Bitcoin and Permanent Deficits

A Clash of Sovereignty

In a world where governments continuously pursue fiscal strategies that rely on deficit spending, a conflict is emerging between centralized monetary control and decentralized digital assets like Bitcoin. The recent paper by Amol Amol and Erzo G. J. Luttmer from the Federal Reserve Bank of Minneapolis, titled "Unique Implementation of Permanent Primary Deficits?", delves into the idea of implementing permanent primary deficits in an economy—deficits that last indefinitely, with the government continually spending more than it collects in revenue. Their analysis uncovers a key obstacle to this fiscal strategy: Bitcoin, which they refer to as a "useless piece of paper," is seen as a disruptor that can prevent governments from achieving their desired fiscal outcomes.

The Case for Permanent Deficits

The authors' central argument is that in an economy without trade in alternative assets like Bitcoin, the government can use fiscal policies—such as issuing nominal debt and managing primary deficits over time—to create a steady-state equilibrium where the price level and fiscal deficits are under control. This, in theory, would allow the government to continuously operate at a deficit without destabilizing the economy.

However, the introduction of a decentralized, non-governmental asset like Bitcoin disrupts this equilibrium. In their analysis, the presence of Bitcoin introduces a multitude of possible outcomes (equilibria), complicating the government's ability to predict or control price levels and deficit outcomes. Bitcoin, they suggest, creates a "balanced budget trap," where the government, despite its efforts, cannot maintain a permanent deficit and is forced to balance its budget instead.

The paper's conclusion is stark: in a world where Bitcoin is allowed to exist and be traded freely, the government cannot maintain fiscal control through traditional means. The authors propose two potential solutions—either banning Bitcoin or taxing it heavily to eliminate its influence on the broader fiscal picture.

The Bitcoin Perspective: Freedom and Sovereignty

For those who align with Bitcoin’s principles of decentralization, individual sovereignty, and financial independence, this paper illustrates a fundamental clash between the centralized fiscal power of the state and the decentralized, borderless nature of Bitcoin. The notion that Bitcoin could be dismissed as a "useless piece of paper" is not only reductionist but overlooks the core reason people turn to Bitcoin: it represents a monetary system free from government interference, inflationary policies, and coercion.

Bitcoiners see Bitcoin as a solution to the very problem of permanent government deficits. As governments worldwide continue to engage in deficit spending, leading to the devaluation of fiat currencies through inflation, Bitcoin provides a haven for individuals seeking to preserve their wealth. From a Bitcoiner’s perspective, deficit spending is a symptom of a broken system, one in which governments print more money to cover shortfalls, effectively reducing the purchasing power of citizens. Bitcoin, with its fixed supply, offers an alternative—a currency that cannot be inflated away and is controlled by its users, not central authorities.

The Sovereign Individual's Choice

A key insight from the paper, albeit indirectly, is the idea that attempts to tax or ban Bitcoin will likely backfire. As discussed extensively here, Bitcoin enables the rise of "sovereign individuals," people who are increasingly mobile and can choose jurisdictions that respect their financial autonomy. Just as capital moves to where it is treated best, so do individuals who value privacy, sovereignty, and financial independence. In a world where Bitcoin can be accessed anywhere, any attempt to restrict it in one jurisdiction will push Bitcoiners to others that are more welcoming.

El Salvador, for instance, has already adopted Bitcoin as legal tender and is fostering an environment that respects individual financial freedom. Governments that adopt a heavy-handed approach to Bitcoin may find themselves losing both financial capital and human talent as individuals migrate to friendlier environments.

Bitcoiners, by and large, do not want to live under governments that devalue their money or impose restrictions on how they can save, spend, or invest. The paper’s suggestion that taxing or banning Bitcoin could help governments maintain control over their fiscal policies misses this reality. Sovereign individuals have increasingly powerful tools at their disposal to protect their wealth and privacy, and Bitcoin is one of the most powerful among them.

Conclusion: The Future Belongs to the Sovereign

The paper by Amol and Luttmer may represent the concerns of governments seeking to maintain control over their fiscal strategies, but the decentralized nature of Bitcoin offers an alternative that cannot be easily suppressed. Governments may attempt to tax or ban Bitcoin to preserve their ability to run deficits, but such actions will likely encourage the very people they are trying to control to seek better conditions elsewhere.

As governments struggle to balance their budgets and manage their debt, Bitcoiners will continue to seek and create alternatives that respect their autonomy. In the end, individuals will always go where they are treated best—financially and politically. And in a world where money is free from government control, the future belongs to the sovereign individual.

The clash between Bitcoin and permanent deficits is not just about fiscal policy; it's about freedom. And in this battle, Bitcoin stands as a tool for those who refuse to let their wealth and liberty be eroded by unchecked government spending. Rather than being seen as a "useless piece of paper," Bitcoin is the linchpin of a new financial order—one that prioritizes individual sovereignty over state control.

Not financial or legal advice, for entertainment only, do your own homework.  I hope you find this post useful as you chart your personal financial course and Build a Bitcoin Fortress in 2024.    

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