What would Fedcoin look like?
JW, a loyal MR reader, writes to me:
It’s 2018, Janet Yellen has been renominated to be Fed Chair by President Walker having served a successful first term of solid growth and low inflation. However, to achieve such growth Yellen has had to maintain very low interest rates. Then, disaster strikes. France leaves the Euro unexpectedly and causes a world wide credit crunch. It’s 2008 all over again. President Walker is unwilling to do any stimulus. Yellen decides that a regime change is necessary at the Fed.
Taking to heart MMT, Keynes, Bernanke, Yellen merges Keynes’ idea of burying money in jars with Helicopter Ben’s idea of dropping money from the sky. The Fed announces that the United States is going to create its own cryptocurrency, which can be exchanged for US dollars at any US regulated depository institution. No or minimal fees can be charged by the banks for this exchange. They will be created just like Bitcoin, decentralized and according to a mining algorithm. American citizens can mine them, create businesses to do so, and put people to work. Unlike Bitcoin, the supply of DollarCoin will not be finite, capped at 21 million. Instead, DollarCoin will be targeted to grow at an inflation rate consistent with an NGDPLT of 20 trillion US dollars. Liquidity is restored. No QE is necessary. CNBC starts cheerfully referring to DollarCoin as YellenCoin.
Meanwhile, Bitcoin plummets in value. With the US Government now accepting a cryptocurrency, its advantages vanish. People’s belief in its value goes away, and looking down, it crashes. Remittances are now sent to relatives in Africa and Latin America by YellenCoin, just as people once did briefly in Bitcoin.
It is interesting to think about why this is so implausible. There are a few reasons:
1. YellenCoin would be a means of payment but not the medium of account. This would move the economy into a currency substitution model, a’la Girton and Roper, but would not have the effects of a straightforward monetary expansion.
2. Cryptocurrencies are much more likely to be used for some kinds of transactions than others. So this act of “monetary policy” would be very much non-neutral.
3. Central banks are not supposed to be seen as taking major risks or overturning the established order of things. They are highly risk-averse when it comes to their public reputations, and their very much prefer sins of omission to sins of commission. If the Fed established Fedcoin and something went wrong with the idea, they would be subject to especially heavy blame. In the meantime, few people (are there exceptions?) are blaming them for not establishing a cryptocurrency.