The Fed is Screwed: Here's how Blockchain Will Help
Pedro Miranda has spent the last two summers at ConsenSys, a global blockchain production studio, researching Central Bank Digital Currencies. He graduated Middlebury College in February 2020. The views expressed by the author below do not represent the views of ConsenSys AG.
The Federal Reserve is screwed into place. The United States has no viable policy tool to stimulate the economy out of the next recession.
Most metrics highlight strong economic performance: A historically competitive labor market, strong wage growth, a robust real estate market, and growing profits. Despite these strong indicators, the Fed is being pressured to cut rates by trade tensions and market factors, from the previously inverted yield curve to a nervous stock market.
Rate cuts alone would not be enough to steer the US out of a recession. With the balance sheet remaining at a whopping $4.2 trillion, or 21.7% of the U.S. GDP, it remains unclear whether an additional round of quantitative easing is even sustainable.
The options offered through the fiscal toolbox are also shot. Recent tax cuts raised debts to unsustainable levels. Based on different Congressional Budget Office (CBO) assumptions, the debt-to-GDP ratio is projected to rise from its current level of 78% to 96–105% through 2028. Therefore, not only is fiscal policy unfeasible as an economic stimulus tool, but fiscal reform will also become necessary in the upcoming years.
So, what should the Fed do come the next recession?
The Fed should look to combine new technological advances with previously labelled unconventional monetary policy tools to enact helicopter money, when central banks make payments directly to individuals, on the blockchain. Bridgewater’s Ray Dalio has already taken notice, arguing that we will inevitably embark on a new monetary policy era where electronic helicopter money is the norm.
By leveraging blockchain, the Fed could impose a time limit on helicopter money, therefore increasing the velocity of money and encouraging consumers to spend. During the 2008 Bush tax rebates, the majority of federally-assisted individuals did not actively spend the money given to them; instead, they saved the money or paid off pre-existing debts. This solution would empower the Fed to designate time limits on the value of financial assistance, thereby guaranteeing the injection of a stimulus into the economy.
A significant criticism of helicopter money is the lack of traceability. However, the addition of blockchain would allow for traceability on transactions in this program.
Increased traceability creates new policy variables for the Fed to consider. The Central Bank could make the program’s digital wallets accessible to everyone. Alternatively, the Fed could direct financial assistance to the neediest economic demographics who have the highest propensity to spend, an interesting characteristic for maximum impact of given stimulus. The Federal Reserve could also restrict the program to certain industries. Allocated money could potentially only be spent by individuals in retail and grocery stores, for example, to ensure that money is being spent on basic necessities.
The program could also be applied to different geographical regions. If one particular region is facing economic hardship, the helicopter model could limit the program’s spending and reception of money to a specific geographical area, such as identified Employment Opportunity Zones.
Helicopter money is an unconventional policy tool that may now become feasible and empowered through the implementation of blockchain technology. As the capacity of the central bank to maintain economic growth and stability remains lackluster, alternative approaches must be considered viable by policymakers and other financial stakeholders.
As our economic obstacles continue to evolve, so too must central banks.
Note: This post was summary of the project, Central Bank Digital Currency: A Sunset Solution for the Next Crisis