A Macroeconomic Feast for Thanksgiving

Three big questions—stablecoins, inflation, and Abenomics—to spice up your holiday policy conversations.

Happy Thanksgiving! There is much for which I am grateful and you, the readers of my newsletter, are high on that list. The fact that so many of you have subscribed to and shared my Substack since its launch this year amazes me. Thank you!

This newsletter has been a wonderful complement to my podcast, giving me the space to share ideas and interests that don’t always fit into the show. To be sure, many of the topics I discuss here—the Fed’s framework review, central bank operating systems, dollar dominance, inflation expectations, fiscal dominance, AI, and more—also appear on the podcast. But this platform allows me to offer more of the Beckworth view and to flesh it out with text, equations, graphs, and even some AI-generated art. Thanks for indulging me!

A big part of my journey from obscurity to a job at the Mercatus Center was my former blog, Macro Musings, which I ran from 2007 to 2020. Through it, I was able to engage in the macroeconomic and financial debates during and after the Great Recession. I met many people and had doors opened to me, including the opportunity to work at a think tank, because of that blog. So returning to a blogging format feels, in many ways, like coming home.

I have said many times that it is still hard for me to believe I get paid, in part, to host a podcast on macroeconomic and financial policy with such interesting guests. My job also involves meeting with policymakers, being interviewed by journalists, writing papers and policy briefs, attending conferences, engaging with people on social media, and, as of this year, writing a newsletter. I feel incredibly fortunate and blessed to have a job that truly feels like a calling from on high.

In the remainder of this newsletter, I would like to share three macroeconomic questions that have recently been on my mind. First, will dollar-based stablecoins become a global public good or a global nuisance? Second, is 3% inflation the new 2%? Third, how successful was the 2012–2020 macroeconomic experiment known as Abenomics? All three speak to a common theme: the changing boundaries of monetary policy in a world where fiscal pressures are rising, new financial technologies are emerging, and traditional tools are being pushed to their limits.

Consider these questions and the discussion that follows my small holiday gift to help spark some spirited Thanksgiving dinner conversations about macroeconomic policy. Enjoy!

Dollar-Based Stablecoins: a Global Public Good or Global Nuisance?

In a previous newsletter titled Barbarians at the Fed’s Gate, I noted that the passage of the GENIUS Act and Governor Waller’s announcement of skinny master accounts meant that the “stablecoin barbarians knocking at the Fed’s gates are no longer outsiders—they are being invited inside.” I should have added that Fed Vice Chair Michelle Bowman, in an August 19 speech, called the GENIUS Act a “watershed moment” that will allow stablecoins to “become a fixture in the financial system.” And on November 7, Governor Stephen Miran delivered a speech that also struck a favorable tone toward stablecoins.

More recently, on November 25, the New York Fed published a blog post on permissionless blockchains that included this striking passage:

Recent legislation provides regulatory clarity on payment stablecoins, but more importantly reflects a rising interest in allowing people to exercise greater control over their money. This control was largely surrendered with the ascendance of book-entry money, where payments relied on the updating of proprietary data sets. In some respects, permissionless blockchains represent a return to peer-to-peer transfers of value, albeit in digital form. We have argued that this can be beneficial…

This positive view toward stablecoins and public blockchains was unimaginable just a few years ago. Back then, the Fed was pro-CBDC and skeptical of crypto assets. Now the roles are reversed. This shift allows the Fed to ride the stablecoin wave instead of being swept away by it (as is the case for some other central banks). The stablecoin wave may mean a larger Fed balance sheet, but that is acceptable tradeoff given the potential for enhanced dollar dominance and greater global financial stability.

Yes, you read that last part—greater global financial stability—right. The widespread adoption of dollar stablecoins in emerging markets is likely to reduce currency mismatch on their balance sheet and make dollar volatility less consequential for them. I explain this point in my article titled “The Rise and Redemption of Stablecoins”:

A key reason for the global financial cycle, as outlined by Hélène Rey, is that many firms and financial institutions in developing countries borrow heavily in U.S. dollars while their revenues, assets, and cash flows are denominated in local currency. When the Fed tightens policy, the dollar appreciates, global financial conditions tighten, and these firms suddenly find themselves squeezed by rising dollar debt burdens and falling asset values. This balance sheet shock forces cutbacks and retrenchment. This is one of the key channels through which U.S. monetary policy spills over globally.

But what Rashad Ahmed noted in our discussion is that if households and firms begin holding dollar assets via stablecoins—in addition to borrowing in dollars—they begin to build a natural hedge on their balance sheets. A stronger dollar no longer only increases liabilities; it also raises the value of their dollar assets, helping to offset the shock. In effect, stablecoins can act as a decentralized balance sheet stabilizer, muting one of the very mechanisms that drives global financial volatility.

When combined with the likelihood that the Federal Reserve will act as a backstop to dollar-based stablecoins in a future crisis, it becomes even harder to argue that dollar-based stablecoins are inherently destabilizing. In fact, they may become one of the very tools that softens the peaks and troughs of the global financial cycle.

Put differently, the GENIUS Act, skinny master accounts, and the embrace of stablecoins by Fed officials together may usher in an era of greater global financial stability. That is the key point David Frum misses in his recent Atlantic essay, where he labels stablecoins the “most dangerous form of cryptocurrency.” His critique overlooks the potential for dollar-based stablecoins not only to serve as global transaction assets, but also to dampen the global financial cycle. Rather than being a global nuisance, dollar-based stablecoins are more likely to be a global public good.

A great first question, then, for your family and friends over Thanksgiving dinner is to ask whether they think dollar-based stablecoins will be a global public good or a global public nuisance.

Is 3% Inflation the New 2%?

Some of your family and friends, however, may have another big question on their minds at Thanksgiving: why has inflation remained above its 2% target for so long? In a recent Barron’s article, I address their concern by considering why the last mile of the Fed’s journey to 2% inflation has been so hard and elusive. I discuss the roles that tariffs and the inflation-scarred American psyche may be playing in this last mile. I also share the graphs below that show upward drift in inflation expectations:

I argue the reason for this inflation drift—and therefore for the intractable last mile to 2% inflation—is fiscal pressure:

If this drift continues, the Fed may find that the last mile of disinflation is not just difficult, but unreachable. Once the consolidated government budget constraint begins to bind, the arithmetic of debt service, not the resolve of central bankers, will dictate the equilibrium inflation rate. Higher inflation becomes a feature, not a bug. It is a necessary lubricant for an over-leveraged fiscal state.

The Fed can talk tough, but as long as fiscal pressures dominate, its independence will remain conditional and its 2% goal aspirational. The last mile of disinflation may be the hardest, not because the Fed is weary, but because the road itself now bends toward fiscal dominance.

In short, the Fed may be succumbing to emerging fiscal dominance pressures as Congress continues to run large deficits and interest payment on the debt becomes a larger expenditure than national defense. These federal expenditures are adding aggregate demand to the economy.

Consequently, a second question to ask family and friends at your Thanksgiving dinner is whether they see fiscal pressures, tariffs, or some other factor being the culprit that has made the last mile so hard for the Fed.

How Successful Was Abenomics?

A final macroeconomic question for your Thanksgiving table comes from this week’s Macro Musings episode with Mike Bird. Mike has a terrific new book out titled The Land Trap: A New History of the World’s Oldest Asset where one of its central stories is how Japan’s land policies of the 1980s helped fuel the massive real estate bubble, the devastating collapse that followed, and ultimately the lost decade of the 1990s. That long stagnation set the stage for the radical policy response we now know as Abenomics, Japan’s bold attempt from 2012 to 2020 to revive growth and end deflation.

Abenomics, of course, refers to former Prime Minister Shinzo Abe’s three-pronged reform strategy: aggressive monetary easing built around a new 2 percent inflation target, flexible fiscal policy, and a suite of structural reforms designed to lift Japan’s chronically weak productivity. These were the so-called “three arrows” of Abenomics. At the time, it was viewed as one of the boldest and most comprehensive policy shifts attempted in any advanced economy after the Great Recession.

When I asked Mike how Abenomics ultimately fared, his answer was frank: “If I’m honest, disappointingly.” He explained how Abenomics under-delivered on the two arrows of flexible fiscal policy and structural reform.

The one area where Abenomics made some headway was with the monetary policy arrow. The Bank of Japan, after all, has been a leader in trying new things. The BoJ did the original QE program from 2001-2006. It also did yield curve control from 2016-2024. The BoJ, in short, has never been bashful about going big. As a result, it went big with Abenomics and had some success in reflating a depressed economy as seen in the figure below.

Japan also finally achieved inflation above 2 percent—long thought nearly impossible—though that largely came as a result of pandemic policies after Abenomics. However, that is not to say Abenomics had no success in raising inflation rates.

This mixed record, though, raises the question as to whether monetary policy alone can reflate the economy. That is, can an aggressive QE program lift an economy out of depression or does it need fiscal policy to support its actions (i.e. run primary deficits)? I think it is easier to argue that tight monetary policy can trigger and cause deep recessions. What is less clear to me is whether a central bank alone can restore nominal demand to its pre-crisis trend path without fiscal support.

So the final macroeconomic question for your Thanksgiving table is whether monetary policy can do it alone in restoring an economy from a deep depression.