US Can Run Fiscal Deficits Permanently If Government Bans or Taxes Bitcoin, According to New Fed Paper

A government can run a “permanent primary deficit” if it bans or taxes Bitcoin (BTC), according to researchers at the Federal Reserve Bank of Minneapolis.

The Fed researchers ask their readers to imagine an economy “in which the government issues stock and pays a flow of non-negative dividends.”

“If a unit of government stock is used as the numeraire, then the price level in this economy is the price of consumption in units of government stock. And the nominal interest rate is the dividend yield on government stock. Agents in this economy who hold government stock are, in effect, holding a nominal bank account at the Treasury that pays a certain nominal interest rate.”

The researchers note that they use Bitcoin as a metaphor for a private sector security that has a fixed supply and doesn’t offer a claim to any real resources.

“Given a need to finance government purchases equal to a certain fraction of aggregate consumption, the policy that maximizes utility in our economy (and also its growth rate) is for the government to charge very large consumption taxes. This implies very large permanent primary surpluses and a unique equilibrium, and it turns government stock into a very large Lucas tree that eliminates almost all idiosyncratic risk. But large consumption taxes may not be feasible, and then a permanent primary deficit may be the best the government can do, provided the equilibrium does indeed deliver the targeted steady state. To achieve this, the government could simply make Bitcoin illegal.

Our final result says that, short of full prohibition, the government could use a continuous Markov policy and combine it with a tax on Bitcoin.”

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Source: https://dailyhodl.com/2024/10/23/us-can-run-fiscal-deficits-permanently-if-government-bans-or-taxes-bitcoin-according-to-new-fed-paper/