Universal Basic Income, Monetary Policy 3, and the National Digital Asset
What is Universal Basic Income (UBI)?
In the United States one of the larger new ideas in our political cycle is that of Universal Basic Income, or UBI, which is currently being discussed by candidates seeking to run in 2020, including Democratic candidate and Venture for America founder Andrew Yang.
Effectively, UBI is a policy reaction to the same macroeconomic and political forces that are driving the price of Bitcoin and other digital assets up today. UBI is also deeply tied to the conversation around monetary policy generally.
For proponents of UBI, here's the bottom line: Fiat monetary policy and technical automation have created serious wealth inequality. Those with technical skills and financial assets have done very well, but those without technical skills or without enough capital to invest have experienced diminishing quality of life. More and more people are spending their whole paycheck on groceries, rent, and services without being able to build wealth, and are racking up brobdignagian levels of cheap debt they will never be able to pay off to sustain their quality of life.
UBI policies are an acknowledgement that serious wealth inequality is creating political upheaval and social unrest, and it attempts to address that challenge by providing a minimal level of income to every citizen in order to “take the edge off” and empower people to either quit working or, more modestly, survive until they can retrain and gain more useful skills.
UBI is not a fringe policy to be talking about; its proponents include many technical figures, whose work has been at the heart of the evolution towards automation, including Tim Berners-Lee, Mark Zuckerberg and Chris Hedges of Facebook, Elon Musk, Former U.S. Treasury Secretaries Hank Paulson, George Shultz, and James Baker, and others. This is not to say all proponents endorse the same policies, but that they all have made statements about the need for a new form of wealth distribution, one that resembles or is some form of UBI.
Macroeconomic Criticism of Fiat-Based UBI
UBI is controversial because it represents a massive increase in spending by governments that are already grossly indebted.
First, the U.S. government has already borrowed so extensively that returning to traditional interest rates at this time would crush America's ability to spend on the things that most governments justify their legitimacy in providing: security, rule of law, other social spending, and so on. The same goes for most other countries, including most of Europe, Japan, and potentially China as well.
The present U.S. government debt extends beyond the roughly 22.5 Trillion dollars officially owed on bonds and mentioned above, to what are called "unfunded liabilities" - promises for future payment which the government has made, but cannot cover under present rates of taxation. This is Social Security, Medicare, Medicaid, student loan forgiveness, and other entitlements programs. Unfunded liabilities represent about 210 Trillion dollars of the U.S. budget, and specific programs are already on track for insolvency at their current spend rate, with Social Security, the largest, expected to be insolvent in 2035 (incidentally the same year the last DigiByte will be mined).
U.S. Democratic Presidential candidate Andrew Yang’s UBI proposal is for each and every US Citizen to receive $1000 a month would translate to roughly $3,893,514,556,000 a year - assuming 324,459,463 citizens multiplied by twelve months at $1000 a month per citizen.
Incidentally, that’s almost exactly the size of the U.S. Budget in 2019 (3.8 Trillion, or 21% of American GDP). Taxes would have to more than double to support this policy, since at the current rate the US is running a budget deficit of nearly 1 Trillion dollars per year.
As a result of this high debt load, UBI is likely to involve the printing of money to be distributed to citizens without collecting the same amount in taxes (albeit taxes would almost certainly rise were UBI passed and ratified). Yang has mentioned some options to moderate this expense, such as providing a floor for people who cannot earn $1000 in the market and phasing out the benefit above a certain level, but even under those conditions there are those citizens who will opt for $1000 a month not working over $1500 a month working.
Further, UBI is heavily inflationary. No one works for UBI - that’s the whole point. There is no economic productivity to go with UBI, other than the money spent on basic consumption needs. Since more dollars are chasing effectively the same number of goods, asset prices would continue to rise and the $1000 a month would quickly have the same purchasing power as $800 a month.
UBI and Monetary Policy
What is important to acknowledge here is that the possibility of UBI in the developed world is not crazy talk or idle speculation. In democracies, if enough people want something they will generally vote for it - and politicians who want to be re-elected will generally give it to them and try to hide the costs. For this purpose, and because the dynamics that make UBI popular are becoming more powerful, we believe it's important to discuss some policy alternatives in greater detail which may be more effective than fiat-based UBI.
The Increasing Probability that UBI Becomes Official Policy
Ray Dalio is one of the greatest macroeconomic minds of the last 30 years. He is the founder, CEO and CIO of Bridgewater Associates, which went from being run in a spare bedroom to becoming the most successful hedge fund in American history.
Recently, Dalio has retired to write, work on philanthropic ventures, and share some of the principles that he has learned and built with the broader world. Most notable for our purposes here is a recent blog post titled “It’s Time to Look More Carefully at “Monetary Policy 3 (MP3)” and “Modern Monetary Theory (MMT)” posted on LinkedIn on May 1st, 2019.
Acknowledging the very same macro effects and policy options in a world bloated with sovereign debt, experiencing asset price inflation, and political upheaval, Dalio writes that there may be only so many options in the future, and that a “helicopter money” policy like UBI may well occur in the future as part of an era he calls Monetary Policy 3 (MP3 for short - MP1 & 2 being 1. changing interest rates, and 2. engaging in asset buys as a central bank - what is known as ‘quantitative easing’).
To provide a very brief summary of Dalio’s thesis, MP3 (and Modern Monetary Theory (MMT) - its ugly stepsister) both provide governments with increased power over the monetary supply.
This is a divergence from the historical system that central banks have relied on thus far (MP1 & MP2), with the emergence of long-term negative interest rates already well underway.
In a world of MP3, with locked in negative interest rates, people are effectively penalized for saving cash and not buying assets with their money. This is because fiat is being issued into the economy more rapidly than ever, and debt and credit are ubiquitous. Between the general inflation and asset price inflation that occurs in this sort of setting, MP3 and MMT will likely have the effect of making more people reliant on government and negatively affecting people’s ability to acquire and own assets, such as residential real estate, even if credit is generally easy to procure.
In light of Dalio’s article, which is extremely in depth and worth reading in its own right, it is important to point out that if money is cheap, more of it will be around to chase the same scarce assets. So even if interest rates are low or negative, those with lots of assets will find it easier to borrow than those with few, effectively further driving a wedge between the ‘haves' and the ‘have-nots’. Effectively, both monetary policies include the possibility of populist spending, and stand to decrease the quality of life for everyday people - albeit Dalio's MP3 proposal is considerably less destructive than full-blown MMT, which effectively grants control over the money supply to elected officials whose sole job is to win a popularity contest. MP3 and MMT create greater fragility and risk of political capture of the monetary system as negative side effects, which we are not going to cover beyond his observed political demand for a policy like UBI.
Dalio’s full blog post is available here: https://www.linkedin.com/pulse/its-time-look-more-carefully-monetary-policy-3-mp3-modern-ray-dalio/
A Fresh Alternative
Because we believe blockchain is both a technical and a macroeconomic play, we thought we’d outline a basic policy proposal: a blockchain-enabled alternative to UBI, which we call the National Digital Asset. This policy proposal is designed to address the same problem of widespread wealth inequality and inflation, but also to provide governments with a monetary policy option that is non-inflationary, beneficial to central banks, beneficial to populations, and deficit-neutral if not deficit-decreasing.
A Blockchain Alternative to Universal Basic Income: The National Digital Asset
The National Digital Asset (NDA) is not Universal Basic Income. It makes no promise of income, is not denominated in fiat, it is not paid with taxes taken from other economic activity. It represents a different shift in monetary policy than those characterized by Dalio, but could be used to supplement other policies.
First and foremost, the NDA is a deflationary blockchain asset with hard rules, not unlike Bitcoin, DigiByte, or other deflationary digital assets.
Second, the NDA would need to be decentralized and run on a mineable UTXO chain, and not on a handful of servers. We’ll get into this in a minute.
Third, the NDA would need to be fairly distributed to be effective, and this is at the core of the idea. The government issuing it will need to keep a treasury for future issuance to unborn citizens and immigrants, as well as to potentially sell in times of crisis, but the heart of the NDA is for each and every citizen to be issued one as a form of wealth.
Fourth, the NDA has to be written with secure code that cannot be exploited by foreign powers. It needs to be secure, not just from hash rate capture, but from quantum and other computing threats.
1. A Deflationary Asset
Being a deflationary asset enables the asset to gain in value over time relative to fiat and to be an effective store of wealth, not unlike gold or Bitcoin. In effect, a central bank could hold the NDA on its balance sheet not unlike the way central banks buy equities in a quantitative easing round, and this deflationary asset would represent a hedge against their own policies of printing money. It would also enable them to pay down deficits and respond in times of crisis.
In effect, rather than having a gold-backed currency, countries using the NDA (their own or someone else’s) would have a parallel asset to their deflationary fiat currency, and would benefit from its adoption, rather than risk a rival printing money to purchase away its scarce gold reserves.
This asset would effectively be priced by the market. Even though the issuing party could accommodate it and provide a basic valuation through central bank buys, the fact that while it is scarce and is accepted as a standard form of wealth, there would and could be no explicit cost to those issuing it. As a mineable blockchain, and not a fragile system on a handful of servers, the NDA would be cost-effective for the government and more secure than a centralized system.
This allows the currency to run in parallel to the other assets in the marketplace, including the existing fiat currency, which wouldn’t be replaced by this policy but rather supplemented. The same goes for other cryptocurrencies, stocks, bonds, and asset classes like housing or commodities.
No one will ever trust a digital currency explicitly run by a government, because that government would almost certainly abuse the power of having direct control over the currency in some eventuality, either by printing it or by censoring it. Centralized government policy and political capture got us here, and we believe that decentralization and immutable code are probably the best way to get out of the mess that political capture of fiat got us into.
Decentralization also has strategic effects, in that it allows for non-citizens and other countries to buy and mine the National Digital Asset, improving the price dynamics for the country (the government and the citizens) that issued it originally. This is not to say that the chain would be private, as access to the chain could be within the bounds of the law, and there could be some technical data to make the transactions visible to governing authorities for obvious reasons such as national security. If people want to transact privately, there are already several methods to do so, including fiat cash transfers, which are the primary method today. In this respect, a country's National Digital Asset would be more in line with security policy goals than present day fiat is.
In effect, the decentralization of such an asset would increase its value, meaning that the country that pursued this monetary shift first would increase its economic influence substantially by having access to its treasury and reserves. At best, second comers could ape the policy, since the demand for the original trustworthy digital asset would outstrip “Alt-NDAs” from other countries with less technical merit and looser rule of law. Just like the US dollar is now dominant, a viable country’s NDA would also likely be considered secure and worth investing in more than an insecure country, and that code would be open-sourced and visible.
3. Fair Distribution
This is the most critical part for policy reasons. Instead of promising $1000 a month, each citizen would receive one unit of the NDA by virtue of being a citizen, with the ability to purchase more as a store of value, or to sell when and if they wanted to in order to make a large purchase or pay off debts. This might involve rational basic governance rules, such as citizens not being able to receive or transfer the asset until they are of voting age. It also absolutely involves personal responsibility and patience - those who immediately sell their asset will be responsible for missing out if it accrues in price and value.
One benefit of a policy like this is that the NDA does not increase the deficit, in fact it provides a fair way to distribute wealth without robbing wealth and productivity from anyone, and without further inflating away individual’s ability to climb the economic ladder in the first place.
Further, this also goes to treasury management. The state would necessarily have to pre-issue itself enough of the NDA to cover multiple decades - if not a century - and would need to have that value locked up in such a way that it could not be stolen or squandered. Once the market has appropriately valued the asset, the government could theoretically begin to sell off some of its excess holdings to pay down its existing debts, or to invest in public infrastructure and spending. If successful, such a policy could help rescue the fiat monetary system, returning sovereign debt levels back to a sustainable level and diminishing the deleterious effects of rampant inequality that UBI proponents want to address.
4. We Have the Technology...
Best of all, the technology to execute a policy like this already exists.
Because the NDA would be a supporting pillar of a new monetary policy, it would be subject to innumerable attacks from foreign powers and from hostile miners and independent players. The security of such a blockchain would be paramount to the success of such a project. If Bitcoin can survive these pressures, then an even more advanced chain will likely be able to survive them as well, including such cryptographic threats as the advance of quantum computing. DigiByte has pioneered a lot of these features, and we believe that successful National Digital Asset programs will probably reflect DigiByte's many security features, especially when it comes to mining security.
Further, since this policy is already possible, it is likely only a matter of time before someone experiments with it. Even if this policy were judged to be “too dangerous” for some undisclosed reason, the fact of the matter is that the cat is already out of the bag, and someone, somewhere is likely to experiment with it eventually. Sovereignless cryptocurrencies already exist at an international level, it's only a matter of time before they are adopted by sovereigns.
The early 21st century is primed for massive monetary and political upheaval, and many are beginning to anticipate what a future monetary policy looks like after long-term negative interest rates and distributive policies begin to take hold.
While the National Digital Asset isn’t an absolute inevitability, we believe it is a far better option than fiat-denominated UBI, which leads to serious inflation and higher taxation. It is also a policy to add to or compete with fiat-only policies of MP3 and MMT - both of which will increase inflationary pressure and will likely fail to combat actual wealth inequality and political upheaval.
We believe that blockchain technology will fundamentally affect the way the world works in the early 21st century. For further discussion of this and many more topics, pre-order our upcoming book, Blockchain 2035: The Digital DNA of Internet 3.0.