The schism of central banks and cryptocurrency adoption

The point of departure is here: Naked Capitalism offers a very interesting article, Defining the Tax Reform Battleground, which describes tax reform in the context of macroeconomics. In that article, they say that the primary argument for tax reform is deficit reduction. But here's the rub. The deficit reduction argument is a phony argument, a ruse, because the government doesn't need to borrow money. A sovereign government only needs to print the money and spend it.

They go on to say that government "taxes" income to manage inflation and keep it in check. I am reminded of a friend of mine who once told me something that the ancient Romans or Greeks (I can't remember which, but that's not important here) figured out: your money is only worth the taxes you pay.

The reason for this is simply laid out by the folks at Naked Capitalism in an argument that is not usually offered for civil discourse by the Democrats or Republicans in power today:

For most people, the greatest challenge to near-and-dear convictions is MMT’s (proponents of Modern Monetary Theory) claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing. (links and emphasis mine)

The primal fear of any sovereign government then, is loss of control over the sovereign power to print money at will. As a corollary, sovereign governments also fear the loss of the power to define legal tender. Anyone who has noticed just how fiercely the banks and their corresponding governments will defend the status quo, must also see that cryptocurrencies portend the loss, or more precisely, the redistribution of this power over money.

It is also worth noting that when the government prints money, or creates money in digital ledgers at the Federal Reserve, somebody gets that money first. Who is it? Is the banks or the government? I'm betting that if we follow the above referenced argument, the government gets it first, spends it, and it lands in a bank somewhere, and the banks then use fractional reserve banking rules to create more money.

It would seem to be a farce if we find that the banks get it and then distribute it, so I have a hard time believing that happens. But I wouldn't be surprised if the banks figured out how to make that happen, too. Wait. I think they did manage something like that with their bailout from the collapse of the housing bubble in 2008.

Cryptocurrencies threaten to undermine that power. But not every government is running for the hills. Japan has clearly taken the bull by the horns and has embraced cryptocurrency as legal tender. I have always admired Japan for their tenacity and willingness to try the new, the unforeseen. They are blazing a trail with their permissive attitudes towards cryptocurrency.

In contrast, some American banks have already pointed their guns at crypto with their actions to ban cryptocurrency purchases with credit cards. Can debit cards be that far off? It is a cautious love-hate thing between the banks and the cryptocurrencies. I suspect they can see the writing on the wall and know that its coming and that with enough people behind it, there will be little they can do to stop it.

I have already seen efforts to co-opt cryptocurrencies by government. The Bank of England has been investigating the idea of creating a national cryptocurrency. Even the United States Federal Reserve has made noises that hint of high level consideration of a new national currency based on blockchain technology. The drawback of both of those suggestions of course, is that the purchasing power of any such currency would be centralized to the hilt within the central bank. This would still permit the government to issue currency at will.

A man only has as much power as others are willing to give him. Money is evidence of that willingness. A central bank, perhaps not so much. Consider the circumstances surrounding the creation of the Federal Reserve, for example. The Federal Reserve Act was originally passed a few days before Christmas in 1913, as if presenting a gift to the banking industry while everyone else was celebrating Christmas. What a wonderful life it must be to be a banker. Is it any wonder why The Fed remains shrouded in so much secrecy? I'm not so sure that political independence is the only reason for that secrecy.

"Austrian Economics" is not what makes me a fan of cryptocurrency. To me, the appeal of cryptocurrency is decentralization of power. Or to put it more simply, the greatest power in any form of government is the power to issue money. Money is the grease that makes the economy work. Money is what we've all been trained to work for, you know, like the animal in the Skinner Box. The power of labor has been harnessed by a small group of very wealthy men in a central bank.

Cryptocurrency represents an opportunity to redistribute that power to many more people. Cryptocurrency is a far more democratic exercise of the power to issue money. Cryptocurrency and the use thereof, is a far more decentralized exercise of the power to spend money.

There are now more than 1500 cryptocurrencies vying for your business. They are nearly universally open source, widely distributed in the sense of production and processing, have public ledgers and are not controlled by any single government. By any measure, cryptocurrency is far more transparent than all of the central banks of the world.

I pause to wonder what governments would look like if the power to fund them were truly voluntary in every sense of the word. Cryptocurrency makes that possible. I suspect that under those circumstances, governments would be far more polite to the people they claim to serve.

If cryptocurrencies eventually prevail over "fiat" currency as legal tender and as a medium of exchange, and I believe that they will, we will have witnessed a non-violent coup of enormous proportions. I feel fortunate to see this revolution in progress and hope to live to see the completion of said revolution.