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What bitcoin can help central banks

Many Central Banks for decades can not develop a predictable monetary policy, and this uncertainty is quite expensive for the economy. We tell how this can be changed if we use what the blockchain offers  .

Soon after Ronald Reagan became president of the United States, former Fed chairman   Arthur Burns visited the current chairman Paul Volcker. Burns came with a warning: the advisers of the newly elected president, led by Milton Friedman, want to replace the chairman of the Fed with a computer. Volcker opposed the idea that a complex financial system should be governed by simple, mechanical rules, and it did not take root.

Gone are decades, but the Fed is still too unpredictable. Its new leadership should reflect on ways to integrate the latest technological advances in order to make the  monetary policy of the  central bank more predictable.

The idea is not too radical: Milton Friedman and other economists have long argued for the confidence that arises with transparent and concrete rules. His “K-percent rule” prescribed annually to increase the money supply  by a certain percentage, regardless of the policy of the central bank and the government.

Technological innovations, such as blockchain and smart contracts, bring Friedman’s vision closer to implementation. Bitcoin , the most successful crypto currency, works on decentralized blockchain. It has a certain level of inflation (generation of new coins) built in, and it will not change until most of the network agrees with this. A total of 21 million bitcoins will be produced; about every four years, the inflation rate is halved. Terms are laid down in the rules of the network, and they are very difficult to change after the beginning of its work.

Countries interested in conducting passive monetary policy can benefit from the experience of bitcoin.Such a policy will have some advantages of passive investment. Index funds save investors large sums on costs and commissions. The Fed and other central banks have their own fairly significant costs, which are reflected in the budget. However, uncertainty is much more expensive than economics. Due to unpredictability of the company’s policy, investments are postponed, long-term planning becomes more complicated.

Defenders of the status quo warn that it would be dangerous to orient the economy on a specific path, given the unpredictability of the future. The solution to this problem is simple: it is sufficient to provide for measures that allow it to be corrected when certain parameters go beyond the limits. Quantitative easing , if the authorities deem it necessary, can be programmed in advance. In this case, if the value of certain assets falls below a certain level, the central bank will be able to buy them.

Whatever the prerequisites for the introduction of passive monetary policy in the US, they are much stronger in the case of countries with historically unstable financial policies. Countries such as Argentina and Zimbabwe should explore the possibility of linking their  monetary policy  to blockchain through smart contracts to implement certain rules. Unlike economically more influential countries, the flexibility of the countercyclical monetary policy of small countries should not be taken into account when deciding on the transition to passive management.

A perfect analogy for the abandonment of central banks is the current trend of transition from inefficient managers to index funds. Nobody will deny that many active managers do not justify their high reward – be they bonuses or budgets.

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What bitcoin can help central banks


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