The Republicans, together with a number of corrupt Democrats, seem likely to get their crypto bill through the Senate. Perhaps this handout to the rich and sleazy can’t be stopped but we should at least be clear about what is going on.

Crypto has been around for close to two decades. Despite the grand promises of the early proselytizers, no one has come up with a clear case for its use other than for facilitating illegal transactions. Bitcoin and other types of crypto are great for doing drug deals and paying ransom to kidnappers, but not for much else. 

Crypto has not proven to be cheaper or easier for normal business transactions, nor has it proven to be a useful hedge against inflation. Unlike gold, the traditional inflation hedge, crypto prices actually fell against the dollar when inflation took off in 2021 and 2022.  

But even if crypto may not serve any useful purpose, we still have a number of people getting very rich from speculating on it and acting as intermediaries. These ‘crypto bros’ hope that they can sucker more ordinary people into crypto and suck money out of their pockets. That is how we should understand the crypto bill Congress seems likely to approve. 

Since crypto can generate incomes, and often very large incomes, for people in the industry, without producing any actually useful product, we should see it as a potential source of inflation similar to large budget deficits. Before getting to deficits and inflation, I’ll clarify why crypto poses a risk of inflation in a way that other items don’t.

If I pay $1,000 for my food or for my mortgage, there is an actual good or service that corresponds to the money I paid out. This is not the case with crypto. When I pay $1,000 for crypto, it is similar to paying $1,000 for counterfeit currency. If I then go out and spend this counterfeit currency without getting caught, it creates inflationary pressure in the economy.

In a $30 trillion economy, $1,000 of counterfeit currency won’t make a difference. However, trillions of dollars of crypto could very well make a difference. In that sense, they could lead to the same sort of inflationary pressures as a very large budget deficit. The problem in both cases is that we are giving lots of people purchasing power that doesn’t correspond to any goods or services in the world.

At the moment, there is little dispute that we have large deficits. Measured as share of GDP, the deficits are over 6.0 percent of GDP, a level we haven’t seen outside of wars or recessions. Trump’s tax cuts, coupled with his increased spending on the military and homeland security, will make these deficits even larger. The question is whether this is a problem.

The classic story is that large deficits drive up interest rates. This can happen, but as our MMT (Modern Monetary Theory) friends remind us, the interest rate is a policy choice. If the Fed chooses to lower interest rates, it can. 

The problem is that if it lowered rates in a context where the economy is hitting limits in its ability to supply goods and services, as was the case during the supply chain crisis, it would lead to inflation. While there are steps the government can take to curb inflation (e.g. selling oil from strategic reserves or price controls), these are not tools generally used and it’s fair to say they all come with some complicating factors. 

But it’s important to consider the deficit horror story that we are hearing pretty much all the time. As we run large deficits, interest payments become a growing share of the budget and the economy. This means that, under general circumstances (if the rate of interest exceeds the rate of growth), we will either have to cut back spending in other areas or see the debt and interest payments grow even larger.

While we are supposed to assume this is automatically a problem, it’s worth thinking about this more closely. Suppose deficits continue to grow as a share of GDP and what we pay out in interest grows further. (We now pay out more in interest than what we spend on the military, a fact that means absolutely nothing, but writing about it can get you a column in any elite publication.) Is this a problem?

The answer depends on whether these deficits are triggering inflation. That will depend in part on how much of the money we pay out in interest is being spent. If we are handing Elon Musk hundreds of billions in interest payments and he puts it in the crypt in one of his basements where he keeps the other hundreds of billions of dollars he worships, it will have no effect on the economy or inflation. We can double or triple our payments to him and it wouldn’t matter. (There are issues about the power that extreme wealth buys, but that is another story.)  

But the story of pushing up against limits of the economy due to large deficits is the same sort of problem we run into with the crypto bros. If we are passing hundreds of billions of dollars to them for their various crypto schemes, which contribute nothing to the real economy, then the economy is at greater risk for inflation. 

In many ways, the problem of a bloated crypto sector, and financial sector more generally, is the same as the problem of paying out large amounts of money in interest on the debt. We are concerned that we would be pushing the economy beyond its capacity to produce goods and services and thereby generating inflation. This problem results from any sector where there is large amounts of waste, not just government interest payments. And as the saying goes, “crypto” is just a new word for waste. 

If we ever get back a democratic government (note small “d”) and can finds ways to downsize crypto and finance, it will free up resources for healthcare, education, and other things we might consider worthwhile. Whether or not we have unused resources in the economy determines the extent to which we can increase government spending, not the size of the deficit.