On “How digital currencies could fundamentally alter monetary policy”, or a regulator’s wishful thinking.

I read a post today
Unsurprisingly, I think it is either poorly thought out, pushing bureaucrats’ pet interests or both.
First of all, let’s not confuse the interest rate a private individual charges another for a loan with the rate at which a government lends or borrows its own IOUs (paper or otherwise). The first reflects the private parties inter-temporal preferences, while the second is just a slightly different way of regulating the issuance (or retirement) of its IOUs.
It is true that in the short term the second may influence the first, because inflation steals money away from its holders to give it away to borrowers, so it makes investing cheaper(again short term). That can be a nice thing to do or not (a different problem), but it is feasible and governments do it all the time.
The thing is that no one likes to be robbed, so it is very hard to get folks to come every now and then to the Fed to get their greenbacks sliced a little thinner. There are taxes, of course, but those are, or should be, a different political process altogether.
It is undeniable that if physical cash were eliminated from the economic system, the ability of an issuer to change the value of citizens’ monetary assets would not be unimpeded by the logistics of paper.
The ability to push consumption would then be unlimited, right? Well, as I say, nobody likes to be robbed, so some would buy more groceries, or a car ahead of time. If I had any serious money, though, I would not have three cars I my garage and a year’s supply of Jello.
I might, however, buy commodity options or simply gold. They could ban gold, or put a large tax on CME. Then I would probably find other limited supply physical assets whose price run-up would not improve the economy a bit. Finally, I could leave for another country.
Furthermore, this idea is not new to this post-Satoshi era. Governments have tried to debase currency to shift wealth around forever. And since electronic funds transfer and ledger money have been around, clever guys have thought of eliminating physical cash (and even gold) to be able to manipulate the monetary aggregates better.
Post-Satoshi, it makes less sense than Pre-, since there is now a non hijack-able asset that cannot be inflated by authorities+ where citizens can find refuge.
It is going to be interesting times. For sure, many economics textbooks will have to be rewritten.

 

 

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