects through unemployment, stagnating wages, and increases in Gini coefficients (wealth distribution ratio). Many of these issues have to do with centralized fiscal policies that would be impossible to execute within the framework of cryptocurrency.
“$53.2 Billion In QE Lite: Fed Concludes First Repo In A Decade Amid Liquidity Panic.” Zero Hedge. Accessed September 27, 2019. https://www.zerohedge.com/markets/fed-has-lost-control-rates-again.
Desjardins, Jeff. “All of the World’s Money and Markets in One Visualization.” The Money Project, October 26, 2017. http://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/.
Gallant, Chris. “How Central Banks Can Increase or Decrease Money Supply.” Investopedia. Investopedia, September 11, 2019. https://www.investopedia.com/ask/answers/07/central-banks.asp.
Hummel, Jeffrey Rogers, James Tobin, Craig J. Richardson, Jon Murphy, John Schuler, Charles L. Hooper, David R. Henderson, and Jeffrey Rogers Hummel. “Interpreting Modern Monetary Theory.” Econlib. Library of Economics and Liberty, June 3, 2019. https://www.econlib.org/library/Columns/y2019/Hummelmonetarytheory.html.
“U.S. National Debt Clock : Real Time.” U.S. National Debt Clock : Real Time. Accessed September 27, 2019. https://www.usdebtclock.org/.
Written by Ron Paul, and Ron Paul. “Congress Spending Surge Is National Suicide.” The Ron Paul Peace and Prosperity Institute. The Ron Paul Peace and Prosperity Institute, August 5, 2019. http://www.ronpaulinstitute.org/archives/featured-articles/2019/august/05/congress-spending-surge-is-national-suicide/.