Coining Crypto
Last week, The Wall Street Journal reported that the SEC is "going after" US dollar stablecoins.
Yesterday, the Journal reported that China's yuan is making inroads against the dollar as a global reserve currency.
Considered together, the two headlines are liable to cause cognitive dissonance: If the US is in danger of losing the exorbitant privilege of printing the world's global reserve currency, surely it should welcome new sources of demand for dollars.
And what new source could possibly be bigger than stablecoins?
Some foreign governments have been increasingly reluctant to hold US dollars, yes. But foreign individuals have not.
With hyperinflation rampaging in countries like Venezuela, Argentina and Lebanon, dollars are as in demand as ever — and stablecoins have made it a little easier to get them.
Sensibly regulated, fully encouraged stablecoins would make it a lot easier.
Can the US government not see that?
Uneasy lies the head that wears a crown
In 1690, the Massachusetts Bay Colony became the first government outside of China to issue unbacked fiat currency.
It did so as a last resort: Following a failed raid of French Canada, the colony had neither land, nor gold, nor British pounds to pay its returning soldiers for their service.
So, it gave them paper money instead — the only intrinsic value of which was a promise that it would be accepted as payment for taxes.
It worked surprisingly well.
Paying soldiers with promises caught on with governments everywhere, with varying degrees of success, and, today, the US government has perfected the art, using promises to pay for, well, everything.
It worked in 1690 largely because the Bay Colony — after printing the un-backed currency — destroyed its printing press and quickly balanced its budget.
The US government will do neither of those things, of course.
And if it's not going to reduce the supply, it stands to reason the government should be keen to increase demand.
Why, then, has it failed to embrace stablecoins?
Let me count the ways.
Financial plumbing: If stablecoins caught on, issuers might corner the market for short-term Treasurys, exposing that all-important market to a run on crypto. If a run on crypto was coincident with a larger financial panic, finance could grind to a halt.
Cornered collateral: Stablecoin issuers may not take the (very small) risk of lending out the Treasuries it owns — this would lower the velocity of money and potentially gum up the financial system.
Crypto contagion: A banking system full of demand deposits from stablecoin issuers could be uncomfortably volatile: Silvergate has survived despite losing 70% of its deposits, but most banks would not have.
Crypto competition: The commercial banking industry (a de facto government branch) will not want competition from stablecoin issuers for their cheapest source of funding — deposits.
Exorbitant burden: The exorbitant privilege of issuing the world's reserve currency may, in fact, be an exorbitant burden. Higher demand for US dollars equates to a higher exchange rate, which hurts domestic manufacturing.
Are you convinced yet?
Me, neither: As long as the government intends to run huge deficits, the benefit of coining the world's reserve currency likely outweighs all of its risks and downsides.
But it doesn't matter, because logic is not how these things are decided.
What a piece of work is man
If you asked any individual legislator or regulator whether they would like to entrench the dollar as the world's reserve currency, I'm confident they'd all say yes.
But there's no reason to expect the decisions they collectively make will reflect that consensus.
Nearly every politician will tell you they are in favor of balanced budgets, too. And they'd mean it.
But the incentives of the political system are such that the collective decision-making process will almost always produce unbalanced budgets.
We all anthropomorphize the government: Every policy it enacts is assumed to be part of a well-thought-out scheme to advance the government's interests.
In reality, though, those policies are the messy product of decision-making by an impossibly large committee responding to impossibly conflicting incentives.
Assuming that everything the US government does is done because it knows what it's doing is not much wiser than assuming King Lear still knew what he was doing by Act 4 of Shakespeare's tragedy.
By the time Lear declared he could not be touched for coining, the embattled King was … well, let's just say he was a few nodes short of a full validator set.
But even a crazy person can see that continuing to run trillions of dollars of annual deficits will require new sources of demand for those dollars.
So, what would a clear-headed King Lear advise?
I expect it would sound something like this:
Oh, hear me now, ye mighty SEC,
Why dost thou chase the stablecoin with zeal?
The dollar is the world's reserve, you see,
Its strength a bulwark to our nation's weal.
So let us not cast stablecoins aside,
But welcome them as friends, with arms spread wide.*
Who in their right mind would argue with that?
*Act 4, scene 6, ChatGPT
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