Nov

14

Should the market cap of crypto currencies be included in money supply for macroeconomic purposes?

William Huggins replies:

I'd you cant use it to pay taxes it doesn't count (just another asset, like a stamp).

Kim Zussman asks:

Why not? They add because if you pay taxes with fiat you can buy merch with crypto.

William Huggins responds:

you can barter wine or chocolate for a ton of things online too but we don't count those either. if money is "anything taken as payment" then we have to get very serious about "degrees of moneyness" (hence m0,m1,etc). in that spectrum, its pretty clear that the only things on the list are legal tender so unless you live in the land of bukele, it doesn't count (also, whose money supply does crypto count as exactly?)

Peter Penha:

I will volunteer that there is no moneyness to crypto as it was determined a 100% haircut asset by the DTC.

I think this leaves Blackrock and other crypto ETF managers in the interesting position that they cannot include crypto ETFs in one of their asset allocation funds or a target date fund, etc - inclusion would pollute.

Crypto in the USA appears to be a walled garden - the only contagion I can see to the financial world would be to holders of Micro Strategy Convertible Debt.

Stefan Jovanovich writes:

The question you all are raising here has a history - how far can "the law" go to monetize promises to pay? Originally, the answer was not one step. The Constitution says that legal tender can only be Coin. Article I, Section 8.

The lawyers have been working around that limitation ever since. Their greatest difficulty has been getting around the literalist non-lawyer Presidents who keep following the actual instructions the People established by vote as "the law".

Success came with the Aldrich-Vreeland Act which authorized banks with Federal charters to form "currency associations". Those were given authority to issue emergency currency could be backed by securities other than U.S. bonds, including commercial paper, state and local bonds, and other miscellaneous securities.

Section 18 of the Act: "The Secretary of the Treasury may, in his discretion, extend from time to time the benefits of this Act to all qualified State banks and trust companies, which have joined the Federal reserve system, or which may contract to join within fifteen days after the passage of this Act: Provided, That such State banks and trust companies shall be subject to the same regulations and restrictions as are national banks under this Act: And provided further, That the circulating notes issued under this Act shall be lawful money and a legal tender in payment of all debts, public and private, within the United States."

Everything since 1908 has been a variation on that theme - "lawful money" can be whatever Congress says it is.

Bill Rafter comments:

I started this question because I am working on a slight variation of digitally quantifying inflation. With the loose definition of inflation being “too much money chasing too few goods”, then the “money” part should include all that can conceivably buy the “goods”. Since one can increasingly buy a whole lot of stuff with crypto, then crypto deserves inclusion. If one were to fast-forward to a time of massive currency instability (this is just a thought experiment), having included the cryptocurrency might have facilitated greater forecasting.

Stefan Jovanovich adds:

For me the paradox of Bitcoin is that it has been a spectacularly successful asset - like a share of Berkshire Hathaway stock bought in the days before Buffett even went public - but it has never been a money. If I had Bill's brain and cleverness, I would try to include in the calculations the sum of personal and corporate credit that the lenders cannot easily pull away from the table (the potential moneyness supply) and the amount of credit actually used; and then seek the correlations to the fluctuations in that spread. In the days before central banking, speculators watched the net supply of commercial paper as such an indicator.


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