On the Money: Crypto, Deficits and Inflation
The bill the Senate just passed would enable crypto bros to bilk more people
After weeks of wrangling, Senate Republicans and a number of corrupt Democrats on Tuesday passed the first major legislation regulating digital assets.
Dubbed the GENIUS Act, the bill would establish a regulatory framework for the $250 billion market for stablecoins, a type of cryptocurrency tied to the value of the U.S. dollar. The bill now heads to the House, which has been working on its own version.
Given there’s bipartisan support for a crypto bill in the House, perhaps this handout to the rich and sleazy can’t be stopped, but let’s be clear about what is really going on here.
Crypto has been around for close to two decades. Despite the grand promises of early proselytizers, no one has come up with a clear case for its existence besides facilitating illegal transactions. Bitcoin and other types of crypto are great for doing drug deals and paying ransom to kidnappers, but not for much else.
Crypto has not proven to be cheaper or easier for normal business transactions, nor has it proven to be a useful hedge against inflation. Unlike gold, the traditional inflation hedge, crypto prices actually fell against the dollar when inflation took off in 2021 and 2022.
But even if crypto may not serve any useful purpose, there are still a number of people getting very rich from speculating on it and acting as intermediaries. These crypto bros hope that they can sucker more ordinary people into crypto and suck money out of their pockets. That is how we should understand the crypto bill Congress is likely to approve.
Crypto Could Trigger Inflation
Since crypto can generate incomes—often very large incomes—for people in the industry without producing any actually useful products, we should see it as a potential source of inflation similar to large budget deficits. Before getting to deficits and inflation, however, I’ll clarify why crypto poses a risk of inflation in a way that other things don’t.
If I pay $1,000 for food or for my mortgage, there is an actual good or service that corresponds to the money I paid. This is not the case with crypto. When I pay $1,000 for crypto, it is similar to paying $1,000 for counterfeit currency. If I then go out and spend this counterfeit currency without getting caught, it creates inflationary pressure in the economy.
In a $30 trillion economy, $1,000 of counterfeit currency won’t make a difference. However, trillions of dollars of crypto could very well make a difference. In that sense, that much could lead to the same sort of inflationary pressure as a very large budget deficit. The problem in both cases is that we are giving lots of people purchasing power that doesn’t correspond to any goods or services in the world.
Deficits Could Trigger Inflation, Too
At the moment, there is little dispute that the federal government has large deficits. Measured as share of gross domestic product, the deficits are over 6 percent of GDP, a level we haven’t seen outside of wars or recessions. Trump’s tax cuts, coupled with his increased spending on the military and homeland security, will make these deficits even larger. The question is whether this is a problem.
The classic story is that large deficits drive up interest rates. This can happen, but as our Modern Monetary Theory friends remind us, the interest rate is a policy choice. If the Federal Reserve chooses to lower interest rates, it can.
The problem is that if the Fed lowered rates in a context where the economy is hitting limits in its ability to supply goods and services, as was the case during the pandemic’s supply-chain crisis, it would lead to inflation. While there are steps the government can take to curb inflation, such as selling oil from strategic reserves or instituting price controls, they are not tools generally used and it’s fair to say they all come with some complicating factors.
But it’s important to consider the deficit horror story that we are hearing pretty much all the time. As the government runs large deficits, interest payments become a growing share of the budget and the economy. This means that, under general circumstances (if the rate of interest exceeds the rate of growth), the government will either have to cut back spending in other areas or the debt and interest payments will grow even larger.
While we are supposed to assume this is automatically a problem, it’s worth thinking about this more closely. Suppose deficits continue to grow as a share of GDP and what the government pays out in interest grows further. (The government now pays out more in interest than what it spends on the military, a fact that means absolutely nothing, but writing about it can get you a column in any elite publication.) Is this a problem?
The answer depends on whether these deficits are triggering inflation. That will depend in part on how much of the money we pay out in interest is being spent. If the government is handing Elon Musk hundreds of billions in interest payments and he puts it in the safe in one of his basements where he keeps the other hundreds of billions of dollars he worships, it will have no effect on the economy or inflation. The government can double or triple its payments to him and it wouldn’t matter. (There are issues about the power that extreme wealth buys, but that is another story.)
But the story of pushing up against limits of the economy due to large deficits is the same sort of problem with the crypto bros. If households are passing hundreds of billions of dollars to them for their various crypto schemes, which contribute nothing to the real economy, then the economy is at greater risk for inflation.
In many ways, the problem of a bloated crypto sector, and financial sector more generally, is the same as the problem of paying out large amounts of money in interest on the debt. We are concerned that households and the government would be pushing the economy beyond its capacity to produce goods and services, thereby generating inflation. This problem results from any sector where there are large amounts of waste, not just government interest payments. And as the saying goes, “crypto” is just a new word for waste.
If the country ever gets back a democratic government (note small “d”) and can find ways to downsize crypto and finance, it will free up resources for health care, education, and other things we might consider worthwhile. Whether or not the economy has unused resources determines the extent to which the government can increase spending, not the size of the deficit.
Dean Baker is a senior economist at the Center for Economic and Policy Research. A version of this column originally appeared on his Substack site.
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