Bitcoin has been called many things, but a “balanced budget trap” is probably not one of them. Or at least not noticeably — until now.
A recent paper published on the Federal Reserve Bank of Minneapolis website suggests that Bitcoin (BTC), or something like it, could one day force the United States federal government to balance its budget.
That would arguably vex policymakers and legislators because they want to keep all their spending options open in case of serious emergencies, like a COVID-19 pandemic or a recession. A burst of spending can stimulate an economy, after all.
So, how can the US escape this “balanced budget trap”?
“A legal prohibition against bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on bitcoin,” the paper’s authors write.
A primary deficit is the difference between government spending and revenues, excluding interest payments.
A red flag for the crypto industry?
Even the suggestion of a Bitcoin ban is bound to chafe the crypto community.
The reaction of those who managed to plow through this dense 37-page paper issued on Oct. 17 was often a mix of befuddlement, outrage and derision.
It also raised some questions over whether such a ban is even feasible, and how a digital currency with a $1.4 trillion market cap could wield such power over a government holding a debt 25 times that capitalization.
US public debt now surpasses $35 trillion. Source: US Federal Reserve
“Bitcoin is not a way to force the US government to balance its budget,” Matthew Le Merle, CEO of Blockchain Coinvestors, told Cointelegraph. “At $35 trillion-plus of debt, something is wrong with the spending patterns of US politicians, and something needs to change.”
“I find this paper quite hilarious in an ironic way,” Daniel Lacalle, chief economist at Tressis — a Spanish investment firm — told Cointelegraph. “It is basically admitting that Bitcoin is a protection against currency debasement and could limit the government’s constant debt accumulation. The funny thing is that if the government was responsible and wanted to defend the purchasing power of…
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