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Taxation Without Representation: the Financial Repression Stealth Tax

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A look at the winners and losers of financial repression

Garrick Hileman
  • Of the various mechanisms for addressing growing government debt, financial repression is compelling from the perspective of policymakers
  • Traditional savers and bondholders, such as banks and pension funds, are some of the biggest losers from financial repression
  • The crypto industry and its users stand to be one of the biggest winners, along with holders of other hard assets
  • Contrary to some recent prominent comments supporting the fairness of financial repression, any stealth tax by definition is neither fair nor democratic

“When you have eliminated the impossible, whatever remains, however improbable, must be the truth”

– Sir Arthur Conan Doyle, stated by Sherlock Holmes

Last month we wrote about how any sudden US dollar crisis could trigger a massive financial crisis. A key potential driver of any future run on the US dollar are growing concerns over unsustainable US government debts, which stand at levels not seen since the time of the Second World War.

Many were already concerned about world record levels of indebtedness prior to the COVID-19 crisis (myself included). Now the US and other countries are facing double-digit percentage fiscal deficits as governments grope with the ongoing pandemic and depression-level economic damage wrought by an unprecedented lockdown.

So far historically low interest rates have kept debt concerns in check. While markets and policymakers are forecasting low rates for the foreseeable future, and no mathematical formula exists to tell us precisely how much debt is too much, we know debt levels cannot continue growing at current rates indefinitely.

At some point debt growth rates must decline or there will be a painful reckoning.

There are just seven distinct ways to address a public debt problem, each offering varying levels of political palatability (Figure 1).

Figure 1: Political preferences vary across the seven mechanisms for sustaining public debts

Growing out of a debt problem is the near universally preferred way to address overindebtedness. Similar to how strong store sales can bailout the manager of a retail shop suffering excessive shrinkage (theft) or other operational inefficiencies (the “sales cures all” principle in retail management), economic growth offers a trifecta of benefits:

  • drives increased tax revenue (without requiring politically unpopular tax hikes).
  • naturally reduces government spending on unemployment insurance and other automatic fiscal stabilizers.
  • helps the bond market maintain confidence in the sovereign’s solvency, particularly if the economy’s growth rate remains above the government’s rate of interest on its debt.

But what happens if sufficient economic growth fails to materialize?

After economic growth there is major dropoff in the political attractiveness or practicality of most of the remaining debt sustainability policy options:

  • Fiscal consolidation: tax hikes can be one of the least politically popular moves a government can make to rebalance (arguments over who should pay more, how much more, etc.), while the years following the 2008 crisis demonstrated how spending cuts (austerity) can be just as politically painful.
  • Financial aid: while grants or other unrestricted aid can be attractive, onerous loans or support from multilateral bodies like the IMF can be unwelcome as they typically come with strings attached, including micro-oversight and the aforementioned tax hikes and spending cuts.
  • Asset sales: selling a country’s proverbial (or literal) crown jewels is an arguably underutilized tactic and can send a powerful signal to the bond market of the sovereign’s commitment to service debt, but selling assets can also be unpopular and lack credibility given the ability of governments to later expropriate domestic assets.
  • Inflation: political thinkers as diverse as Keynes and Lenin agree (and history has frequently confirmed) that outsized inflation can lead to massive and catastrophic political upheaval. Any policymaker who chooses hyperinflation risks political suicide (or worse).
  • Repudiation: the Greek debt crisis illustrated how even a relatively minor default (failure to pay interest and/or principal on schedule) can pose a systemic contagion threat and be blocked by creditors, and even relatively ancient defaults incurred under prior political regimes often remain unforgiven

In the coming months and years some combination of the above policies may be implemented across various governments. For example, the UK Chancellor recently floated the idea of tax hikes, and some developing country foreign debt will probably need to be “restructured”, a euphemism for default.

But there are mounting signs that policymakers will attempt to sustain massive government indebtedness in the US and elsewhere via financial repression.

Financial repression covers a wide range of multifaceted policies, but its key characteristic in advanced economies is artificially low or negative interest rates. These artificially low or negative interest rates help governments to continue servicing debts even in low-growth environments.

The preferred policymaker term for the artificially low interest rate aspect of financial repression is the much less sinister sounding “yield curve control”. While neither term is widely understood both are rising in use (Figure 2).

Figure 2: Google searches for “yield curve control” (aka financial repression) are on the rise

Part of the reason behind financial repression’s attractiveness to policymakers is its historical track record of aiding countries such as the US and UK in sustaining record levels of public debt following the Second World War. While the UK did suffer a number of serious financial crises and non-pecuniary defaults, both countries were able to avoid missing any interest and principal payments while also steadily decreasing their debt-to-GDP ratios from triple to double digits in the decades following the war.

But some, including World Bank Chief Economist Carmen Reinhart, offer a perhaps more cynical take on why financial repression is such an alluring debt sustainability policy for officials: it is a stealth tax.

Financial repression often occurs alongside above norm inflation, making suppressed interest rates especially punishing for traditional savers, who struggle to earn sufficient yield via bank deposits and money market accounts to maintain purchasing power over time.²

These inflation-related losses are one element of what can be a very significant and hidden financial repression tax: a stealth transfer of economic value from creditors (e.g. traditional savers and bondholders) to debtors (e.g. governments).

While traditional bank savings account customers are often one of the biggest losers from financial repression, shareholders of commercial banks and other investment entities conscripted into holding government bonds are often another major casualty.

On a more positive note, crypto offers a solution to the liquidation of traditional bank savings deposits in the form of nascent crypto interest markets, which have grown rapidly in recent months to approximately $10 billion in size.

Some crypto lending markets currently offer double-digit annual interest rates on US dollar stablecoin deposits and sometimes even greater yields (and risks) via various DeFi (decentralized finance) protocols. Both the crypto industry and its users stand to be one of the big if not biggest winners from financial repression.

Other likely winners in a world of suppressed interest rates include owners of hard assets such as gold and real estate. Stock equity holders have also benefitted from low interest rates, and many believe stocks will continue to be attractive in such an environment.

The main focus here has been to draw attention to why financial repression appears compelling from the perspective of policymakers, and to point out some of the economic winners and losers.

However, in a world with major gaps in financial and economic literacy the morality of financial repression also warrants attention, particularly in light of some prominent comments made recently supporting the fairness of financial repression.

For example, the normally excellent Gillian Tett of the Financial Times recently suggested that financial repression is the “fairest, most democratic way to actually get a debt burden reduced”.

But how can a stealth tax be considered democratic?

Gillian herself even uses the term “stealth transfer” in describing financial repression, so she is under no illusion about the hidden nature of the financial repression economic tax.

Based on my experience researching financial repression over the past decade it is my view that the vast majority of people have little to no idea what financial repression is, or how it operates. Those who are economically less literate and less well-off will be especially challenged to defensively position themselves in a financially appropriate manner.

More transparent taxation, openly debated in legislatures and passed through normal democratic processes, stands a much better chance of passing a fairness test than any stealth taxation orchestrated largely by unelected technocrats that heavily impacts smaller traditional savers.

Dr Garrick Hileman is a visiting fellow at the London School of Economics and the head of research at Blockchain.com, the leading provider of cryptocurrency solutions and creator of the world’s most popular crypto Wallet and the Blockchain.com Exchange. You can read more of his analysis and research on Twitter @GarrickHileman and @Blockchain.

Source: https://medium.com/blockchain/financial-repression-stealth-taxation-without-representation-c61d0a4ea8fb?source=rss—-8ac49aa8fe03—4

Blockchain

Americans Can Now Buy Dogecoin from 1,800 Crypto ATMs Across the Country

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The meme coin that exploded in popularity recently, Dogecoin, has reached another milestone as the Bitcoin ATM provider CoinFlip decided to list the token on 1,800 cryptocurrency ATMs in the United States.

Dogecoin Coming to 1,800 ATMs

Started as a joke digital token inspired by Shiba Inu, Dogecoin took the world by storm in the past several months, which has prompted the popular Bitcoin ATM provider CoinFlip to take action.

The Chicago-headquartered company announced yesterday that it had added Dogecoin to its growing network of over 1,800 cryptocurrency ATMs located in 46 states.

The statement informed that this milestone “validates the legitimacy of the coin and further showcases CoinFlip’s dedication to meet consumer and industry needs as coin popularities shift.”

Daniel Polotsky, the CEO and Co-Founder of the ATM provider, said that the move would enable the general population a more straightforward way to receive Dogecoin exposure.

“Given its growing popularity and recent mass adoption, we are dedicated to making sure that Dogecoin is a part of our portfolio of coins and encourage further support of this cryptocurrency in the coming months.” – he added.

Dogecoin’s Support from Musk, Snoop Dogg, and More

CoinFlip reasoned that the Dogecoin listing comes after the token received massive endorsements from some of the world’s most popular names. Perhaps it all started with the CEO of Tesla and SpaceX – Elon Musk.

The executive previously updated his Twitter bio to display “former Dogecoin CEO,” posted dozens of DOGE-related tweets, and even bought some for his son.

Ultimately, every Musk interaction caused an immediate price reaction as DOGE surged to new highs. Consequently, the token even entered the top ten cryptocurrencies by market capitalization.

Furthermore, this skyrocketing craze caught the attention of other famous individuals, including the US rapper – Snoop Dogg.

As such, it may not be a surprise that CoinFlip said that its decision came only after Dogecoin received “support from celebrities such as Elon Musk, Snoop Dogg, Gene Simmons, and Kevin Jonas.”

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Source: https://cryptopotato.com/americans-can-now-buy-dogecoin-from-1800-crypto-atms-across-the-country/

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Bitcoin at $21,000? Is a buying opportunity coming soon?

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A series of on-chain metrics registered corrections when Bitcoin fell on the charts last week. In fact, BTC dropped down to as low as $43,000 briefly, with significant reshuffling seen after Futures Open Interest dipped by $4 billion too.

Other factors such as the Bitcoin funding rate experienced a reset as well, with Grayscale’s premium registering a low of -3.77%. AMBCrypto had previously reported about the positive reboot for the aSOPR, wherein it was identified that weak hands were getting washed out.

However, one particular metric carrying historical importance did not correct much. Interestingly, it could possibly alter the course of the rally going forward.

Bitcoin NUPL continues to avoid 0.5 reset

Source: Glassnode

According to Glassnode’s latest report, the strength of the current Bitcoin rally can be illustrated by BTC’s Net Unrealized Profit and Loss or NUPL. In the past, the NUPL has regularly retested the 0.5-mark during bull market corrections. While a 0.5 re-test was seen multiple times during both the 2013 and 2017 rallies, the same is yet to be identified in the current market.

Here, it’s worth noting that market dynamics have definitely altered over the years with respect to user profitability and hodling sentiment, with selling pressure not fueling massive outflows for Bitcoin.

Source: CryptoQuant

Further, data from CryptoQuant seemed to suggest that Bitcoin outflows from exchanges have continued to maintain their low levels over the week, with long-term hodlers unfazed by the 21% decline in cryptocurrency’s price.

The resilience exhibited by investors was coming to fruition at press time since Bitcoin had managed to establish a position above its immediate resistance of $47,400 over the last 24 hours.

While it is still a little early to predict the start of a new bullish leg for Bitcoin, according to Willy Woo, consolidation above $45,000 is a strong sign of stability.

If history repeats itself, does NUPL reset carry a damaging outcome?

While the NUPL has not registered a reset at 0.5 during this rally, historically, it has happened during every bull cycle. According to data, the realized price trading is currently $14,511, and if the NUPL drops down to 0.5, it would mean Bitcoin would possibly drop down to a floor price of $21,766.

That would mean a 55.76% drop from BTC’s press time position, a drop that will completely take away all of BTC’s gains since 15 December 2020.

While historical probabilities are worth pondering over, it is also important to consider the macro-difference between previous rallies and the current one, with Bitcoin at the receiving end of more adoption than ever before.

For instance, the average weekly investment into Grayscale’s Bitcoin Trust during Q4 of 2018 was $2 million. The average investment in GBTC for Q4 of 2020 was $217.1 million. Needless to say, the course of history for Bitcoin is indeed changing.


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Source: https://ambcrypto.com/bitcoin-at-21000-is-a-buying-opportunity-coming-soon

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Litecoin is trading at a 1,800% premium via Grayscale’s LTC trust — But why?

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Shares in Grayscale Investments’ Grayscale Litecoin Trust, or LTCN, have been trading at a whopping 1,800% premium over the market rate of their underlying asset, Litecoin (LTC).

$319 per Litecoin? 

This difference is primarily due to retail investors’ inability to purchase shares directly from Grayscale Investments, whose funds are aimed exclusively at accredited investors.

LTC holdings per LTCN share (orange) and premium (blue). Source: Bybt.com

It costs $319 to buy a share in Grayscale Litecoin Trust. However, its LTC holdings per share are currently worth just $16.42. That means it’s almost 20 times more expensive to buy Litecoin via the trust than regular spot exchanges.

LTCN shares have recently traded for as high as $496 in November 2020 — 38% above Litecoin’s highest closing price in December 2017. Although the premium on Grascale’s Litecoin fund has been drastically cut over the past three months, LTCN shares remain an unattractive investment vehicle for retail traders.

The trust offers exposure to LTC without investors needing to handle or custody cryptocurrency. Nevertheless, its shares can only be sold by Grayscale Investments to institutional investors.

The unusual spread appears to have been driven by increasing retail demand for Litecoin ahead of the Mimblewimble privacy solution rollout, with Grayscale accumulating $258 million worth of LTC so far.

Arbitrage is not really an option

Grayscale’s Litecoin Trust aggressively ramped up accumulation in February, buying at a rate equal to 80% of new Litecoin being mined during the period.

However, anyone thinking about a potential arbitrage opportunity should note that all LTCN shares require a one-year holding period after they’re created. Besides, the trust requires all investors to be accredited, with a minimum of $25,000 to start.

The United States-based investment firm also offers trusts for other cryptocurrencies, including Bitcoin (BTC). The Grayscale Bitcoin Trust (GBTC) is the firm’s largest holding, with over $30 billion in assets under management.

In recent days, the Grayscale Bitcoin Trust traded at a discount to net asset value as the TSX Purpose Bitcoin ETF saw record inflows. A diminished appetite in the secondary markets creates a potential imbalance, as there is no redemption program for the Grayscale rust funds.

Had there been a way to convert those shares back to their LTC or BTC equivalent, a market maker would gladly buy the trust shares at a discount.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Source: https://cointelegraph.com/news/litecoin-is-trading-at-a-1-800-premium-via-grayscale-s-ltc-trust-but-why

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