Promen Stablecoins Significant problems for monetary policy? Consider this discussion in a recent Conversations with Tyler:
Dixon: I think you will probably have every bank, I hope, a stablecoin as you have those credit cards. These all have users and customers. The sofas have a button with the text: “Send a stablecoin.” What I hope is that there are enough legitimate actors around these who create a network effect that, up to your point, yes, that things will be, but it will be marginalized.
Cowen: Should we conclude in that world that the Federal Reserve loses control of the money supply? Make a stablecoin. It is supported by a T-bill. It is like a private open market operation in a funny way. I think that’s fine. I’m not sure if the Fed arranges the money supply today. Will that be a macro problem?
Dixon: I feel that I am talking to a famous economist. [laughs] I am now on your territory. It is dangerous because I am not an economist.
Cowen: Well, I didn’t discover this myself, to be clear. I really ask different people. I asked Austan Goolsbee the same question because I don’t know.
In a recent message, Said Tyler the following:
The AI is your smartest reader. It is your most sympathetic reader.
So why does he ask “different people”? Why don’t you ask AI? I suspect that the answer is that ‘smartest’ can be defined in many ways, and although the top AIs are the smartest in many respects, they are not the smartest in the most challenging areas. I asked chatgpt about this problem, and the answer Is much inferior to the person I will offer. (I have a bit naughty here. Tyler’s right that AIS is smarter than I about most questions – but not in areas where I have expertise.)
So here is my answer: Stablecoins are no problem for monetary policy. The FED will still arrange the monetary basis and they have almost unlimited ability to adjust both the supply and the demand for basic money. This means that they will be able to respond to creating money substitutes as required to prevent an impact on macro -economic objectives such as employment and price level.
The FED can directly control the range of basic money through open market activities, that is, the purchase and sale of Treasury Securities. That is all the power they need to fully compensate the impact of stable coins on the demand for basic money. But they have an extra powerful tool that also influences the demand for basic money: interest on bank reserves. With these two policy tools, the FED has the technical opportunity to relocate the price level to any position they like. Of course, political considerations would exclude the Fed Engineering an extreme movement up or down in the CPI, but that is no problem when the FED tries to stabilize the price level in the light of the growing use of Stablecoins.
By the way, some of my views on monetary policy are controversial and are not accepted by the experts. I do not believe that my opinion about this specific issue is controversial at all, unless the basis of the basic money fell to zero. This seems quite unlikely, especially since the stablecoins should probably be supported by a form of government money, and at least some money will continue to circulate.
Ps. Unlike the popular opinion, the demand for currency has not fallen, even if we have moved to a “cash economy”. Currency question, Even if a part of GDPIs higher than 100 years ago today, when people used in a routine cash to make purchases. That is because increased government regulation (ie the war against drugs, etc.) and higher taxes caused the demand for currency if an anonymous value shop rises much faster than the demand for transactions for currency has decreased.
It is conceivable that the recent delay in the growth of the currency demand is partly due to stablecoins, but it is more likely to reflect the fact that much higher nominal interest rates have increased the alternative costs since 2022 to keep zero interest rate as a store of value.