Power & Market
ECB’s Long Journey into Currency Collapse Just Got a Lot Shorter
The ECB’s announcement on Thursday July 21 of a “new instrument” for tackling “fragmentation risk” is ominous for the future of the euro. The idea is to pre-empt the emergence of serious break-up risk for the euro-zone as the policy interest rate continues to move higher in coming quarters towards “neutral.”
Chief Lagarde and her colleagues are determined to pre-empt this process triggering financial stress in the form of market crisis for weak government and bank paper. Saving the euro from high inflation must go along with saving the monetary union from break-up (fragmentation risk).
The launch of the new instrument and its likely use means “saving the euro” will drain not bolster confidence in the European money. Historians will not overlook the irony of this new likely giant step on the euro’s long journey to inflationary collapse occurring just on the same day as Mario Draghi, Chief Lagarde’s predecessor, renowned for his swaggering remark about “doing whatever it takes to save the euro” being forced to resign as Prime Minister of Italy.
The new instrument, born under the name “transmission protection instrument” (TPI), will be the catalyst to the accelerated full transformation of the ECB into a bloated European “bad bank” fund. This entity enjoys a giant privilege. Its liabilities are in large part the designated money (whether as banknotes or as reserves of banks) enjoying huge protections as such (most importantly legal tender) in all member countries of the European Monetary Union.
In effect, since the EMU crises of 2010-12, the ECB has been the agent which has “communalized” much of the bad state and bank debt of Italy (also Spain, Portugal and Greece). It has done this by issuing euro money liabilities against giant purchases of government paper and long-term lending (called LTROs) into the corresponding weak banking systems (again most of all Italy).
This communalization has created three big problems for the future of the euro:
First: the road back to monetary normality surely involves shrinking monetary base (now almost 50 percent of euro-zone GDP, compared to 27 percent in US). But how to accomplish this when the ECB would have to dump huge quantities of weak sovereign and bank loans on to the open market to achieve this purpose?
Second: as interest rates rise, it becomes increasingly problematic whether those weak borrowers can service their loans from the ECB. New loans to pay the interest are a red flag regarding insolvency danger, whether in the form of legal default, or default by inflation (thereby reducing real value of principle). The European public at some stage should become alarmed about the danger of default by inflation spilling over into their holdings of the money issued by this bad bank fund.
Third: the tolerance of the German public for this transformation of the ECB and its money could snap in a way which means that the Federal Republic pulls out of the union. Germany has been critical in keeping the ECB humpty dumpty together. Partly this critical role depends on public perception (that Germany stands behind the ECB and all its potential losses), albeit there is much wishful thinking here rather than legal fact.
And then there is the target-2 system – in effect an interbank clearing system, but where net balances between the member central banks are not cleared). The Bundesbank’s credit balance here now stands at over 30 percent of German GDP (matched largely by Italian and Spanish net debit balances; France’s balance is at approximately zero),
Germany, though, can walk away – a course which is not absurd given that ECB holdings of loans and government paper issued by weak banks and sovereigns amounts to over 100 percent of German GDP. In the big picture we should note no member country, jointly or severally, guarantees the monetary debts of the ECB. In fact. the only meaningful guarantee here would be a promise to sustain real purchasing power of money.
If Germany exits EMU, then the ECB’s monetary liabilities just become worth a lot less in real terms (via currency collapse and inflation). Ultimately these monetary liabilities might cease to be monetary – that occurs if monetary union comes to an end. Then the monetary liabilities of the ECB would have to find a market price (in terms of real purchasing power) as the paper of a giant bad bank devoid now of monetary function.
No doubt, any break-up scenario has huge costs, including write-offs for the German public. The existential question, though, poses itself: if not now, when? How much larger will these costs be when the decision to break-up is forced much later.
No-one expects the present coalition government in Berlin to be taking any such decision. But market valuations including of money do reflect shifting probability of future catastrophe even far ahead. The dangers highlighted here of ultimate monetary collapse have just got a lot worse due to the ECB’s launch of its new instrument.
According to the official press release on the TPI, the ECB, its own discretion (by vote of its governing council) can engage in unlimited purchases of paper from any member country if it considers the behaviour of its credit spread (say relative to Bunds) as having come out of line “with fundamentals.” In making that determination, the ECB will check with the EU Commission concerning the evolution of public finances in the given country. The ECB will also check for general economic sustainability in its various dimensions.
If, for whatever reason, the Italian spread (Italian government bond yields vs. German) suddenly widens – perhaps because markets distrust the political direction or sense that Italian credit institutions are in a new bleak situation – then the ECB can turn on the taps. Yes, it will sterilize the new lending, that means presumably disposing of German and Dutch paper in the ECB balance sheet to make room for Italian for example, becoming even more of a bad bank.
There are decisive moments in monetary history. The aftermath of July 21 is likely to be one of them as regards the European monetary future.
End the Incorporation Doctrine
Since the Civil War, perhaps no development in American law or politics has done more to expand the de jure power of the federal government than the Incorporation Doctrine. This legal doctrine took a Bill of Rights designed to limit federal power over the states and did exactly the opposite: it greatly expanded the role of the federal government in potentially regulating every aspect of daily life within the states themselves.
So what is the Incorporation Doctrine?
Stephan Kinsella defines it:
The meaning of the Fourteenth Amendment, “ratified” in 1868, has been debated for about 140 years now–and increasingly so in the last 90 or so years as the “Due Process” clause of that Amendment was used as a source of federal power over the states, via the “incorporation doctrine,” under which many of the rights implicit in the first 8 amendments of the Bill of Rights have been “incorporated” into the Due Process clause and thereby “applied” to the states.
I come to my main point. If it is true that, at best, the Fourteenth Amendment does not clearly grant to the feds a host of new powers–and even if there are arguments for it (as Thomas himself leans toward), it is clear that there is no such clear grant–then it does not grant them. Just as we interpret serious agreements strictly, and against the drafter; just as we require formalities and writings for serious matters (such as living wills, sales of real estate, and so on), so a wide grant of power to the central state, in the context of a decentralist Constitution where the states historically jealously guarded their sovereignty, must be clear and expressly written to take effect. In other words, the central state should not be allowed–as a matter of constitutional or libertarian norms–to legitimately shift the balance of power away from the states, and toward itself, by vague and ambiguous wording that it itself drafted.
There is no historical or legal basis for the Doctrine in the actual texts of the Constitution, but as a matter of limiting state power, the Doctrine must also be opposed on practical grounds. After all, it is the Incorporation Doctrine which has provided legal scholars and politicians a pretext under which to claim that the federal government should be the last word in virtually every legal conflict in America, from school prayer, to local taxes, to gun ownership. One even often encounters self-identified laissez-faire libertarians who completely accept that the federal courts should intervene in local city council meetings to decide the propriety of local eminent domain laws. Lew Rockwell has explained just how wrong this approach is:
[I]t would be no victory for your liberty if, for example, the Chinese government assumed jurisdiction over your downtown streets in order to liberate them from zoning ordinances. Zoning violates property rights, but imperialism violates the right of a people to govern themselves. The Chinese government lacks both jurisdiction and moral standing to intervene. What goes for the Chinese government goes for any distant government that presumes control over government closer to home.
How is the libertarian to choose when there is a conflict between the demands of liberty and strictures against empire? The answer is not always easy, but experience and the whole intellectual history of liberalism suggest that decentralized government is most compatible with long-run concerns for liberty. This is why all the founders were attached to the idea of federalism: that the states within the union were the primary governing units, and the Bill of Rights was to protect both individuals and the states from impositions by the central government—even when liberty is invoked as a justification.
Just so that we are clear on this last point: the purpose of the Bill of Rights was to state very clearly and plainly what the Federal Government may not do. That's why they were attached to the Constitution. The states, under the influence of skeptics of the Constitution's limits on the central power, insisted that the restrictions on the government be spelled out. The Bill of Rights did not provide a mandate for what the Federal Government may do. You can argue all you want about the 14th amendment and due process. But a reading that says it magically transforms the whole Bill of Rights to mean the exact opposite of its original intent is pure fantasy.
At the heart of all this is the fact that a federal government that has the power and authority to decide what is "constitutional" in every corner of the empire also has the power to force state and local governments to submit to federal laws.
In other words, the Incorporation Doctrine largely abolished the United States as a confederation of independent states, and moves it far down the road toward becoming a unitary consolidated government. The more practical and wise classical liberals of the eighteenth and nineteenth centuries understood this and opposed the consolidation of American law under a national government. Mike Maharrey explains why:
I think centralizing power is always a net loss for liberty. So did the founding generation. This is why the framers of the Constitution emphatically rejected a proposal to give the federal government veto power over state laws. It’s also why the first Congress rejected applying some provisions of the Bill of Rights to the states.
When I say this, it tends to confuse people, because, in today’s political system, the federal government vetoes state laws all the time through federal courts. And virtually every time somebody perceives that a state government has violated their rights, they run straight to federal courts to stop the offending state action.
Despite my protests, the application of the federal Bill of Rights to the states has become a key feature of the American political system.
As I said, I believe this will ultimately prove to be a net loss for liberty. When you turn to federal courts to protect your liberty from state actions, you’re playing a game of Russian roulette with five bullets loaded into your six-shooter. Despite a few minor victories here and there, federal courts almost always come out with opinions that expand government power, not protect individual liberty. And these expansions of government power become the law of the land across the entire United States. In a decentralized system, bad state court decisions only impact the people in that one state.
The risk isn’t worth the reward.
Essentially, the Incorporation Doctrine renders the Tenth Amendment null and void. We can have a functioning Tenth Amendment or we can have an Incorporation Doctrine. But not both.
It's also why here at mises.org, we are explicitly decentralist and opposed to applying the Bill of Rights to the state governments. It's a good thing when the state constitutions have their own bills of rights, naturally. Most states do have them, and most of them are quite good. But it is both dangerous and illiberal to insist that the federal government meddle in state and local governments to change state laws and dictate to states what is "constitutional." That was never the intent of the American constitutional system, and the very idea of incorporation destroys the original intent of the Bill of Rights, which was to limit federal law.
Rather, the idea of the American confederation was to provide protections for liberty through competition among states, and through balancing state power against federal power. The Incorporation Doctrine, however, has greatly tipped the legal scales in favor of federal power and makes the United States far more of a consolidated state than was ever intended. If we're serious about expanding laissez-faire and true self-determination in the United States, the Incorporation Doctrine must be abolished.
- "Why Rothbard Wanted 'Radical Decentralization'" by Ryan McMaken
- "Decentralization Is a Step toward Self-Determination" by Ryan McMaken
- "Why Governments Hate Decentralization and 'Local Control'" by Ryan McMaken
Entrepreneurial Doctors Work around Government Medical Controls
Governments have long had tight links to many lines of work including many businesses, law, and medicine.
The key way to delink from existing entanglements is to invent bypasses: new businesses like Federal Express, new products like cellular networks and private arbitration. In all cases, to make new alternatives available to customers.
Delinking from governments couldn’t be needed more than in medicine. Crony-socialist covid treatment, pharma, and public health have been leaving many dead and even more injured and susceptible to further disease and early death.
But out of these ashes, a new way is coming to life.
Dr. Richard Urso tells this story in an EpochTV American Thought Leaders interview with Jan Jekielek that was posted in two parts on April 21 and April 23.
Dr. Urso is an expert clinician with extensive experience developing treatments, and an accomplished entrepreneur. He was trained in ophthalmology, became chief of orbital oncology at MD Anderson Cancer Center, and left and developed a 750-employee ophthalmology practice.
The Remnant Is Forged
On March 10, 2020, one of Dr. Urso’s best friends from medical school called him and said, “I know you’ve been looking at this and I trust you. I’m not going to the hospital because I’ve already seen what happens overseas.” Dr. Urso treated him with vitamin D, hydroxychloroquine, erythromycin, aspirin, and steroids. He took these and got better quickly.
Dr. Urso was told to not use masks that were needed for emergency personnel, and if he did he would be criminally liable. He decided to not wear masks.
He was told to not work. He and some colleagues decided to keep seeing emergency patients. They started losing money but were able to keep their doors open and keep 300 of their 750 employees working.
He told his patients that if they got covid symptoms they should first call their regular doctor but then if their regular doctor wouldn’t help them and didn’t refer them to someone else, they should call him.
So far he has treated 1,800 covid patients.
As he and others wrote with Dr. Peter McCullough, best clinical treatment starts as early as possible with a sequential multi-drug cocktail. The antivirals ivermectin and hydroxychloroquine and the anti-inflammatory prednisone are crucial drugs. Other antivirals can be used in place of ivermectin and hydroxychloroquine, but it’s hard to have success without any anti-inflammatory prednisone.
Over time, he and others have gone strongly towards mast cell stabilizers and H1 or H2 immune-response blockers. Cyproheptadine blocks H1 like Claritin does but more strongly, and also blocks serotonins that are manufactured in the lungs and create a huge inflammatory response. The stomach-acid medicine Pepcid blocks H2. So does the asthma medicine Singulair. Almost every one of these drugs also has a small antiviral action.
They also use the cholesterol-lowering drug fenofibrate. They can use the transplant antirejection drug cyclosporin. They also can use JAK inhibitors.
In long covid, they’re seeing reactivation of the Epstein-Barr mononucleosis virus and the herpes virus family. Here, they use the supplement lysine, which inhibits these viruses’ replication.
In general, he always supplements vitamin D. He long ago learned that this helps the body’s tumor recognition, and he found that nearly all his cancer patients were vitamin-D deficient. Vitamin D reduces cancer risk by 30% to 40%, reduces stroke and heart attack risk by 50%, reduces bone-fracture risk by 83%, helps with flu and allergies, and makes you better looking. It also helps prevent and fight covid.
Dr. Urso and others have followed in the tradition of doctors like the legendary heart surgeons Michael DeBakey and Denton Cooley and trauma surgeon Red Duke. They didn’t take days off. They had their labs close by, and they would fly on the helicopter to treat trauma. They had dedication and intellect and charisma. These doctors were the factor that established their medical system’s brand.
Through the 90s, hospitals became stronger, offsetting the power of the insurance companies. But as the hospitals became stronger, doctors became marginalized. They became employees.
As employees during covid, doctors became reluctant to speak out. For people taken care of outside of hospitals, who collectively numbered in the millions of patients, the whole United States of America wound up being treated by about 400 doctors, with nurse practitioners also chipping in.
Now, such capability just needs to be reinforced and built upon.
The Next Steps Are in Progress
First, for messaging, Dr. Urso, Robert Malone, John Littell, Heather Gessling, Brian Tyson, Ryan Cold, and Mark McDonald started the International Alliance of Physicians and Medical Scientists, a worldwide group numbering 18,000 professionals. This group’s Global Covid Summit prepared a declaration resolving that healthy children shall not be subjected to forced vaccination, that naturally-immune persons recovered from SARS-CoV-2 shall not be subject to any restrictions or mask mandates, and that all health agencies and institutions shall cease interfering with physicians treating individual patients.
To improve the messaging, this group has partnered with a group that has the required infrastructure built already. Given their grounding in preeminent clinical practice and their demonstrated excellence, they will be much better than Medscape, which is basically drug company information, and WebMD, which also is drug company information.
Second, they’re going to create a national telehealth plan. This is relatively easy to do.
Third, they’re going to create clinics, maybe by a franchise model, to cover some administrative costs and unify their marketing.
Fourth, on surgery centers, Dr. Urso has already been involved in building three surgery centers, and many other doctors know how to do this too.
Fifth, on hospitals, it’s more complicated. Some really-great administrators want to work with them. The biggest complexity will be integrating the information technology to create the whole business structure.
The goal is to restore doctor-patient centered care, obviously also including nursing.
Dr. Urso would assume that this organization he and others are developing will grow in power and influence, and at some point, in some ways, will itself become corrupted. This is just a natural thing that has to happen. Things build, forests grow, fires tear them down, and they regrow again.
Right now, 900,000 people have died because the State decided we wouldn’t have early treatment.
That’s absurd. There’s always a treatment for every disorder.
Dr. Urso and others are reinventing our medical system.
Elements of Libertarian Leadership
Leonard Read was an important leader in the libertarian movement from the time he started the Foundation for Economic Education (FEE) in 1946 until his death. What primarily put him in that role was his unwavering commitment to liberty. But it was also due to his concern with the fact that not all forms of leadership and education were effective and consistent with liberty. While he dealt with those latter issues widely throughout his work, it was the main topic of his 1962 Elements of Libertarian Leadership, passing its 60th anniversary this year.
At a time when America’s political leadership is far from effective, and even farther from working to enhance citizens’ liberty, it seems an appropriate time to re-consider Read’s words, because he could already say six decades ago that “our waning individual liberty is more difficult to restore than most people judge.”
...The solution to the problem of rescuing an individual liberty on the skids requires, broadly speaking, the mastery of two disciplines: the philosophy of freedom and the methodology of freedom. The former has to do with an understanding of what freedom actually is, and the latter with the techniques, means, and methods by which an improved state of freedom may be effected.
...Right method…consists of self-improvement. If everyone were devoted to the perfection of self, there could be no meddlers amongst us, and without meddlers there could be no socialism.
If people followed Read’s path of “perfection of self,” which would result in no meddlers or socialism, one must consider what is ruled out by that approach.
...Liberty…does not and cannot include any action, regardless of sponsorship, which lessens the liberty of a single human being.
...Unrestraint carried to the point of impairing the liberty of others is the exercise of license, not liberty. To minimize the exercise of license is to maximize the area of liberty. Ideally, government would restrain license, not indulge in it; make it difficult, not easy; disgraceful, not popular. A government that does otherwise is licentious, not libertarian.
...To do as one pleases, if it infringes upon the freedom of another, is not freedom at all--its tyranny. It is impossible for freedom to be composed of freedom negations. Total freedom…as relating to society and government, is the ideal to be sought. This is a goal to be kept uppermost in mind, and any deviations from it are to be disapproved.
...A philosophy which concedes that each individual is an end in himself is a philosophy that precludes the practice of the few using the many as means.
...Freedom…The individual is both its means and its end--the only foundation of freedom, and also its crowning object.
But knowing some things that are ruled out is not sufficient if we are to succeed in advancing liberty in a world where “in spite of…lip service to freedom, our actual liberties continue to dwindle. The centralized state makes more and more of our decisions for us.”
...Fighting to retain liberty…is tantamount to fighting for life itself.
...It is useless to name all the various panaceas…aimed at the mere preservation of individual freedom. For we cannot preserve that which has already been so largely lost. We have a restoration job on our hands. Freedom must experience a rebirth in America; that is, we must re-establish it from fundamental principles.
...When all of us come to believe that the preservation of liberty is a responsibility that can be delegated, then liberty will have not a single defender. Authoritarians thrive in the absence of libertarian thinking like weeds in the absence of cultivation.
...The gospel of freedom cannot be effectively preached from within institutions headed in the socialistic direction…become a part of their machinery, and it follows that one must not only accommodate himself to, but put his stamp of approval on, the deviations and compromises implicit in such arrangements.
...As the belief grows that coercion is the only practical way to get things done…the belief in man acting privately, freely, voluntarily, competitively, cooperatively, declines.
...Free men lose faith in themselves when government takes over an activity…A decline in faith in free men and what they can accomplish results in a rising faith in disastrous authoritarianism.
So what is the path forward towards a renewed liberty; a flourishing freedom?
...The price of freedom [is] an intellectual and spiritual renaissance with all the hard thinking and difficult introspection required to energize such a revolution in thinking.
...The…price that must be paid for freedom [is] the intellectual and spiritual effort required to grasp the full implications of the idea expressed in these words of the Declaration of Independence: [Men]…“are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness.” …It…denies the state as the endower of men’s rights and…it follows from a man’s inherent right to life that he has a right to sustain his life, the sustenance of life being nothing more nor less than the fruits of one’s own labor.
...Unless we believe that man’s rights are endowments of our Creator and, therefore, inalienable, we must conclude that the rights to life and liberty derive from some human collective and that they are alienable, being at the disposal of the collective will.
...This conception makes impossible…any ascendancy of government beyond its principled position. It restricts the powers of government to the exercise of such force as any individual is morally warranted in employing…Government, logically, can have no powers beyond those which individuals may properly exercise…Man is free to act creatively or productively as he pleases. Here we have the absence of any and all political restraints on creative action…government limited to defense of life and property [as opposed to] government regulation and control of every aspect of our lives.
...Each individual is an end in himself…No other person or set of persons, however organized, has any moral sanction to interfere…no person is warranted in compelling any human being to serve merely as a means to his own ends.
What obstacles must be overcome along that path, if substantial expansion of freedom is to be possible?
...Those who refuse to rule themselves are usually bent on ruling others.
...[Ask] Why is it that a person who obviously cannot manage himself, let alone those who are beholden to him, concludes that he is competent to direct a nation of people or the whole world when even the wisest of men would feel utterly incompetent for any such project.
...If the state can grant a man’s rights, it can also retract them; that is, it is in control of rights. Freedom of choice as to how one employs himself or what he does with the fruits of his own labor is expanded or contracted according to the caprice of those who have gained command of the political apparatus…extensions of the premise that man’s rights derive from the state.
...Bad ideas, if they are to be rendered ineffective, must be replaced with good ideas…but how few there are who can skillfully, persuasively, and attractively explain authoritarianism’s opposite: the free market, private property, limited government philosophy! In the absence of this ability state interventionism thrives.
...The ideal society…must severely limit its political officialdom, denying it any degree of rulership in the overriding sense. With this done, the leadership must spring from among the people. Unless there emerges in a society an aristocracy of high principle, that society can never be free…potential leaders with a devotion to those moral principles upon which the philosophy of freedom and, therefore, a free economy must rest.
...All that retards the development of the human potential is anti-freedom. All that advances the individual’s wholeness or completeness as a spiritual, moral, and wise human being is freedom in action.
So what are the means for advancing freedom without violating the principles of freedom?
...The more destructive the end in view the more fitting are compulsive means, disintegrative methods; the more creative the end in view the more antagonistic to a solution are compulsive methods and the more must reliance be placed on attractive, integrative forces.
...The gaining of wisdom or the understanding of freedom is not imposed by man upon men, nor can it be. It is not marketed or sold.
...Truth, wisdom, an understanding of freedom, an expanding consciousness are the highest of human aims and the methods of attaining them must be of an equally high order.
...Logically, we cannot accept as right for ourselves that which we construe to be wrong for everyone else.
...Physical persuasion--coercion--as a means to broadening an understanding of freedom is patently absurd.
...Advancement of libertarian ideals requires that each of us understands that the higher grade the objective, the higher grade must the method be…if the objective be the expansion of another’s consciousness or the increasing of his wisdom, then only high-grade methods can be effective.
...Liberty can’t be saved by those who retire into their ivory towers or take to the hills…to bemoan its plight. It is the individual who is active who pushes liberty over the brink--or rescues her.
...[Libertarians’ lives must exhibit] the power of attraction…[which] draws to itself whatever is susceptible to its force. This is at once its merit and its limitation.
...The omnipotent state--authoritarianism--will not be liquidated except by liberated individuals.
Leonard Read’s most famous book was Anything That’s Peaceful (1964). That title summarized the libertarian view in a nutshell--freedom in all things but what infringes on others’ equal freedom, based on each person’s self-ownership, and its implications. In Elements of Libertarian Leadership, he was already deeply concerned about how to move toward such a world. Given that Americans have instead moved far in the opposite direction since then, and that libertarian leadership is thus even more necessary to reverse it, we could benefit from again asking what such leadership should look like if it is to succeed.
Expectation Versus Reality in 2022
The Russia-Ukraine crisis is unfolding. With Biden threatening sanctions, what will this mean for domestic monetary policy? With the Fed’s March meeting several weeks away, Fed Governor Christopher J. Waller explained how he expects the year to unfold; starting with the obvious:
Inflation is too high, and I think concerted action is needed to rein it in.
The following day, CNBC announced the latest Personal Consumption Expenditure (PCE) reading:
Fed’s favorite inflation gauge up 5.2% for biggest annual gain since 1983.
Perhaps after seeing months of record breaking inflation statistics, Gov. Waller reiterated his position:
I am focusing most of my attention on inflation, which is far too high and needs to come down.
Fair. Now, what methods will be employed to lower inflation to a satisfactory level… according to the Fed?
Waller calls it the Appropriate Monetary Policy, which is expected to be implemented within the upcoming year. The action is slated to begin in March when the Fed will stop all new asset purchases, ending the expansion of the nearly $9 trillion balance sheet. Per the Governor, rates will finally be addressed:
Based on my outlook, my preference is to increase the target range 100 basis points by the middle of this year.
Currently the Federal Funds Effective Rate is 0.08%. To see this rate around 1% in only several months requires quite a bit of imagination; which he is anticipating.
By the summer he wants to target the 1 to 1.25% range.
As for shrinking the balance sheet, no specified time was given, but he projects no later than July. This will be much different than the last time the Fed shrunk the balance sheet, two years after the first rate hike.
Acknowledging high inflation is a problem, he goes on to say:
We constantly say we have the tools to fight inflation, and now we must demonstrate the will to use them.
The Fed seems intent on tightening, except the speed at which rate hikes and balance sheet reduction occur will be much quicker than before. The previous tightening cycle, rate hikes lasted from 2016 to 2019, before they were slashed again. The reduction on the balance sheet lasted from 2018 through 2019.
Note the last tightening cycle preceded the recession of 2020. Whether one believes this caused the 2020 recession or considers it merely coincidence depends. In any case, the opportunity to witness a causal link between tightening and recession or stock market collapse may come again. This time, the expectation is to increase rates and reduce the balance sheet within the same year.
But a lot has changed since 2016. The rate of PCE inflation, the national debt and size of the Fed’s balance sheet offers significant challenges. They say history doesn’t repeat itself, but it does often rhyme. When the next economic crisis hits, don’t expect the Fed to accept any responsibility.
Entrenched Is the New Transitory
It’s been said: if you can’t convince them, confuse them. When it comes to Jerome Powell discussing inflation, he is never in short supply of words. At the first Federal Open Market Committee (FOMC) meeting of the year, the Chair of the Fed set the stage for an end to easy money policies and voiced concerns over a new economic threat: entrenched inflation.
With transitory inflation becoming passe in 2021, it was only a matter of time until a new phrase was invented. Like its predecessor, it too is without economic merit. The difference between entrenched inflation, as opposed to transitory inflation, and what can only be called regular or your garden variety inflation, is without delineation.
He introduces the idea, making it seem as though he’s protecting the country from a form of inflation that could persist for long periods of time:
We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.
He doesn’t explain how he will fight entrenched inflation differently than other types of inflation. However, the Fed claims when (price) inflation is high, the central bank will raise interest rates. Despite the questionable theory behind this, it’s a long-standing belief held by central bankers worldwide. So far, the Fed has done a poor job fighting all forms of inflation. Consider the puzzling scenario when the Consumer Price Index (CPI) reached 7% in December, its highest level in 40 years, well past the arbitrary 2% target. Yet, Powell refused to raise rates this January.
Referring to inflation, Powell admits the Fed’s previous take was wrong, but offers assurances that this time they’re prepared to fight the economic phenomenon of rising prices, saying:
We do realize that… inflation has persisted longer than we thought. And, of course, we're prepared to use our tools to assure that higher inflation does not become entrenched.
Reiterating a third time how the Fed will utilize their tools to ensure inflation doesn’t increase too much implies that the current 7% inflation rate is not high enough. A state of confusion is really all that remains:
I think the path is highly uncertain in that we're committed to using our tools to make sure that inflation, high inflation that we're seeing does not become entrenched.
To add insult to injury, the money supply continues to have no effect on price increases. Powell’s aloofness on the connection between the money supply and prices is put on display when he tells us:
…the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services.
As far as they’re concerned, inflation must exist in a Goldie-locks zone, or a sweet spot where it is not too high or too low. After a couple of decades of persistently low inflation numbers, the Fed finally got what they desperately desired. Unfortunately, they’ve failed to inform society why 7% is an acceptable inflation rate, especially since the Fed takes credit for managing inflation.
Last year inflation was transitory, this year it could be entrenched. Regardless of what modifier is used, (price) inflation compounds. Unless there is negative inflation, or deflation, the compounding effects only exacerbate year over year.
Unfortunately, the Fed will never be able to fight inflation because they do not understand inflation. New phrases like entrenched inflation or transitory inflation are used to create an air of confidence for those who don’t understand economics and confusion for those who do.
End Legal Tender Laws
Mention the term "legal tender" in polite company and most people will resemble a deer in the headlights. In simple terms legal tender is a kind of money a creditor cannot refuse in discharge of a debt due to him in the money issued by government. This is a legal designation for government-issued money—usually fiat money, nowadays—with special status. And although legal tender laws do not force consumers and merchants to use the “official” money, this money comes to be highly favored. Thus, here in America we buy and sell using dollars. In the United Kingdom, the British Pound is legal tender. In Japan, it is the Yen. You get the idea. It isn't impossible to use monies other than legal tender, but using something else is often more akin to private, off the books, barter. For example, perhaps I want to buy my neighbor's used lawn mower. I have some British Pounds left over from my last trip. My neighbor is planning a trip to the UK. He agrees to sell me his used lawn mower for some of my British Pounds. However, my neighbor would still legally have to pay his taxes in dollars and his credits would likely still demand dollars. So, dollars will be preferred for nearly all transactions.
Now, all this may sound perfectly reasonable, but legal tender laws present a huge opportunity for those who monopolize its production to manipulate the currency, primarily to allow for increased government spending. Governments suck resources out of the economy by bypassing the natural constraints of seeking a tax increase, always politically unpopular, or borrowing honestly in the bond market, which will drive up interest rates. Government by the people is thwarted, and the increase in the money supply causes vast harm to the economy.
Why Repeal Legal Tender Laws?
Naturally, advocates of eliminating legal tender laws have an obligation to convince the public that it's the right thing to do. Why would any nation, especially the US, want to use any medium of exchange other than the dollar? Simply put, debasing the dollar allows government to steal from the people. The government prints money out of thin air to balance its ever expanding budget. This leads to vast and dire economic consequences, such as higher prices, boom/bust credit cycles, and transfers of wealth from the early receivers of the new money to the later receivers of the new money. This is the Cantillon Effect, as described by Emile Woolf in his latest essay.
The Path to a Better Money
The next question that the public may ask is what would replace the dollar. The answer is that the dollar would not necessarily be replaced, but it would have to compete for the public's patronage in a free monetary market. It would have to compete not only with other national currencies but also with recently created media of exchange, such as bitcoin and other cryptocurrencies. In addition, we would expect that commodities such as gold and silver would regain some significant part of the market, especially since these commodities have been used as media of exchange for thousands of years until the recent experiments with fiat national currencies protected by legal tender laws.
Alasdair Macleod of Goldmoney.com has explained why crypto currencies are not suitable as alternative mediums of exchange, although the distributed ledger technology may have applications in a sound monetary regime. Rather, it is most probable that gold and silver would regain their prominence. There is a reason that the term "gold standard" is still used when describing something that is of the highest quality. There are many advantages to gold as a medium of exchange, but the most important are its universal acceptance by people of every walk of life all over the world, the fact that it cannot be counterfeited, and that it is rare. Gold specie itself could be exchanged by private individuals to satisfy major purchases, but for every day transactions the public would find it advantageous to rely upon a trusted third party to safe keep the gold and make it redeemable upon demand through any of the modern methods of money transfer, such as paper check, paper certificates, and digital means. Of course, the government itself could offer "gold dollars." After all, it claims to have over eight thousand tons of gold in its vaults. But government's track record for issuing more receipts for real money, gold and/or silver, than it has in its vaults probably would preclude it from gaining the public's acceptance. More likely, major banks would issue their own gold backed money. The banks could gain acceptance in the market because they would be subject to ordinary commercial law that describes a "bailment." A bailment is a transaction in which someone takes custody but not ownership of a good for the benefit of another. When we take a suit to the dry cleaners, we have entered a bailment agreement. The dry cleaning establishment does not own our suit. It takes temporary custody of it. Likewise when we check a coat at the theater or restaurant. If the dry cleaning establishment sells our suit or the restaurant gives our coat to another party, we can sue for damages and possibly bring criminal charges. Therefore, one's gold dollar account at a major bank must be legally redeemable in specie upon demand. If the bank does not have the gold, the customer can take it to court on a charge of fraud. Even the bank officials and owners could be charged with a crime. Try doing this with the government!
Just as a better mousetrap drives less effective ones out of the market, better money will drive out bad money. Privately issued money will gain more acceptance over time as the public learns that it can trust the issuers not to issue more receipts than specie held in reserve. Not so with government money. Once the public's trust has been lost, it will be impossible for government to regain it in the face of honest competition. It is most likely that bank issued fiduciary media (technically the real "money" is gold or silver in its vault) will be used first for transactions among banks, bond merchants, and large companies. But over time the public will learn that modern electronic money transfer methods are just as reliable for retail use. Then we can expect competition by the big banks to spread rather quickly. Eventually, government's fiat money will be abandoned for whatever one can get in, say, gold backed Goldmoney.comDollars, CitibankDollars, BankAmeriDollars, DeutscheMarks, BarclayPounds, or the like.
The Necessity of Financial Truth
With the government no longer able to print money to satisfy its profligate spending, the reckoning will have arrived. Let us not believe that a reckoning is avoidable. It is not. Nor should we wish it to be. To continue to print money in massive amounts, as the government does now, will lead to a financial and economic collapse. Would we want our doctor to tell us that all is well when his tests say otherwise? Would we want him to recalibrate his thermometer, blood pressure gauges, etc. so that they gave false indications in order that we could continue an unhealthy lifestyle right up to the point of collapse? Of course not. Yet this is a consequence of fiat money; i.e., the true state of the nation's financial and economic health is hidden. On the other hand, sound money reveals the true state of our financial affairs, both private and public, so that we do not unwittingly destroy capital and/or make promises that cannot be met. Furthermore, let us not give false promises that everyone will be spared real hardship in a return to sound money. Those who have relied upon the government to pay their bills will find that not all bills will be paid as in the past.
Real statesmanship will be required to cut government spending and explain the reasons to the public. The real villains will not be those who pull the world back from the financial and economic precipice but those who spent us into this mess in the first place--the Keynesian economists, the Modern Monetary Theorists, the Socialists, and especially the feckless politicians who swallowed the impossible siren songs of these charlatans and forced them on the public in order to buy votes by promising the moon. Let us have the courage to demand the truth, no matter how unpalatable it may be. Eliminating legal tender laws will set the wheels of monetary and economic reform in motion.
Entrepreneurs are Austrians
The great Per Bylund has claimed that “Experienced entrepreneurs are Austrians.” This is because they “Develop gut feel through trial-and-error,” but they “lack explanation (theory) and terminology.” In fact, Bylund goes as far as to say that “Most entrepreneurs fail most of the time often because they are not Austrians.” This makes sense considering Austrians put such heavy emphasis on entrepreneurship. A successful entrepreneur would greatly appreciate and understand claims like Mises’ “The driving force of the market, the clement trending toward unceasing innovation and improvement, is provided by the restlessness of the promoter.” A simple Austrian claim like the argument that the main issue for business is to lower costs below price which must be below the subjective value of the consumer makes perfect sense to a successful entrepreneur because he or she has spent his or her entire career doing exactly that. As Bylund explained, a career of trial-and-error has given these successful entrepreneurs a gut instinct for all of our principles.
In this past year, however, we have seen this fact begin to make itself much more evident. Back in August Jack Dorsey, co-founder and former CEO of Twitter, tweeted a link to Anatomy of The State by Murray Rothbard here on the Mises Institute’s website. Additionally, Dorsey regularly professes his interest in sound money with other Tweets claiming “#wtfhappenedin1971” as a reference to the US officially severing any remaining ties to the gold standard. More recently sharing “’Transitory’” as a shot at the fact that all the inflation we have been seeing has been sold to us as transitory despite the obvious untrue nature of this claim. As a proud Bitcoin maximalist it would make sense that Dorsey would have an interest in sound money, but it makes even more sense to take one step back and see that it is a gut instinct as an entrepreneur that would draw him to both Bitcoin and sound money thoughts as a whole. Menger once argued that
Entrepreneurial activity includes: (a) obtaining information about the economic situation; (b) economic calculation – all the various computations that must be made if a production process is to be efficient
Mises contributed to this that
What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference.
Jack Dorsey, as an entrepreneur spent a career economically calculating. Whether he initially had the theory and terminology or not, he spent his entire professional life developing his instincts and learning more and more that he could do so better with sound money. As that went on he’s demonstrated a newfound interest in Austrian economics because entrepreneurs are at their core Austrians.
Dorsey was not the only big name in business that has come forward with Austrian adjacent beliefs. CEO of Tesla – as well as several other companies – and 2021 Time Magazine Person of the Year, Elon Musk, recently said in an interview “The government is simply the biggest corporation, with a monopoly on violence and where you have no recourse.” Whether he has actually read Anatomy of The State or not, one who has read it can clearly hear his gut channeling its inner Rothbard as it states something so close to Rothbard’s “Briefly, the State is that organization in society which attempts to maintain a monopoly of the use of force and violence in a given territorial area.” At another point in the same interview, Musk takes on another fairly Austrian stance:
The rules and regulations keep increasing every year. Rules and regulations are immortal, they don’t die. Occasionally you see some law with a sunset provision, but really, otherwise, the vast majority of rules and regulations live forever… eventually it just takes longer and longer and it’s harder to do things. There’s not really an effective garbage collection system for removing rules and regulations. And so gradually this hardens the arteries of civilization, where you’re able to do less and less over time. So I think government should be trying really hard to get rid of rules and regulations that perhaps had merit at some time but don’t have merit current.
Musk, with or without a series of economics textbooks, from his experience in the business world understands the dangers of these regulations which lead to the problems of the Seen, the Unseen, and The Unrealized as explained by Per Bylund:
In reality, regulations are not what politicians promise. They are not actions to help people. They are restrictions on entrepreneurs’ economic behavior. Entrepreneurs are aiming at satisfying customers’ wants as much as possible. Regulations aim to restrict this customer-satisfying action by forbidding certain innovations, or declaring that they must be designed and implemented in ways that have value for the regulator and not for the customer or entrepreneur.
Entrepreneurs are forced to abandon some of their efforts to generate new value by satisfying customers, or to redirect their efforts into less value-producing channels. The potential output of their creativity goes Unrealized.
Musk and Dorsey throughout this past year espousing Austrian adjacent principles have shown that those engaging in entrepreneurship pick up the logic of Austrianism by their experience matching exactly what we teach. However, while they are two high profile easy examples to demonstrate this, this happens with the millions of entrepreneurs all across the country. Everyone engaging in entrepreneurship, in “the pursuit of making productive factors more valuable than their current market prices indicate,” is learning more and more the principles of Austrian economics through their real-life experience. It is our job to recognize this, encourage this, and give them the theory and language to further dive into this and better serve their role – as Mises says – as “The driving force of the market.”
Economic Calculation under the Fed
When the Federal Reserve or government intervenes in our lives and the free market, it’s normally referred to as “central planning” or “economic planning.” However, whenever a handful of handsomely compensated people make economic decisions on behalf of the citizens, economic calculation is impossible. But without economic calculation, how are decisions made?
Last Thursday, Federal Reserve Bank of Philadelphia president Patrick Harker gave an interview to the Wall Street Journal, illustrating the thought process for “tapering” the Fed’s balance sheet:
We’re talking about a process that once we start it, depending on how we do it, would be, say, 12 months in length…. We’re doing $120 billion a month, if we cut back $10 billion each month, we’d be done in 12 months, right? I think that’s a reasonable thing to do.
He’s referring to the $8 trillion balance sheet which the Fed has been steadily increasing by purchasing approximately $120 billion worth of US and mortgage debt over the past year.
Interestingly, this tapering doesn’t refer to actually shrinking the balance sheet from its current all-time high. Instead, the goal is to decrease the number of new purchases by a smaller amount on a month-over-month basis.
Under his plan, one year later the Fed would add approximately $760 billion new securities. If the Fed continued its $120 billion monthly purchase for an entire year, the result would be approximately $1.4 trillion in new securities purchased in the year. It hasn’t been stated what happens after the one-year mark is reached.
While true, $760 billion is less than $1.4 trillion, the takeaway is the method these planners use to arrive at these billion-dollar ideas. The first issue is that the rationale behind $120 billion per month payments by the Fed has never been explained. Other than telling the public that this money will add liquidity to the market, no one has ever explained how the purchase amount was arrived at. They could have bought $60 billion a month, or $200 billion a month. Either way, there exists no measurement or calculation by which to say that $120 billion per month is the correct or even “optimal” number of securities to purchase.
Over a year later, the Fed recognizes they should not baselessly increase the money supply indefinitely; therefore, talk of tapering begins. But the second issue is just as impossible to fix as the first: If the Fed is to buy less securities, then by how much, and how quickly should this be done?
They could simply stop making purchases overnight, or use the Philadelphia Fed president’s proposed plan of a slow reduction in purchases, despite no one being able to explain why $10 billion a month is preferred to $20 or $30 trillion. All methods are equally valid, as they are based on nothing more than the whimsical nature of the central planner; thus, all decisions of the planner remain, in effect, “right.” Until central planners are removed, society will have no other choice but to live under the market conditions the planners believe best suited for us.
We are sadly reminded that a handful of experts have the power to make billion-dollar decisions based on nothing more than guesswork or a gut feeling at best, or for self-serving and possibly nefarious means at the very worst. In the case of the Fed’s tapering, according to the president, there need not be any basis other than the belief that it seems like a “a reasonable thing to do,” right?
El Salvador Blazes the Path to Bitcoinization
On Saturday, El Salvador’s president [Nayib Bukele] shook the Bitcoin world by announcing a plan to make Bitcoin legal tender in his country. Details will emerge over time, but even this early it looks like a very big deal.
So I wanted to get some quick thoughts on paper.
First off, will it happen? Lots of bills are introduced about Bitcoin but few become law. In this case, however, President Bukele sports a 92% approval rating and has a strong majority in the Salvadoran parliament. He’s a right-leaning populist, so he has many enemies in media and abroad, but he seems very secure at home.
So, yes, it’s very likely to become law. We don’t yet know what pressure outside countries, especially the US, will apply—more on that below. But, for now, it looks very much real.Okay, but is it a big deal? Critics are already laughing off El Salvador as a small and poor country. Of course, Google’s first 10,000 users looked silly compared to Yahoo’s millions. All revolutions start small.
For this revolution, there are two big implications for Bitcoin. First, even if just one country uses Bitcoin as legal tender, it could fundamentally change the regulatory and accounting landscapes worldwide that today stand in the way of much wider Bitcoin adoption.
Second, if Bitcoinization is popular among the Salvadoran people, it will likely spread to other countries in a long-anticipated “domino effect.” This could rapidly raise Bitcoin’s prospects of replacing fiat currency.
What’s El Salvador doing that’s new here? In 2016 Japan made a series of reforms that were widely misreported by journalists as making Bitcoin “legal tender,” but that actually made Bitcoin a “legally acceptable means of payment.” This distinction is very important and is the main way government monies handicap competitors.
To illustrate, if you lend somebody a Bitcoin in the US and they agree to repay you a Bitcoin, under the “legal tender” regime they can change their mind anytime and pay you in USD instead. So it’s long been “legally acceptable” in most countries to have contracts in Bitcoin (ask Russell Okung). But, legally, either party could insist on USD settlement.
If you’re American, you’ll recognize this dictate from the phrase “this note is legal tender for all debts, public and private,” inscribed on all US currency. And it’s the key mechanism that forces people to use government money under certain circumstances like the payment of debts. Meaning that if a competing media, like Bitcoin, can also stand as a legal tender, then now you go from monopoly to competitive currencies—the ultimate cage fight on equal footing.
So, yes, El Salvador is breaking fresh ground. It’s a true legal tender law, and given El Salvador is dollarized and doesn’t even have a national currency, the country is more likely to treat Bitcoin on an equal regulatory footing as its existing legal tender, the US dollar. For once, Bitcoin may get a level playing field.
What will Bitcoinization mean for average Salvadorans?
The country today is, indeed, poor, and has an underdeveloped financial system, with 70% of the population unbanked. Moreover, the Salvadoran economy is dominated by migrant remittances, which make up fully 22% of El Salvador’s GDP—about the same as oil’s contribution to Saudi Arabia’s national income.These factors—unbanked population, remittances, and dollarization—combine to make El Salvador a perfect case study for Bitcoinization. After all, international remittances are one of the clearest use cases for Bitcoin; today, these remittances cost over 6% in fees—closer to 9% in sub-Saharan Africa—but can reach “upwards of 20%” for smaller amounts.
Indeed, President Bukele emphasized remittance fees in his legal tender announcement, noting that “[b]y using Bitcoin, the amount received by more than a million low-income families will increase in the equivalent of billions of dollars every year."
So it’s a smart move. Next up, how will it affect regular Salvadorans? A key here is El Salvador’s close partnership, now deepened, with payments firm Zap and their Strike app. Strike works like Venmo or PayPal but, instead of holding US dollars on your behalf, Strike holds Bitcoins. So the process is as easy as using Venmo or Apple Pay, and Strike’s fees are fractions of a penny—far lower than a credit or debit card might charge.
As important as payments are for regular Salvadorans, the bigger impact from changing a nation’s money is impact on savings. Given El Salvador has lacked a national currency for 20 years, all domestic savings are in foreign currencies, particularly in the US dollar that is, after all, El Salvador’s single existing legal tender.
Will all those dollar holders swap for Bitcoin if the legal tender “playing field” is leveled?
I would guess in the medium term, most Salvadorean savings do not swap for Bitcoin. For the paradoxical reason that, because Bitcoin is a superior store of value to the US dollar, it enjoys enormous speculative interest that remains vulnerable to noise, whether from regulatory threats or unstable billionaires.
In practice, Salvadorans will probably mentally break their savings into medium-term savings and long-term savings. In other words, the money you’ll need in the next 2 or 5 years vs. the money you’re setting aside for a decade or longer—for retirement, or for your kids.
For those medium-term savings, most Salvadorans will probably keep the majority in the relatively stable US dollar, while long-term holdings will care more about the superior returns of Bitcoin, even with the roller coaster. We could only guess the proportion, but for scale perhaps 20% of savings go into Bitcoin over the next decade.
At that scale, if Salvadoran uptake of Bitcoin means transaction demand plus, say, 20% of savings, then, considering El Salvador’s population, GDP, and probable money supply, you might be talking about $5 billion over next decade going from US dollars to Bitcoin. About a 1% bump for Bitcoin price, spread over a decade.Not large by itself, but that’s where the rest of the world enters the picture.
A key question will be what, if any, “domino effects” come from El Salvador’s move. There are several effects that are pretty interesting, and that get bigger if and when more countries join in.
First, if Bitcoin is recognized as a legitimate currency, which is the custom for legal tender monies, then central banks may open up to holding part of their reserves in Bitcoin. For a sense of scale, if central bankers were to hold Bitcoin like they hold gold today, which notably is not legal tender anywhere, that’s roughly $2 trillion.
That much demand would, all on its own, roughly triple Bitcoin’s existing demand. So, all else equal, it might roughly triple the price of Bitcoin.Now, this probably won’t happen first in large, conservative central banks like the Federal Reserve or ECB [European Central Bank], rather you’d want to look at other emerging countries. Which countries?
And this brings us to the 800-pound gorilla: Will other countries follow El Salvador to Bitcoinization, and in what ways?
The key will be how Salvadorans themselves come to see the reform. After all, politics is the art of finding a parade and getting in front of it. If Salvadorans see Bitcoinization as a good thing, other people will notice. If not, it’s back to the drawing board.
So there is a lot riding on El Salvador, especially on Strike’s team, which happily includes some of the smartest and most altruistic people in Bitcoin, such as Adam Back.
Zooming in on specific countries, if Salvadoran Bitcoinization goes well, who are the most likely next dominos? We might focus on countries in four categories:
- Countries that are also dollarized (Ecuador, Panama, Liberia)
- Countries with high inflation that are politically free enough to want to fix it (Argentina, Ghana, Nigeria, Turkey, Pakistan)
- Countries with high dependence on migrant remittances and substantial inflation risk (India, Philippines, Mexico, most of central America)
- Countries targeted by US financial sanctions (about 20 countries including Russia, Iran, Venezuela, Cuba).
Taken together, these and similar countries make up a majority of the world’s population. Not so laughable anymore.
Now, long before any of these “dominos” come—indeed, even if no other country follows El Salvador—this reform alone could bring enormous improvements to the regulatory environment worldwide that has so far handicapped Bitcoinization as a medium of exchange.
The excellent Caitlin Long surveyed some of these potential changes in a thread today. In sum, she thinks there is a good chance this transforms Bitcoin into a foreign currency for regulatory purposes. Which could set in motion a number of important changes.
First, that firms can treat Bitcoin as cash for accounting purposes, which removes the accounting nightmare of dealing with taxable events with unclear bases in your firm’s unit of account.
Second, if Bitcoin is treated as a foreign currency, it automatically goes on the same banking footing as, say, Canadian dollars held by a US bank. The discriminatory regime that restricts financial access for Bitcoin-related businesses could be removed in a stroke.
A third question is capital gains; foreign currencies held for investment purposes do pay capital gains, but it’s unclear whether the above accounting changes might make Bitcoin tax compliance easier for firms.
Finally, if Bitcoin is a foreign currency, then the likelihood that it will get effectively outlawed declines substantially, while the more sci-fi scenarios of coordinated worldwide bans become even less likely.
So, taken together, and long before any other countries follow El Salvador to Bitcoinization, we could see a dramatic improvement in the regulatory and accounting treatment of Bitcoin.
This alone could lead to much higher demand and, therefore, much higher Bitcoin prices. Higher prices that would, in a beautiful irony, benefit the very Salvadoran people who contributed to them: a fitting reward for being “first movers” in declaring monetary independence.
Now, what could go wrong?
I imagine many bureaucrats in Washington or Brussels are working this Sunday asking not what could go wrong, but what they could make go wrong. How to stop this.
At the same time, I also imagine El Salvador’s announcement caught them off guard, and they don’t yet know what to do.
The fastest play for a country like the US is to use existing anti-money-laundering regulations (AML) to threaten Salvadoran banks, perhaps accusing them of enabling narcotraffickers or, given the news cycle, ransomware hackers.
If the media plays along—Bukele is an enormously popular right-wing populist, so not a stretch—then they could frame the narrative as dictator trying to partner with cartels and hackers. If the media does go down this route, I hope they’re very clearly called out by Bitcoiners who smell the bullsh*t.
Still, the good news is that one should never underestimate the incompetence of a government caught by surprise. Bitcoin regulation inside the US is very much contested territory, a kind of regulatory no-man’s-land as various agencies do battle with little resolution in sight. Indeed, this lack of oversight has been frustrating for domestic firms who would like a bit more legal certainty than US regulators appear ready to share.
This means it’s entirely possible that, just as the US failed to strangle Bitcoin in its crib, it could fail to strangle Bitcoinization in its crib. The Man may want to kill Bitcoin, but can’t quite herd his cats to get it done.
For the sake of the Salvadoran people, indeed for all those for whom Bitcoin offers a path to freedom, let’s hope enough regulators remember what drew them to public service in the first place: comforting the afflicted, not destroying them on behalf of the corrupt.
[The original text of this article appeared on CryptoEconomy.]
When commenting, please post a concise, civil, and informative comment. Full comment policy here