A recent study conducted by the Federal Reserve Bank of Minneapolis suggests that governments should consider implementing taxes or bans on assets like Bitcoin in order to maintain deficits. According to the research paper released on October 17, the presence of Bitcoin poses challenges to policy implementation in an economy where the government aims to sustain permanent deficits through nominal debt. The Minneapolis Fed argues that Bitcoin creates a “balanced budget trap,” forcing the government to balance its budget. The researchers used Bitcoin as an example of a fixed-supply “private-sector security” without “real resource claims,” and they concluded that it should be either banned or subject to taxation as a solution to this dilemma.
The concept of a primary deficit is crucial in understanding this issue. It arises when a government spends more than it collects in taxes and other revenue, excluding interest payments on its debt. The term “permanent” emphasizes that the primary deficit is intended to be sustained indefinitely. Currently, the United States has accumulated a total national debt of $35.7 trillion, while the annual gap between spending and tax revenue, the primary deficit, stands at approximately $1.8 trillion. An article from Reuters on October 19 highlights that the increase in interest costs for Treasury debt, resulting from higher rates and increased debt to finance, is the main driver of the fiscal 2024 deficit, the largest outside of the COVID-19 era.
Matthew Sigel, the head of digital asset research at VanEck, commented on the research paper released by the Minneapolis Fed on October 21. He stated that the Fed had aligned itself with the European Central Bank in its criticism of Bitcoin, adding that the ECB had previously released a paper on October 12 arguing that older Bitcoin holders benefit at the expense of newer ones. The ECB suggested regulating the asset to prevent its price from rising or even banning it altogether. Jürgen Schaaf, an ECB senior management adviser, also voiced his opposition to Bitcoin on October 20, claiming that its rise is fueled by wealth redistribution at the expense of non-holders. He advocated for policies that curb Bitcoin’s growth or eliminate it.
Interestingly, Dan McArdle, the co-founder of Messari, discovered a 1996 research paper from the Minneapolis Fed titled “Money is Memory,” which made a case for Bitcoin twelve years before its genesis block. The paper defined money as an object that does not enter production, is available in a fixed supply, and is equivalent to a primitive form of memory.
In summary, the recent research paper from the Federal Reserve Bank of Minneapolis suggests that governments should consider implementing taxes or bans on assets like Bitcoin to maintain their deficits. The presence of Bitcoin creates challenges for policy implementation in an economy where permanent deficits are sought through nominal debt. The debate surrounding Bitcoin’s impact on deficits continues as experts and institutions express their opinions on the matter.