President Trump recently signed the GENIUS Act into law, establishing a comprehensive regulatory framework for stablecoin issuance. Much of the celebration surrounding its passage has focused on what appears to be a remarkable policy reversal by the US government. While it’s true that many politicians have embraced cryptocurrency (or have been replaced in office by those who have), the Act’s passage is not purely based on the promise of the underlying technology. That stablecoins function as a form of financial repression is at least as important, given the rising, and increasingly unsustainable, national debt.
According to the Congressional Budget Office‘s January report, the US debt-to-GDP ratio is approximately 100 percent and is expected to reach 118 percent over the next ten years. This level of debt is not unprecedented. The US experienced similar levels following the Second World War. In fact, history is replete with examples of high levels of government debt. What makes the current US debt situation particularly concerning is that it is not the result of war — and nearly every projection suggests the debt will continue to grow.
If one examines historical debt-to-GDP ratios in advanced economies, a pattern emerges. A prolonged period of war tends to cause a rapid increase in debt. Following the war, military spending declines and the debt-to-GDP ratio gradually and slowly falls over time. This pattern makes sense. For much of modern history, national defense was the state’s primary expenditure. Wars are extremely costly, both in human and monetary terms. Rather than covering the monetary cost with sufficiently higher taxes during the war, governments tend to borrow in order to spread the burden of taxation over time. A prolonged war therefore leads to a rapid growth in debt, followed by a gradual decline.
The recent history of the United States and other modern states is quite different. Expenditures on social safety net programs have dominated the budget in the postwar period, exceeding national defense. Furthermore, the dramatic increase in US government debt combined with the significant rise in interest rates in recent years have resulted in the US paying more in interest on the debt than it does on national defense. This is not sustainable.
To address its growing debt problem, the US government has four broad policy options:
- broad-based tax increases
- entitlement reform
- allowing inflation to erode the debt’s real value
- financial repression.
In the current political climate, the first two options are largely off the table. Members of both major political parties claim to be better stewards of entitlement programs and those discussing higher taxes often confine such taxes to the “wealthy.”
Since the debt is owed in nominal terms, one way to reduce the debt would be to issue more dollars to buy it back. This would lead to higher inflation. Although technically not a default, higher inflation would effectively reduce the real (inflation-adjusted) repayment lenders receive.
It would be difficult for the US government to intentionally engineer a higher rate of inflation. The 1951 Federal Reserve-Treasury Accord separated the roles of debt management and monetary policy. A policy to deliberately inflate away the value of the debt would require that the Federal Reserve relinquish its independence.
That said, even an independent Federal Reserve could end up effectively monetizing the debt. Should debt continue on its unsustainable path, for example, concerns about the ability of the government to repay might lead to volatility in the bond market. The Federal Reserve would likely respond by acting as a buyer of last resort, expanding its balance sheet and ultimately causing higher inflation. Still, there is probably some limit to how much the Fed would monetize the debt, so long as it maintains its independence.
That leaves financial repression. Financial repression is defined as a formal requirement by the government that certain financial institutions purchase government debt. The government might prevent certain financial institutions from holding any financial assets other than government debt. Alternatively, the government could require financial institutions to hold a specific fraction of assets in US Treasury securities. The effect of such policies is to increase the demand for the government’s debt, which weakens the tendency for rising debt issuance to lead to higher borrowing costs.
Enter the GENIUS Act.
Stablecoins are digital dollars, similar to the digital dollars in traditional bank accounts. Both are claims to a physical dollar issued by the financial institution. Whereas the digital dollars in one’s bank account reside on a ledger controlled by the financial institution and are transferred over the payment rails of the traditional financial system, stablecoins reside (and are transferred) on the blockchains of various cryptocurrency projects.
Stablecoin issuers are financial intermediaries. One deposits a dollar to receive a stablecoin. The issuer sets a fraction of the dollars it receives aside to meet redemption requests, and uses the remaining fraction to buy interest-earning assets. This is where the financial repression comes in. The GENIUS Act requires that these stablecoin issuers hold their assets in cash, short-term US Treasury securities, or as reserve balances at the Federal Reserve.
The hope is that stablecoins will expand global access to dollars. The issuers will then invest a fraction of those dollars into US government debt. To the extent that these stablecoin holders were not previously holding dollars or dollar-denominated assets, the new policy could significantly increase the demand for US government debt and keep borrowing costs down.
This isn’t mere happenstance. A number of current and former members of Congress are on record arguing that stablecoins expand the reach of the US dollar globally, reinforcing dollar dominance, while also creating a growing, passive demand for US government debt.
In short, the GENIUS Act may look like a forward-looking regulatory framework for a new technology — and it is. But it is also a clear step toward a modern form of financial repression, which appears to be the government’s favored strategy for managing its increasingly unsustainable debt.
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