Minneapolis FED Research Paper Finds Banning or Taxing 'Bitcoin' Can Help Maintain Permanent Budget Deficits
A new research paper from the Federal Reserve Bank of Minneapolis suggests that governments can either tax or ban "fixed supply private-sector bubble assets that are not a claim to any real resources" to ensure the long-term viability of large and permanent budget deficits.
- The working paper titled "Unique Implementation of Permanent Primary Deficits?" by Amol Amol and Erzo G.J. Luttmer explores how a government can sustain a permanent primary deficit using nominal debt and continuous Markov strategies.
- They conclude that this strategy can be effective unless there are alternative assets, such as bitcoin, in the economy.
- Bitcoin here is used as a "metaphor for a private-sector security that is in fixed supply and that is not a claim to any real resources."
"In an economy with incomplete markets and consumers who are sufficiently risk averse, we show that the government can uniquely implement a permanent primary deficit using nominal debt and continuous Markov strategies for primary deficits and payments to debtholders. But this result fails if there are also useless pieces of paper (bitcoin for short) that can be traded," write the economists.
- According to the report authors, bitcoin introduces a "balanced budget trap," an alternative state where the government is forced to balance its budget, limiting its ability to spend beyond the resources obtained via taxation.
"If there is trade in bitcoin, then there is no continuous Markov strategy for the government that leads to unique implementation. Instead, there is a continuum of equilibria with distinct real allocations in which the price of bitcoin converges to zero. And there is a balanced budget trap: continuous government policies designed for a permanent primary deficit cannot eliminate an alternative steady state in which r - g = 0 and the government is forced to balance its budget."
- The report suggests that financial repression mechanisms, such as banning or taxing bitcoin, might be necessary for governments aiming to maintain fiscal sustainability through permanent primary deficits.
"A legal prohibition against bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on bitcoin at the rate -(r - g) > 0," was stated in the paper abstract.
- Specifically, the authors of the report point out that a tax rate greater than the difference between the real interest rate and economic growth rate can eliminate positive price equilibria for bitcoin.
