I had fun yesterday with a tweet from Josh Mandel, future MAGA Senator from Ohio, who declared his allegiance to core American values: God, family and Bitcoin. I didn’t have space to talk about some of the things he said about Bitcoin, which is really at the center of his campaign. But I was particularly struck by this tweet from October, in which he appears to claim that fiat money (dollars are backed by nothing other than their official role as legal tender, and dollars can be created at the discretion of appointed officials at the Fed) is a crucial catalyst for inflationary spending:
Mockery aside, is there any truth in this statement? Did the US government rely on the printing press to cover deficits and thus fuel inflation?
It is not an absurd notion in principle. Deficits financed by money, sometimes leading to extreme inflation, have occurred at other times and in other places. In fact, over-reliance on the printing press is the cause of hyperinflation. And maybe it’s worth explaining how it works, if only to contrast with what’s actually happening in the United States in 2022.
The story of hyperinflation is this: You have a government that cannot borrow and cannot collect enough taxes to cover its expenses. So she turns to the printing press, simply issuing money to pay her bills. This issuance of money causes rapid growth in the money supply, which leads to high inflation.
However, high inflation turns money into a hot potato that people want to get rid of as quickly as possible, so that the speed of money – the rate at which it turns over – increases, causing prices to rise even higher. price. The problem is that as the value of the currency decreases, the government must print even more – in fact, must increase the money supply at an even faster rate – in order to cover its deficits. This leads to even faster inflation, which leads to further increases in speed, and everything turns into chaos.
The point is, everyone understands this story, so hyperinflation only happens when governments are very weak – usually during or just after disastrous wars or revolutions. This is not the situation in America now; in fact, investors are practically begging the government to take their money, with real interest rates on federal debt significantly below zero.
Yet the US government is covering some of its bills by issuing new currencies – a process known as “old fashioned”lordship, Derived from the ancient tradition in which monarchs charged fees for minting gold or silver into coins. So how important is seigniorage in modern America?
It’s actually a little trickier to answer than you might think. When people talk about money supply, they are usually referring to a measure that includes bank deposits, which are not created by the government. Historically, we measured seigniorage by the annual increase in the monetary base – the money in the hands of the public, plus the reserves that banks were required to hold. Since the 2008 financial crisis, however, banks have voluntarily held large excess reserves, apparently because they don’t see enough good lending opportunities – and the Fed has paid interest on those reserves, making them more similar. to public debt than to money. the private sector was forced to accept.
My take is that it’s best to focus only on currency – pieces of green paper with pictures of deceased presidents – which made up 98% of the money base before the crisis. So how many new currencies has the US government put into circulation? In 2021, the answer is around $ 150 billion – actually down from the last year of the Trump administration:
It’s not a lot. I know, $ 150 billion here, $ 150 billion there, and finally you’re talking about real money. But that’s a small fraction of the budget deficit, not to mention the economy as a whole.
Oh, and to the extent that we are implicitly taxing people by making them accept green paper instead of gold or Bitcoin, who, exactly, is taxed? As I noted in a recent column, over 80% of the value of dollars in circulation consists of $ 100 bills:
We don’t know exactly who holds these bills, but I don’t think it’s mostly working class Americans sitting in restaurants. And a significant fraction is probably owned by foreigners; printing money for foreigners who want to hide their wealth and activities from their governments is an important American export, although not particularly honorable.
So, no, ordinary Americans are not impoverished by a government that abuses the power of the printing press. The inflation of 2021 was painful, although we can say that accepting it was better than the alternatives. Either way, careful analysis indicates that to claim that none of this would have happened if we had used Bitcoin is as silly as it sounds.
How many dollars are overseas, anyway? It is complicated.
El Salvador is officially on a Bitcoin standard. It is does not go well.
welcome to Cryptoland. Apparently not a parody.
Conspiracy theory economy.
In front of the music
the collector keeps seigniorage away.