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“Politicians are like bad horsemen who are so preoccupied with staying in the saddle that they can’t bother about where they’re going.”
― Joseph Schumpeter
We all spend a lot of time thinking about how much the Fed should or shouldn’t raise interest rates.
Economists joust over whether fed funds should be raised to 1% or 1.25% with all the fervor of medieval theologians debating how many angels could dance on the head of a pin.
Sometimes I wonder which of those two debates is more useful.
Because we never stop to think why the Fed is tasked with setting interest rates in the first place.
Why is it, for example, that when the Fed cuts, it’s criticized for unnaturally manipulating rates lower? But when it raises, you never hear, “Why is the Fed unnaturally manipulating rates higher?”
Most of the people clamoring for the Fed to raise rates would, on any other economic issue, be arguing to leave things to the invisible hand of the free market.
But we don’t trust the free market to set interest rates.
Why? Because money itself is not a free market — the government has a monopoly on money printing and they are not shy of using it.
But it’s worth remembering that it’s our elected representatives in Congress that are doing the money printing, not the much-maligned bureaucrats at the Fed — and that they do it because we ask them to.
We ask them to spend a lot of money and not tax us too much — to fill the punchbowl, in other words.
And then we ask the Fed to take it away.
This is about as efficient as driving with your left foot on the gas pedal and your right foot on the brake, which only works in go-karts. (As the second best go-karter in all of Blockworks, I happen to be an expert.)
The US economy, however, is far from a go-kart: not exactly a Lambo anymore, but maybe a Mac Truck? (Or is it a Nikola truck, which only works when gravity rolls it down a hill?)
So it’s not clear to me that a go-kart monetary system is the best thing for us.
You probably knew all of that already. But I'm guessing you haven’t given it much thought.
We’ve all internalized the idea that the government issues money and the Fed sets interest rates. We never question if there is any other way.
In Money: Free and Unfree, George Selgin explains that the invisible hand of the free market has often done a better job on fiscal and monetary policy than the unfree hand of government.
In Scotland, the century long Free Banking era that ended in 1845 was remarkably devoid of financial crises — in a time when the neighboring Bank of England lurched from one self-made crisis to the next.
And in the Great Depression, thousands of US banks went under despite the best efforts of the Federal Reserve while free-banking Canada experienced not a single bank failure.
So why do governments now universally retain a monopoly on money creation?
It’s not because, if given the chance, the free market would print too much money. As Selgin details, that has not historically been the case.
Instead, it’s because printing money is a way for governments to collect taxes without paying a political price — to the degree voters notice, Fed bureaucrats take the blame.
This may be the reason that regulators have recently been paying more attention to stablecoins than to bitcoin.
Bitcoin is no real threat to the dollar.
But stablecoins could, eventually, challenge the government’s monopoly on money creation.
Hence the sense of urgency at today’s congressional hearing. Politicians are uncomfortable with the idea of private money creation.
If you’re thinking, “but commercial banks create money by making loans,” you’d be right. But that money is destroyed when the loan is repaid. It’s only the government that prints permanent money.
And while stablecoins may, for the moment, be more akin to temporary bank money than permanent government money, politicians may intuitively sense a threat to their monopoly.
A stablecoin like Magic Internet Money (MIM) is not likely to displace the US dollar as the world's reserve currency.
But if enough people get comfortable using it, we might start to question why we do money the way that we do.
Checks and Balances
Back when the question of angels on pins was a hot topic of debate, kings and queens were careful not to debase the coins they issued.
If Londoners got the idea that their monarch was debasing their gold coins, they’d start using coins issued by the King of France instead.
Similarly, in pre-central bank America, dollars issued by the Bank of Raleigh might have been worth less than the dollars issued by the Bank of Seattle. Or one might have been worth more in one place while the other was worth more someplace else.
That is how the free market regulates money creation. And the same dynamics are now at play in crypto.
Like medieval Londoners choosing between gold coins or colonial Americans choosing between bank-issued dollars, crypto savers now have their choice of stablecoin money issuers.
Most of these are pegged to the US dollar, but switching into stables pegged to the Korean won, British pound or Swiss franc is just a matter of a few mouse clicks.
If left unregulated, that low-friction currency market could become a check on the government’s money printing. Just as the availability of French gold coins stopped the English monarch from debasing English gold coins, the easy availability of a Swiss franc stablecoin could, in theory, stop the US government from debasing the dollar.
The US government does not want to be in competition with the Swiss franc.
Nor do they want to compete with a crypto-native reserve currency. (Of which the OHM forks were a first attempt.)
The tone of urgency around stablecoin regulation at today’s congressional hearing was a sign that the government is taking these risks seriously.
DeFi is an emergent banking system and the conventional wisdom is that banking systems need to be highly regulated.
Stablecoins may prove otherwise.
Crypto, aiming to disintermediate the banking system, could instead turn out to be the thing that sets it free.
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Bearish sentiment toward Treasuries is near an extreme. (Chart) — Jesse Felder
The crypto bounce feels big but BTC is really just making up for prior weakness. BTC has recovered 29% of the drop from 69k to 33k. (Continues) (Chart) — Brent Donnely
There was $4bn more crypto VC funding in Q4-21 than in all of 2019 & 2020 combined and people will still swear to you we're going into a deep bear market bc muh Fed tightening. (Chart) — Travis Kling
How does inflation affect the value of a business? (Continues) (Table) — André Thormann
Five groups of technologies could attract $2T of capital per year by 2025 (Table) — McKinsey & Company
Bitcoin is in jeopardy of snapping its longest winning streak in more than four months as traders question whether the bounce-back from recent lows was too fast, too soon. (Continues) (Chart) — Ken Sexton