Bitcoin proves that the ‘interest’ paid by central banks on bank reserves (IOR) is not an “interest rate” but a helicopter drop to banks. Imagine that Bitcoin came with an additional feature, that all holders of Bitcoin would receive annually an additional coin for every 10 they currently hold. This would not miraculously turn Bitcoins into a liability! Nor is this an “interest rate”, which is a price required to induced lenders to hold a loan or a debt security. It would in fact be a transfer of money to the holders of money. Demand for goods and services would likely rise, and no one’s liabilities would alter a jot. Inflation may or may not rise depending on a host of factors. For the purposes of this argument, the only substantive difference between Bitcoin and say, dollars, is that dollar reserves are held by banks, and Bitcoin reserves are held by everyone who holds Bitcoin. Paying the holders of Bitcoin more coins is a helicopter drop. So too is transferring dollar reserves to banks who hold reserves.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.

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