Crypto to make your head spin

We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk- adjusted martingale. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.

That is a new paper from Pierpaolo Benigno, Linda Schilling, Harald Uhlig.


.....Maybe this is one of those situations where you need to be sufficiently sophisticated to be confused by a seemingly obvious question. To my amateur eye, this mystery looks as easy to solve as: "bad money drives out good". Thanks Gresham!

It does seem like an intuitive result to me. I think the interesting suggestion in the paper is that the presence of an international (crypto)currency substitute for fiat which can be used in commerce strictly limits policy options available to central banks (what they call "Crypto-Enforced Monetary Policy Synchronization", or CEMPS).

The only hope for central banks is a worldwide ban on crypto led by the US. That’s not going to happen.

By the way MR readers, several big things are about to happen in the crypto world led by Bitcoin. First, the New York Stock Exchange’s futures market “Bakkt” starts up next month, the SEC is expected to approve a crypto ETF in October, and Bitcoin’s “halvening” happens in May. Fidelity will also be offering custodial crypto accounts. BTC is around $10K now. Expect BTC to reach a new all-time high of $20K this year or the next. Every time Bitcoin has reached an ATH after a multi-year pullback it’s gone around 10X or more from that ATH. We’ll see $250K BTC around 2022. Central banks are debasing fiat and people should be DCA’ing into BTC now.

This is what I want to hear. Please continue to confirm my biases.

People in general don't know that right now, a single Bitcoin transaction burns more energy than flying on a passenger jet from Canada to Mexico.

If price goes up 10x from here, energy use will go up close to 10x. That means a single Bitcoin transaction will use more power than flying anywhere on the planet.

I am bullish on proof-of-stake crypto, but bearish on Bitcoin and other proof-of-work currencies that waste enormous amounts of power.

Most of that energy spent is due to the subsidy, which Mike P just said is getting cut in half next year. Not every transaction needs to be confirmed on the main chain either.

If Ethereum proves that PoS is viable, awesome. Everyone will want it. But if it crashes and fails, then the comparison must be made against the full cost of enforcing a fiat currency.

Ethereum proof-of-stake is running on testnets today, but we also have sophisticated proof-of-stake running live right now on Tezos and Cosmos blockchains. And less sophisticated versions have been running for years.

Regardless, once people become familiar with the horrific numbers on Bitcoin proof-of-work, I think money will fly out of the currency as quickly as it flew in. The optics are just awful: if you buy a ticket with Bitcoin to fly from Boston to Miami, the Bitcoin transaction releases more CO2 and burns more power than the flight itself. Just obviously not "the future of money"!

On the consensus algorithm and power usage fronts, I'm excited to see what comes out of Avalanche (which may even be applied to PoW chains like Bitcoin Cash, though it wouldn't decrease power usage without a full conversion of the consensus code) and AVA Labs' work on the AVA network/cryptocurrency:

If the money is flying out of altcoins and into Bitcoin right now, then what do you think they're becoming familiar with now? Halving, scaling, scammers, what opportunity cost is...

A single Bitcoin transaction costs $2. It can't be burning that much energy. Miners might be spending more energy per block than the transactions account for, but it isn't right to think of it as the cost of the transaction itself. The cost is going to the mining fee, and would be paid even if Bitcoin were doing zero transactions in that period.

The transaction fee doesn't pay for the energy burn. The energy burn is paid by the block reward (right now, 12.5 BTC every 10 minutes), by cheap power and (at times) by miners paying more in electricity than the mined BTC is worth.

The energy burn is entirely due to the incredible value of the ~10 minute bitcoin dispersals. It's a digital scrum to fight over these valuable crumbs. The incredible energy burn is a feature, not a bug as it makes a 51% attack hard to pull off. In fact, as the reward falls (in Bitcoin terms) the risk is that the hash rate will fall and make it easier to pull off a 51% attack.

It does seem that if Bitcoin will become more important, it will be associated with a shift to off-chain transactions, only periodically settled on-chain. The blocks are just too small to cram everything in, and too slow for micro transactions.

The market is of course aware of the energy story you're telling, and yet Bitcoin market share is at a 2-year high, the price is also holding above $9k for over a month now too. You should be shorting Bitcoin if you really believe your claims, because the market is at least apply a decent weight to them not being true. You could get rich.

nominal rates are only interesting when there is a superficial deviation, i.e., indeterminate, illuminate vis-à-vis resolution.

More like crypto to make your dick hard - that is if any of you folks actually had dicks!

marxist sociologists home birthed a new buzzword for california
spellin bee students"cisheteropatriarchy"
its much more buzzy than just plain ole patriarchy!

the maestro eats a “sinequanon” a) a demon b) triton c) Hermaphroditus d)

usually eat pancakes about now
but the local café closed down

Crypto makes your dick hard? Are you a cryptosexual? I'm not judging, just wondering.

Okay, okay, knocking my head, here. Someone, please explain. Does this indicate that a Chinese cryptocurrency will not work? How about Libra?

Please see my reply to dearieme, re: global currency.

The Impossible Trinity is not the Father, Son, and Holy Ghost, it's a fixed foreign exchange rate, free capital movement (absence of capital controls), and an independent monetary policy. In religious studies, if one believes one understands the Holy Trinity, one doesn't understand it; the same can be said of the Impossible Trinity. I won't criticize economists (some of my best friends are economists), but are we living in peak economics, or has it already passed.

The Impossible Trinity is very possible. I am Father, Son, and Holy Ghost. I am the Chosen One. I am the King of Israel.

Why crypto? Wouldn't the same be true of gold?

I believe it would be. Gold acts as a global currency. It has no intrinsic value, other than what people assign to it. But historically, it has tended to be assigned a high value across most nations and cultures. Cryptocurrencies, at their invention, were INTENDED to be accepted and used globally, in pretty much the same fashion. Of course, the key here is: are they ACCEPTED and assigned value by the global market.

I don't think any NATIONS have gotten involved in creating cryptocurrencies, although Laputan Astronomy's comment mentions a Chinese crypto. If they have done so, that is an interesting attempt, by a national actor, to leverage the nature of cryptos as non-national. Once again, the key will be whether the market accepts the Chinese crypto to have value, as will be demonstrated by demand.

I don't see how the Chinese or any government-backed crypto could have the same store of value properties as gold or Bitcoin, given its nature. Facebook is also issuing a cryptocurrency.

Perhaps by its nature, a global currency (using gold as an example) cannot be an entity-backed currency. Wondering about how Facebook's Libra coin would apply.

FB is not a nation, and thus, likely no different than BTC should it create a crypto-currency.

Sounds like they are stating that a global (crypto)currency would synchronize monetary policy worldwide, and once that synchronization happened, it would be very difficult for central banks to have monetary control of their own government-backed currencies?

As long as the free market in money continues, more and more people will convert more and more fiat for crypto. As that process continues, the debasement of fiat and appreciation of cryptocurrencies will accelerate until everyone understands that you cannot leave anything in fiat. At that point, around 2030, BTC will exceed $10 million a coin.

I think it more likely that Gresham's law is applicable here - with the crypto being the "good currency" actor. I don't know if we could get numbers, but it seems to me that most BTC is hoarded - taking it out of circulation - which is one point of Gresham's observation. The other method of removal would be debasement, but that is hardly possible with any modern currency.

I'm not a macroeconomist and I couldn't understand this paper. I don't get why the cryptocurrency is relevant. From the paper:

"A key assumption for obtaining our result is that markets are complete, arbitrage-free and frictionless."

Once you assume that, what's the difference in whether you have a cryptocurrency or not? As long as the two countries' currencies are freely exchangeable it seems like it has the same effect.

Once you assume that, the difference is in the plausibility of the assumption. If the assumption is implausible then the model's result is implausible. Cryptocurrencies make these assumptions more plausible. Compared to gold for instance, there's less friction in using a cryptocurrency for cross-border exchanges. I did not read the paper, but ignored in the abstract is what gives the cryptocurrency value. Risk of an unbacked cryptocurrency presumably adds friction to use and may undermine this result, i.e. bitcoin is so unstable this result does not hold for the global economy today. Would be more interesting to see a discussion of what happens if a third state backs a cryptocurrency, i.e. the more plausible that backing the lower the risk of using the currency and the more plausible this result, but with the added complexity of that state having to maintain the global cryptocurrency.

A standard result in international finance is that with floating exchange rates, countries can pursue different monetary policies.

This paper says that if there's a global (crypto)currency then the countries cannot pursue independent monetary policies, even with flexible exchange rates.

So that's how the gobal (crypto)currency is relevant. You're correct that it doesn't have to be crypto -- but it does have to be global, which is a strong assumption, not met by current cryptocurrencies which are still too niche to move markets strongly.

It's like String Theory. It explains everything and well, everything!

"global (crypto)currency"

There's a strong assumption in that phrase. Not the crypto part, which the authors correctly put in parentheses and whose relevance some commenters have correctly wondered about.

It's the "global" part. Yes, if we assume that a global currency exists (or any sort, crypto or not) then yeah it's not surprising that individual countries will find that their ability to manipulate their monetary policy or exchange rate will be curtailed -- there's a global currency that affects each country's financial markets.

But crypto is a long way from achieving that degree of global influence. Swings in the price of bitcoin don't move the dollar's value against other currencies nor US interest rates.

'exchange rate between the national currencies is a risk- adjusted'
That means a stationary market. For example, the miner fees are always equal across the paths and time to transit the ledger equal for all.

Not really the case, rescaling is not instant, so miners do not immediately absorb currency runs with new capability.

As a practical matter I presume you need to have employment contracts (and other regular business) denominated in the crypto currency for this to be any different than the current situation. After all people can already write contracts tied to the value of various commodities and use commodities or complex baskets of goods as stores of value.

So as a practical issue I expect this is less about cryptocurrency and more about the acceptability of denominating things like employment contracts and good prices in something other than the local fiat currency.

How'd I do?

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