During the economic crisis of 2008, I remember watching people lose their minds and predict financial Armageddon as the national debt crossed from 9 trillion to 10 trillion dollars. Although the psychological impact of going from single to double-digit trillion-dollar debt was significant, the economy simply didn't collapse to the same extent that many people predicted. In fact, the economy has continued to trudge along despite the US currently carrying over a 26 trillion dollar national debt. In this article, I'd like to entertain the notion that a fiat-backed money supply has certain advantages in allowing the government to respond to extreme scenarios.
Delaying The Inevitable
I think one of my biggest blunders as a young economist was accepting the predictions of many gloom and doom pundits who predicted a complete global meltdown in 2008. To be fair, 2008 through about 2012 were rough years, but they came nowhere near the predictions of total economic annihilation that many suggested. For better or worse, one of the intrinsic components of a fiat-based monetary system is that it allows the government the ability to “Kick the Can Down the Road” and delay the inevitable consequences of poor economic policies by printing money to cover up the underlying issues. I do believe that our lack of solid economic policy will cause trouble down the line, but I now see that it is much more difficult to predict exactly when this will occur and how severe it will be.
By contrast, cryptocurrencies are finite and determined by an algorithmic supply. It's easy to see why many people consider this a benefit. In contrast to fiat monetary systems, cryptocurrencies generally don't allow the creation of money out of thin air or any centralized authority to inflate the money supply and use it for its gain. Although this leads to a more stable financial system, it can also hamper the government's ability to react to unexpected circumstances.
For example, many financial experts believe that government stimulus packages were necessary to keep the economy afloat during the 2008 recession. Likewise, many people believe that money printing, stimulus checks, and unemployment benefits provided during the Coronavirus pandemic show why it's important for the government to be able to have an “elastic” money supply.
Likewise, the concept of a debt limit applies very differently to a fiat-based monetary system than it does to a cryptocurrency-based monetary system. In the US, our government shuts down approximately once per year because we reach our so-called "debt limit." Although we have a self-imposed debt limit, even when the government goes into shutdown, it continues to operate and provide essential services. And, within a few days of a shutdown, the government is usually reopened by the politicians with a higher debt limit.
Because we can print our currency, there isn't a risk of the government running out of money. Our “debt limits” are more of a periodic meeting to arrange the printing of more money than a real threat to the government's ability to function and operate. Essential services are still provided when the government is “broke.” The real threat comes in the form of devaluation and lost purchasing power.
By contrast, cryptocurrencies are finite, and when an individual or country or company is out of a crypto-currency they are simply out. The government or company can't simply create more Bitcoin. If the government were out of Bitcoin, it would be forced to stop providing emergency services until it was able to raise more Bitcoin through taxes or possibly receive loans.
A Possible Solution
Although we want to ensure a stable monitor system that protects us against inflation, I think there's also a case to be made for a monetary system that can adapt to changing circumstances and respond to emergencies.
I know it's easy to see things in extremes and black and white, but I think it's fair to say that both cryptocurrencies and the fiat system have advantages and disadvantages. I agree with a fellow author (Sugarfix if I remember correctly) who pointed out that the one possible solution may be a system in which cryptocurrencies and fiat exist side by side. So long as people can opt out of the government's monetary system and into cryptocurrency, it would act as a balance that allows the government to print money to react to unexpected situations while also giving people an “out” and allowing them to move into cryptocurrency when the government abuses this privilege.
In summary, I think its important to remember that there is no one size fits all wonder cure for each economic ailment. Cryptocurrencies do resist inflation, are decentralized, etc, but I feel that there are certain (very limited) situations where fiat has advantages. What is your ideal monetary system? Would it be completely crypto-based, fiat-based, or some mixture?
Thanks for reading!