Goodcoin: The crypto solution for sovereign debt?

The theoretical concept of a cryptocurrency employing Proof of Socially Beneficial Work (PoSBW)—a class of which could be called Goodcoin, discussed in the article linked below—is a radical shift from traditional blockchain validation methods like Proof-of-Work (PoW) or Proof-of-Stake (PoS). PoSBW mandates that new tokens are minted only after demonstrated and easily quantifiable positive societal results have been achieved, essentially anchoring the currency’s value to measurable human benefit. For instance, this could involve minting tokens for achieving health improvement goals among low-income residents of a city, such as a reduction in juvenile diabetes incidence, or the provision of shelter for the homeless. This innovative approach theorizes that Goodcoin-type currencies can fund essential social work without contributing to governmental indebtedness or monetary inflation.

A theoretical concept of cryptocurrencies employing proof of socially beneficial work.

A simulation conducted as part of the PoSBW research specifically examined the potential impact on the United States (see figure below, from the article). Given the current challenge of an escalating US Federal debt (around $34 trillion at the time of writing) and the rising costs of social benefits like Medicare, the model offers a stunning solution. The simulation projected that if the US Federal Government were to begin receiving and utilizing Goodcoin tokens (minted to fund social benefits), the accumulated value of those holdings could match the entire US Federal debt in just 10 years. This suggests that a successfully adopted PoSBW cryptocurrency could potentially wipe out the entire US Federal Government’s debt by creating a new, value-anchored stream of funding that bypasses the need for conventional debt issuance.

Beyond the U.S., the fundamental social funding proposition of PoSBW asserts that these cryptocurrencies will be utilized globally to fund socially beneficial work without increasing countries’ indebtedness. This is a critical factor for nations grappling with soaring debt-to-GDP ratios, such as Japan (266%) and Canada (118%). The framework is designed to be universally applicable, allowing tokens to fund specific socioeconomic achievements in any country. By providing an alternative means to finance major social commitments—like retirement income and healthcare for aging populations —Goodcoin and its peers offer a pathway for governments to escape the "vicious cycle" of rising debt, higher borrowing costs, and potential central bank monetization that leads to inflation. For a brief discussion on this, along with a few other related topics, please refer to the video linked below.

The Fed's long reach: Influencing the 10-year Treasury

The 10-year U.S. Treasury yield serves as a linchpin for numerous borrowing rates across the economy, making it a crucial determinant of both consumer and business spending. Its influence extends to mortgage rates, corporate bond yields, and even the cost of auto loans. When the 10-year yield rises, it generally signals tighter financial conditions, leading to higher borrowing costs and potentially dampening investment and consumption. Conversely, a fall in this benchmark yield can ease financial constraints, encouraging borrowing and stimulating economic activity. This pervasive impact underscores the significance of the 10-year Treasury in shaping the overall economic landscape.

A commonly held belief within financial circles is that the Federal Reserve's monetary policy tools are primarily effective in controlling short-term interest rates, most notably the federal funds rate. The traditional view suggests that while the Fed can directly dictate the cost of overnight borrowing between banks, its influence over longer-term yields, like the 10-year Treasury, is largely indirect, mediated through market expectations of future short-term rates and inflation. This perspective often portrays the long end of the yield curve as being more subject to the ebb and flow of market sentiment and long-run economic forecasts, with the Fed's direct control seen as limited.

However, the Federal Reserve's response to the Global Financial Crisis provides a compelling historical example of its capacity to directly influence 10-year U.S. Treasury yields. In the years following the crisis, the Fed implemented multiple rounds of quantitative easing (QE), involving the large-scale purchase of long-term Treasury bonds and mortgage-backed securities. These actions directly increased demand for these assets, putting downward pressure on their yields, including the 10-year Treasury. For instance, during QE2 (November 2010 - June 2011), the Fed explicitly aimed to lower longer-term interest rates to support the economic recovery (see figure above). The subsequent decline in the 10-year Treasury yield during this period demonstrates the Fed's ability to actively shape the long end of the yield curve through targeted interventions. For a brief discussion on this, along with a few other related topics, please refer to the video linked below.

Has the US been funding economic growth with debt?

Summary

- Since the Great Recession real economic growth seems to be largely funded by debt in the US.

- One could argue that the US has a robust economy, so the government can keep on borrowing for several more years, and then simply print money to pay for some of that debt.

- The problem with this approach is that it would could lead to a devaluation of the US dollar, and thus an increase in inflation in the US.

- The bottom line is that the US must reduce its federal debt.

Federal surplus and GDP growth in the US from 1950 to 2018

The graphs below are for the period going from early 1950 to late 2018, and were generated using the US Federal Reserve Economic Data (FRED). This publicly available web resource combines access to an extensive database of world economic data with very nice graphing features (see: ).

The graph at the top shows the federal surplus rate as a percentage of the real gross domestic product (GDP) in the US for the 1950-2018 period. Values below the line indicate negative surpluses, or deficits. The graph at the bottom shows the real growth in GDP in the US for the 1950-2018 period. It is called “real” growth, because it is corrected for inflation.

The difference between GDP growth and federal surplus

Has the US been funding economic growth via federal deficits? Let us see. The graph below shows the difference between the real growth in GDP and the federal surplus rate. Values below the line are for periods in which the US is essentially funding GDP growth through issuance of debt, primarily in the form of treasuries (bills, notes, and bonds), a debt that tends to accumulate over time.

As you can see, since the Great Recession () we have been seeing quite an interesting and unique pattern in the US. Except for a small period of time around 2015, real economic growth seems to be largely funded by debt. The extent to which this has been happening has not been seen since 1950.

Generally speaking, income from taxation gravitates around 17 percent of GDP. This happens, contrary to popular belief, almost regardless of taxation levels. Therefore, GDP growth should lead to a reduction, not an increase, in the federal deficit – since deficits occur when the government spends more than it takes in as income from taxation. The largest proportion of government expenses come from retirement benefits; which grow as the population becomes older.

The danger of inflation

So, what is the big deal? One could argue that the US has a robust economy, so the government can keep on borrowing for several more years, and then simply print money to pay for some of that debt. After all, the amount of US currency in circulation has been steadily increasing over the years ().

The problem with this approach is that it would could lead to a devaluation of the US dollar, and thus an increase in inflation in the US, because an increase in the supply of anything (including money) tends to lead to its devaluation if demand does not increase at the same pace.

Here is a simple analogy. If you lend money to John Doe (JD) in return for JD dollars, and then JD issues more JD dollars to borrow from someone else, you will probably be concerned and want to exchange your JD dollars for something else. For example, you may want to exchange them for Jane Smith (JS) dollars, assuming that JS owes less debt as a percentage of her income than JD.

Generally speaking, that may be the fate of the US dollar, if the federal debt keeps on growing. The US dollar will lose value, leading to inflation, if other currencies or stores of value (e.g., gold) are given preference over the US dollar.

The bottom line is that the US must reduce its federal debt. How can this be done? Increasing taxation levels is unlikely to be a viable solution, as income from taxation gravitates around 17 percent of GDP; as noted earlier, almost regardless of taxation levels.

One possible solution is to significantly increase skill-based immigration of young workers, thus reducing the number of retirees as a percentage of the overall US population. The US is in an enviable position in this respect, as there are many skilled professionals willing to live and work in the US.