Last Tuesday, El Salvador made bitcoin its official legal tender. It became the first nation-state in the world to issue a currency not managed by a sovereign federal reserve. The US dollar still remains as an official alternative national currency. The law passed to introduce bitcoin into commerce requires merchants to accept bitcoin in payment. Therefore, the currency is obligatory. Any use of bitcoin or the dollar is strictly at the discretion of the consumer.
It is unanimity among financial advisors that this is a very risky venture. Basing a nation’s treasury on a currency over which the national exchequer has little or no control is like betting on the performance of a stock exchange. Emotion of the investor plays an unpredictable role in the value of the equity. Bitcoin has fluctuated in price as much as 25% in a ten-day period. Such instability jeopardizes not only valuation of reserves, but borrowing power for debt financing on the open bond markets.
Why then would El Salvador take such a risk?
El Salvador is a remnant of a colonial system that never achieved the free enterprise reforms necessary to compete in a global economy. It became independent from Spain and Mexico in 1821. As an economy, it was subject to former landlord grants. Noble privileges were never totally eliminated. In the 20th century, El Salvador experienced numerous coups, revolts, and dictatorial rulers resulting in political and economic instability. The Salvadoran Civil War fought in the 1980s left the country economically challenged. It still struggles economically today.
Even though the US dollar prior to last Tuesday was the sole national currency, El Salvador has great difficulty accumulating dollars to pay for strategic commodities, goods and services. The fees collected to transfer dollars in and out of Salvadoran banks can cost up to 20% of the financial transaction. Bitcoin allows for commerce to be conducted outside a federal banking system and therefore achieve the elimination of such banking service fees.
The President of El Salvador is Nayib Bukele. He is a young 40-year-old next generation political leader. Nayib is a self-made millionaire whose first run for office was the presidency. He thinks outside the box. He seeks opportunity and available solutions, regardless of risk or controversy, rather than yield to the futile results of business as usual. Risk can be measured as compared to what is certainty. In this case, doing nothing will only mean many more years of poverty in El Salvador. Therefore, as the only option available, the risk is worth it.
El Salvador is actually in better shape than many other developing countries. Its national currency is the US dollar, not a weak local currency that is untradeable on international monetary markets. Critical commodities like oil or wheat necessary for the support of a local economy must be purchased in dollars. Exchanging local currencies for dollars is another layer of cost to developing countries. If the El Salvadoran bitcoin experiment is successful, many other countries will be tempted to follow suit. The turbulence this could cause in international financial markets is unknown.
The U.S. Congress continues to deficit spend at unprecedented levels. $5.4 trillion has been leveraged into the system within the last 18 months. Congress is now debating a $3.5 trillion additional human infrastructure bill, even though the $5.4 trillion has not yet been spent. Of the $3.5T, only $1.7T is borrowed. This leaves approximately $2T for creative financing that will add fuel to the inflationary fires.
US Senator Joe Manchin of West Virginia is the key Democrat opposed to such reckless spending. This past week on Meet the Press, he asked the simple question: “why the haste?” He pondered, where is the prudence in the planning? We don’t know if all this money is actually needed. Will such programs become addictive rather than rehabilitating? He wisely stated, “I will not vote for a bill that I do not understand and that I cannot explain.â€
Speaker of the House Nancy Pelosi makes no attempt to answer Senator Manchin’s rational questions. Nor does she have any compassion for or apparent knowledge of the inflationary impact on developing countries that must make strategic national purchases in dollars. This developing global financial crises is not minor in scope. Of the 193 countries recognized by the United Nations, 173 are considered developing and in need of financial support. A stable dollar is critical to these developing nations’ economic stability.
If the dollar ever fails as the world’s currency, it will primarily be because the United States abused its power as the manager of its own sovereign currency. All that is necessary for the world’s economic system to stabilize, to hold China’s communistic system at bay, and to allow for developing countries to pursue their own economic success, is for the United States Congress to balance the federal budget. The world does not have to go back on the gold standard. If the United States would just respect the simple principle that you cannot spend and borrow forever, the US dollar would be as good as gold.
There is an old adage that unprecedented times call for unprecedented actions. When the American colonists were asked why they would take such risk to declare independence from the most powerful nation on the planet. Their answer was, “business as usual will end badly.â€ (Thomas Paine’s Common Sense) When the risk presented is the only option available, you take it rather than yield to the futile results of business as usual.
I would not bet against Nayib Bukele.
In this new era of national currencies, why do our elected leaders refuse to recognize sound principles of monetary management? Especially when America has been given the historic gift of global leadership. Each of us as citizens must demand from our elected officials moral monetary policy. National government righteous character promotes free enterprise, allows for free will, and protects every country depending upon America’s leadership for the right to life, liberty and the pursuit of happiness.
The Bible’s words of wisdom are commutable between individuals and nations.
the simple keep going and pay the penalty.
The plans of the diligent lead to profit
as surely as haste leads to poverty.
My name is Marc Nuttle and this is what I believe.
What do you believe?