Trustworthy Money Survives

With rising inflation and an alarming national debt, will cryptocurrency one day augment or replace the U.S. dollar?
Bitcoin coins on a black background.
Stock Photo

Created Anonymously around the time of the 2008 global financial crisis, the “Bitcoin” has distinguished itself as the best-performing asset of the current decade. Despite its stock price flight into the stratosphere, relatively few Americans have much knowledge of or interest in Bitcoin’s investment success or its chances of gaining universal acceptance as our new national “crypto’’ (digital) currency.

An old adage asserts that “people can’t stand what they cannot understand.” The topic of replacing or commingling our present monetary system of transactions, rooted in the dollar, with a computer/electronic system underpinned by a coded Bitcoin is daunting, both in concept and implementation.

This lack of public understanding stems from two major sources: the technical sophistication of defining Bitcoin’s business model for becoming our nation’s primary currency system and the fact that development of its new currency system has, thus far, shown its most attractive face to the public as an investment (stock market value) rather than as a recognizable transactional tool.

The latter feature translates one’s investment from just a stock price called Bitcoin (a computer-coded currency) into a very tangible, everyday usable, secure, and trustworthy currency deployable anywhere on global markets. These days, at least for Bitcoin stock, that appears to be the $64,000 question.

What popular attribute of the cryptocurrency advances Bitcoin’s revolutionary quest to supplant the dollar domestically and perhaps become the world’s reserve standard? Bitcoin embodies computer encryption — mathematically encoded algorithms that regulate the generation of its units of currency and verify its ability to transfer funds between parties engaged in commerce.

The coding of these operational messages is performed independently of the Federal Reserve (U.S. Central Bank), and mostly avoids U.S. Treasury regulations and directives when it comes to the Treasury’s oversight in printing and minting cash and coin.

Today, our Central Bank and Treasury are printing and minting money at a reckless pace, thereby sponsoring yet another bout of inflation that’s highly damaging to our market system. Inflation imperils our future by crippling our economic, financial, and military security, and by weakening citizen trust and confidence in the entire functioning of interpersonal relationships.

The unwillingness of our elected office-holders, whether Republican or Democrat, to budget honestly is revealed in their perpetual resort to deficit spending and accumulating debts.

As a result, federal government borrowing and accumulated national debt no longer can be repaid by real GDP growth or productivity gains. Real GDP growth rates are far too slow to generate sufficient tax revenues. 

U.S. productivity and labor participation rates in the workforce are low, and average education achievement levels have been falling for half a century. Making the outlook even bleaker for any immediate pickup in real income and output growth is the sudden policy switch to importing major, high-priced energy from unfriendly or hostile competitor nations, rather than continuing the 2017-2020 policies of tapping domestic energy and technology resources that simultaneously made the U.S. energy-independent and a fabulous exporter of surplus energy to the rest of the world, at a handsome profit. 

Such profits provided taxes to our revenue-ravenous U.S. public sector entities. The bottom line is that fear of greater instability of U.S. currency, budgets, and debt — and their destabilizing impact on U.S. institutions of finance and commerce — are inviting citizens to look at a currency that may prove itself more trustworthy and controllable by responsible individuals than politicalized bureaucrats and their political masters.

This is the entrée Washington has delivered to Bitcoin developers and likeminded competitors offering cyber-currency alternatives. In general, the younger generations favor these efforts to correct the bankrupt outlook for the U.S. and the crushing debt we’re imposing on every future adult American.

The Federal Reserve is bankrupt. Here’s the reality, as narrated by the monetary authorities and Treasury officials themselves (which largely explains why cryptocurrencies constitute challenges to the U.S. Treasury and Federal Reserve).

Federal Reserve Frailty
Back in 2008, the Federal Reserve and Treasury Department demanded that commercial banks, in order to retain their ability to continue doing business, must “mark-to-market” the government bonds, notes, and bills they carried in their bank portfolios. This meant that when the federal authorities audited the banks’ books and found that the securities held by the banks, if sold at that moment of audit, were worth significantly less than what they cost the bank when purchased, the bank, under regulator rules, could be severely penalized or drummed from the marketplace. 

If the theoretical losses in the bank’s total asset portfolio — if sold at that “mark-to-market” price moment — impaired the bank’s net worth so gravely as to render its capital structure inadequate to function safely, the hapless bank could be declared insolvent and dissolved, never to return. 

And here’s the irony, hypocrisy, and threat now confronting the Fed and Treasury: Accelerating inflation and public sector debt, created under Fed and Treasury debt and monetary policies, are reflected in the immense expansion of Federal Reserve holdings of the Treasury’s bonds, notes, and bills. 

The Federal Reserve purchased many of these Treasury-issued securities at prices far higher than they are today, and it has been keeping interest rates lower than the inflation rates of the nation for many years, despite the negative yields and financial hardships such policies inflict on holders of these fixed-income investments (often senior citizens and other retirees). Even now, Fed policy contemplates waiting until the second half of 2022 before allowing 10-year government bond yields to rise. Meanwhile, U.S. inflation rates already exceed 5 percent, and the 10-year bond rate fluctuates below 2 percent.

By mandating low interest rates, the Fed helps the Treasury Department, hoping to avert mounting interest costs on trillions of dollars of outstanding U.S. debt.   

But here’s the catch. What if government auditors were to require the same “mark-to-market” test on the asset portfolio of the Federal Reserve Bank that these regulators mandated on the commercial banks 13 years earlier? Clearly, they’ve put themselves and citizens in an economic straitjacket. For what happens when the Fed’s announced monetary policies push interest rates to real (rather than contrived) market levels, incorporating actual inflation rates and expectations?

Coup de Grace
If the average rates on securities held by the Federal Reserve were to rise to an average level of three percentage points above current levels, the aggregate portfolio of securities held by the Central Bank would register a huge loss if “marked” to market (i.e., sold at the moment). To be sure, the Fed hasn’t anything near a trillion dollars in capital reserves as a buffer to absorb such a shock.

It would be classified officially bankrupt and not permitted to continue operating. What’s good for the goose is good for the gander. Many people believe there’s little chance that the Federal Reserve will be removed, at least as the U.S. monetary authority. But they may be mistaken. The Fed faces a daunting future, indeed. This is what cryptocurrencies anticipate.

In order to succeed, alternative currency providers must satisfy the basic laws that govern people’s expectations of what a currency requires. Most of all, one must trust the stability, security, visibility, simplicity, low cost of using, and universal acceptance of that currency, especially a new currency that purports to supplant an existing one. Trust is paramount. 

Individuals, even before the widespread acceptance of the dollar, facilitated transactions by bartering goods with neighbors or merchants. In agricultural economies, farmers wrote their payment promises (i.e., “checks”) on cows they were selling in exchange for other goods and services. Perhaps it wasn’t as convenient as pocket coins or cash, but it worked and closed deals that satisfied both sides of the transaction.

Cybercurrency startups and their technologies for securing confidentiality and confidence in commerce will be challenged by private sector firms and individuals, not to mention the vast, established bureaucracies in the Federal Reserve and Treasury.

In the end, the final arbiter and highest hurdle will be convincing those ever-present, but often quiet, voices in marketplaces who seek that special currency possessing the greatest moral value.