Why Americans Should Take Bitcoin Seriously

As readers of this blog well know, I write about what I consider to be the biggest and most serious problems our country faces.  And you probably also know what I consider to be the biggest problem of all:  our national debt.

As bad as our debt problem is, the practical problem is what should we do about it?  Of course, we need to restrain the growth of spending and/or raise taxes.  But what is a reasonable way to get this done?  I used to think that the best solution is to do a better job of controlling the growth of entitlement spending. This would still help a lot, of course, but such a strategy may not be enough because the problem is getting so much worse all the time.  Starting with George W. Bush, the debt problem has accelerated with each successive president: Bush, Obama, Trump, and now Biden.  It is discouraging and demoralizing to think that our debt problem is now so bad that it may be almost insolvable short of a huge crisis.

For all these reasons I am highly intrigued by an article in the current edition of National Affairs by Avik Roy, “Bitcoin and the U.S. Fiscal Reckoning.”  Mr. Roy says that soon “policymakers will face a Solomonic choice: either protect Americans from inflation (by raising interest rates) or protect the government’s ability to engage in deficit spending (by continually printing more money).  It will be impossible to do both.  Over time, this compounding problem will escalate the importance of Bitcoin.”

Here is a brief summary of his argument:

  • When viewed through the lens of human history, free-floating global exchange rates (like we have at present) remain an unprecedented economic experiment – with one fatal flaw. They enable deficit spending.
  • There are several reasons to believe that America’s fiscal profligacy cannot go on forever. Most importantly is the unanimous judgment of history: in every country and in every era, runaway deficits and skyrocketing debt have ended in economic stagnation or ruin.
  • Indications that investors are growing increasingly concerned about the U.S. fiscal and monetary picture – and are in turn assigning more risk to “risk-free” Treasury bonds – are on the rise. Between 2010 and 2020, the share of U.S. securities owned by foreign entities fell from 47% to 32%.  As foreign investors reduce their purchase of U.S. government debt, the Fed is forced to increase its own bond purchases.
  • Until and unless Congress reduces the trajectory of the federal debt, U.S. monetary policy has entered a vicious cycle from which there is no obvious escape.
  • Satoshi Nakamoto, the creator of Bitcoin, wrote in 2009, “the root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.
  • Bitcoin has the same five important qualities as gold has: it is unforgeable, divisible, durable, fungible, and scarce. Furthermore, bitcoin is rarer, more portable, and more secure than gold.  And it cannot be censored (e.g. by China).
  • Policymakers will be tempted to impose capital controls that restrict the ability of Americans to exchange dollars for bitcoin. This would be a huge mistake by confirming to the world that the United States no longer believes in the competitiveness of its currency.
  • Instead, federal policymakers would do well to embrace the role of bitcoin as a geopolitically neutral reserve asset. In fact, the Treasury Department should consider replacing a fraction of its holdings – say 10% – with bitcoin, sending a positive signal to the innovative blockchain sector.
  • Ideally, the rise of bitcoin will motivate the U.S. to mend its fiscal ways. But even if this doesn’t happen, ordinary Americans will have the opportunity to protect their savings from the federal government’s fiscal mismanagement.

Conclusion.  Bitcoin represents an enormous strategic opportunity for individual Americans and the U.S. as a whole.  The bitcoin currency and its underlying technology could become the next great driver of American growth.  But in order for this to happen, the changeover from the current fiat currency must begin to take place before the economy is decimated by drastic inflation.

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1 thought on “Why Americans Should Take Bitcoin Seriously

  1. An INGENUOUS Reply!

    Simply put, it’s hard not to view Bitcoin and its brethren as an ANTHROPOCENE era, Ponzi Scheme that apparently captures a micro-second assessment of the estimated net worth that is timely attached to each of its individual transactions. Admittedly, the trustworthy character of this Scheme may be no better than the free-trade transactions underlying the worldwide marketplace arena of its resources, but the most significant attribute of the current marketplace is that we have at least some access to its fundamental algorithm. Who knows for sure what that is for Bitcoin? All I have ever seen are stacks and stacks of computer servers, something about “mining”. For sure, that makes Bitcoin a deep concept!

    The late Henry Aaron, Ph.D., who was an economist at the Brookings Institute, long ago prognosticated the disastrous effects of entitlement spending (especially for healthcare) that have been championed by this blog. It is well to recognize that the health-spending difference between 18% (our 2019 GDP allocation to health spending) and 13% (the highest level of any other OECD nation) in 2019 was $1 Trillion. If you are interested in thinking about this, see my Blog at http://www.nationalhealthusa.net/goals/

    So, we can watch Bitcoin and be powerless to understand it OR watch the inflation rate and exercise our Social Choice (per Nobel awardee Amartya Sen) and vote ourselves out of inflation based on the best analysis of the alternatives. At least, I can thank Jack for his persistence and his unquenchable search for knowledge. In the meantime, it’s always helpful to maintain an underlying appreciation of irony when considering life’s dollars-and-scents.

    Paul

    P.S. Abbot and Costello would have done a glorious rendition of “Who’s on first” about this. If you have never watched their “Who’s on First” sketch, you can find it easily on U-Tube. You may need to watch its several times to get all the fine nuances, it goes pretty quickly. Then when a friend or foe mentions “Who’s on first” you will respond innately with laughter, especially because you know He’s on Second!

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