The IMF is an interventionist, socialist institution. But nevertheless, their capitulation to the coming bitcoin hard money reality continues. We would never have seen analysis like this out of them just a few years ago.
See: Monetary Policy in the Digital Age by Dong He from a June 2018 IMF publication.
To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies.
Unlike the value of fiat currencies, which is anchored by monetary policy and their status as legal tender, the value of crypto assets rests solely on the expectation that others will also value and use them.
However, they lack three critical functions that stable monetary regimes are expected to fulfill: protection against the risk of structural deflation, the ability to respond flexibly to temporary shocks to money demand and thus smooth the business cycle, and the capacity to function as a lender of last resort.
- ‘Protection’ against structural deflation – this belies a misunderstanding on the types of deflation. There’s good/benign growth deflation, and there is the ‘bad’ credit deflation – which is most often brought about by fiat money credit expansion in the first place. For more detail, see Joe Salerno’s An Austrian Taxonomy of Deflation.
- Ability to respond to shocks in money demand – This is based on the fallacy of ‘monetary stability’. There is no such thing. We live in a constantly changing world and human/consumer desires shift, as do prices, and people’s level of certainty about the future. Central bankers trying to reduce all the volatility and small failures in the world just creates more risk of the Talebian ‘black swan’ massive failure like we saw in the GFC or the Great Depression, which were caused by government monetary intervention.
- Lender of last resort – similar to above. By stopping individual bank failures and not letting them go under, moral hazard is created. Consumers stop caring about the soundness of their money, and the banks they leave it with. It’s better to not have a lender of last resort at all.
If crypto assets indeed lead to a more prominent role for commodity money in the digital age, the demand for central bank money is likely to decline.
In other words, if central bank money no longer defines the unit of account for most economic activities—and if those units of account are instead provided by crypto assets—then the central bank’s monetary policy becomes irrelevant.
How should central banks respond? How can they forestall the competitive pressure crypto assets may exert on fiat currencies?
As IMF Managing Director Christine Lagarde noted in a speech at the Bank of England last year, “The best response by central banks is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.”
Central banks must maintain the public’s trust in fiat currencies