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View: What the crypto crowd doesn’t understand about economics

Just last week I argued that cryptocurrency is here to stay. Now I’d like to explain to some of my crypto friends why parts of the mainstream economics and financial world do not take them more seriously. To put it bluntly: Many of you do not understand monetary economics very well.

There are two common mistakes.

First, the dollar is not on the verge of collapse, nor will it be replaced by a crypto asset. The US is one of the world’s two largest economies and the center of the English-speaking world. It has the power to tax, the strongest network of alliances and the most powerful military. Yes, it has printed a lot of dollars since 2008, but it also has taken steps to lower the speed at which those dollars circulate.

Rates of price inflation are likely to be higher for the next two years or so, but already some of the immediate inflationary pressures are abating; lumber prices, for instance, are now plummeting. Over a 10-year time horizon, the US government can borrow at a near-zero real rate of interest, hardly a sign of a doomed empire.

Nor is the US government about to go broke or on the brink of resorting to hyperinflation. The US debt-to-GDP ratio may well hit 200 per cent, but the poorer and smaller nation of Japan is doing OK with similar debt levels. Keep in mind that national wealth, while difficult to estimate, may run as much as six to eight times higher than GDP. So a 200 per cent debt-to-income ratio could mean a debt-to-wealth ratio as low as 25 per cent. That’s hardly the end of the world. Think of how comfortable you'd be if you paid off "only” 75 per cent of your mortgage.

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