Could Banning Bitcoin Help Governments Tackle Budget Deficits?
Researchers at the Federal Reserve Bank of Minneapolis suggest that a government can maintain a "permanent primary deficit" by imposing a ban or tax on Bitcoin (BTC).
They present a hypothetical economy where the government issues stock and pays dividends.
In this model, if government stock serves as the numeraire, the price level reflects consumption in terms of this stock, while the nominal interest rate corresponds to the dividend yield. Holding government stock functions like a nominal bank account with interest from the Treasury.
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Bitcoin symbolizes a private sector asset with a fixed supply and no claim on real resources. The study argues that to finance government spending, a policy of high consumption taxes would maximize economic utility and growth, resulting in substantial permanent surpluses.
This approach would effectively convert government stock into a large Lucas tree, mitigating most idiosyncratic risks. However, high consumption taxes may be impractical, making a permanent primary deficit a viable alternative, especially if the economy can achieve a stable state. The researchers conclude that, even without an outright ban, the government could employ a continuous Markov policy alongside a Bitcoin tax.