Power & Market
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.
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.]
Listen to the Audio Mises Wire version of this article.
The attorneys for Betsy Fresse have filed a lawsuit claiming that Starbucks fired her for not wearing a “Pride” shirt while working at her New Jersey store. Fresse, a Christian, believes that marriage is between a man and a woman and that the shirt would go against her Christian convictions. Fresse claims never to have discriminated against customers and there is no mention of her actively proselytizing. She simply refused to wear a particular shirt.
Apparently, Fresse’s manager told her that she did not have to wear the shirt; however, she later received a termination notice. Starbucks denies that the refusal to wear the shirt had anything to do with it. A spokesperson for Starbucks said, “Other than our green apron, no part of our dress code requires partners to wear any approved items that they have not personally selected.”
One of the company’s values is “Creating a culture of warmth and belonging, where everyone is welcome.” In addition, their website states, “We’re committed to upholding a culture where inclusion, diversity, equity and accessibility are valued and respected.” Those who take Fresse’s position would argue that Starbucks is acting hypocritically by not being inclusive of traditional Christian principles.
What is the free market, classical liberal view of this situation? Did Starbucks fire her for not being “progressive” or for holding a “bigoted, old-fashioned” view? Or did they terminate her for something related to job performance?
As I have argued before in a mises.org piece, a private company should have the freedom to determine its own policies—hiring, code of conduct, performance requirements, wages, and dress code. A private company does not owe anyone a job—it is a privilege to be hired. Of course, the government would enforce voluntary contracts, and if there were a breach, then the employee would have a case.
Therefore, even if Starbucks made it a requirement to wear a “Pride” shirt, this would not violate employees’ rights because it is not a right to work for a private company. Fresse’s Christian convictions do not trump the company’s right to determine its own policies. Those supporting Fresse might ask, “If Starbucks did require employees to wear a shirt with a particular message, isn’t that forced speech and a violation of her free speech right to not wear it?” However, the question ignores that Starbucks is a private employer and that only government and public institutions can violate free speech rights.
Just as homeowners have the right to clearly state and specify the rules of speech and behavior of their guests based on whatever criteria they wish, private employers should have that same right. If a guest violates the agreed-upon rules, the homeowner can order a guest to leave. This would not violate the guest’s free speech rights, or any other rights, since homeowners can create and enforce their own rules and it is a privilege, not a right, to be at someone else’s house. The free market view is that one’s business should operate under the same philosophy as one’s own home. Just as the homeowner is free to determine the “house rules,” as ridiculous, restrictive, or offensive as one might think them, a private business should have the same right. Nevertheless, just as the homeowner could face a situation where nobody might want to come over due to his or her particular rules, a business could face the punishment of the market—customers choosing a competitor.
Fresse’s Christian stand probably was the real reason for her termination, as her view does not fit the Starbucks culture. It would not be a surprise if the Seattle-based company’s CEO and executives did not share the traditional Christian view of marriage and sexuality. Of course, this would also mean not supporting the Muslim or Orthodox Jewish or Mormon positions either. However, I suspect Starbucks would tread more lightly if one’s Muslim beliefs were the basis for refusal to wear the shirt.
Advocates of true “free market capitalism,” including those with deeply held religious views, would not call for government regulation of Starbucks’s hiring even if they were upfront about religious discrimination. If Starbucks’s official policy were “We do not hire close-minded people who believe in an outdated view of marriage and sexuality,” this would not justify government sanction under a classical liberal philosophy. Now, if the government—the only entity that can legally use force—compelled companies to discriminate against a particular group or ordered companies to hold particular philosophical positions or forced employees to wear shirts with particular messages those actions would violate individual rights and undermine true free enterprise.
In a true free market, a private company has the freedom to create and enforce its own policies. If a job applicant disagrees with the philosophy or polices of the private employer, they would simply choose not to work there. Of course, nothing is free, including discrimination. Starbucks would risk the loss of business, with customers voting with their dollars somewhere else, and they would potentially lose excellent, highly qualified employees.
Watching as Biden and Trump supporters went at it, I found myself bewildered by what was hardly being discussed, by the dearth of coverage of the serious issues facing us today. Differences between competing visions for the future have never been greater, yet even as Americans process election results, the focus remains nearly entirely on ad hominem arguments. Republicans can’t believe “Sleepy Joe” may have now wrapped it up, while Democrats seem apoplectic “bullying Trump” is fighting back, claiming he threatens the fabric of our democracy while ignoring their own maneuverings years past.
None of this is surprising in our heavily partisan environment. Easier to craft salacious headlines and lob heated charges against a candidate than to enumerate policy differences driving current results, to thoughtfully analyze what brought us to this point. Yet those differences drew many to the polls this November. And it’s ultimately what drew me into checking out Jo Jorgensen. In my mind, policies still count.
Late in the game I began quietly supporting the Libertarian candidate. “Quiet” because I endeavored to remain at peace with friends and family. To speak up often meant feeling anger and scorn. Instead, I kept my mouth shut. Increasingly, however, I’ve been filled with growing repugnance, watching as the disputed election drags on. The principles at stake matter, yet the media gives them short shrift. It’s why, even if libertarians are kept from debates and underreported, going forward I will more openly support their positions and ideas. Democracy itself was once only the germ of an idea into which flesh and blood breathed life.
However far from current policy some of their positions may seem, libertarians offer proposals that honor the agency of every citizen. They are filled with possibility and hope.
As Jorgensen laid out on her website, the War on Drugs has long been racist and destructive. Americans have died in droves. Total deaths far exceed the deaths from covid-19, yet where is the focused plan of attack? We can’t mandate masks for that. And where is real reform of our criminal justice and prison systems? For decades we have seen bluster with little progress. Minority communities in particular continue to be devastated. And forget about serious immigration reform. Beyond the hype, nobody has made more than a dent. Then there’s the devastation of our environment along with our undeniable need for energy. Both major parties play games with environmental claims and data, leading to much distrust. Wind power, for example, looks good on paper, if you only compare it to the pollution from fossil fuels while ignoring its slaughter of birds and the replacement of the blades with short lifespans. Challenging to break down, those fields of gigantic blades don’t decompose. Yet Americans are inventive. By removing governmental barriers to entry, as Jorgensen proposes, small innovators and businesses, where the greatest innovation comes, will once again stand a fighting chance. They can meaningfully compete against corporations who now receive preferential treatment from the federal government.
Perhaps most important for the world of my grandchildren, I’ve been won over by the libertarian idea of neutrality, the belief that we, as a nation, have no business being imperialists. Humanitarian “interventionists,” assisting with aid, certainly. Americans have famously opened up their hearts when global disasters strike. But better to take Jorgensen’s position in my mind, to use Switzerland as our model, neutral and well armed, open to the world for trade and for tourism, while remaining secure in our defense. I have only to look around at our sons and daughters who served our military to see the cost of our decades of arrogance and folly. Our veterans’ brokenness, continually underserved by our government, remains a true national disgrace.
The list of differences I have with the major political parties is a long one, from allowing seizure of private property to regulating love. And while I’m well aware some of these positions can trigger outrage in many, are libertarian ideas really that improbable? Perhaps. In today’s environment, it’s a battle to be sure. But are they impossible to enact? Far from it. Though they are dangerous for those invested in the status quo.
Oscar Wilde once said, “An idea that is not dangerous is unworthy of being called an idea at all.”
In the aftermath of such a tumultuous and painful year in America, maybe it’s time to consider a new path.
There is severe confusion about the meaning of economic growth. Many seem to mistakenly think that it has to do with GDP or producing stuff. It does not. Economic growth means that an economy's ability to satisfy people's wants, whatever they are—that is, to produce well-being—increases.
GDP is a rather terrible way of capturing this using (public) statistics and is corrupted by those benefitting from corrupting such figures. GDP is not growth.
Likewise, having more stuff in stores isn't growth. Producing increasing quantities of stuff that nobody is willing to buy is the very opposite of economic growth: it is wasting our limited productive capacity. But note the word “willing.” Well-being is not about (objective) needs, but about being able to escape felt uneasiness. It can turn out to be right or wrong, but that’s beside the point.
Economic growth is the increased ability to satisfy whatever wants people have, for whatever reasons they may have. Examples of economic growth aren't the newest iPhone or plastic toy made in China as much as it’s the availability of quality housing, food and nourishment, and the ability to treat disease. One obvious example of economic growth since the days of Malthus is the enormous increase in our ability to produce food. The quantity and quality have increased immensely. We use less resources to satisfy more wants—that's the meaning of economic growth.
“Economic” means simply economizing or finding the better use of scarce resources (not only natural ones). Economic growth is thus better economizing. It means that we have the ability, which means we can afford, to satisfy more wants than just the basic needs.
The beautiful thing with economic growth is that it applies to society overall as well as to all individuals: increased productive capacity means more ways of satisfying wants but also cheaper ways of doing so. But this does not, of course, imply that the distribution of access and ability to consume is equal and instantaneous. It spreads in stepwise fashion and will reach everyone.
Increased productivity increases the purchasing power of all money, including (and most importantly) low wages, thus making it much more affordable to satisfy one's needs and wants. But the distribution of such prosperity cannot be equal or instantaneous: any new innovation, new good, new service, etc. will be created somewhere, by someone—it cannot be created for 7 billion plus people instantaneously.
So anything new, including new jobs and new productive abilities, has to spread, as ripples, across the economy. As new things are created all the time, this means that we'll never actually get to a point where everyone enjoys exactly the same standard of living. It cannot be any other way, because economic growth, and the well-being it generates through the ability to satisfy wants, is a process.
Perfect equality is possible only by not having growth: to pull the brakes, not increase well-being. In other words, to not increase convenience and living standards, not figure out how to treat diseases that we would otherwise soon be able to cure. Those are our options, not the fairytale of "equal access to the outcome of growth."
This doesn't mean, of course, that we should be satisfied with inequalities. It only means that we should recognize that some inequality is inescapable if we want everyone to enjoy higher living standards. But we should also recognize that much of the inequality we are seeing today is not of this “natural” kind: it's inequality of political rather than economic origin. This comes in two forms: inherited from privileges enjoyed by a few in the past, reinforced by contemporary political and social structures, and privileges created today through policies creating winners (cronyism, favoritism, rent seeking, etc.).
From the point of view of economic growth as an economic phenomenon, policy-originated inequality has effects on both the creation and distribution of prosperity. First, policy creates winners by (a) protecting some from the competition of new entrants and future winners and (b) restricting (monopolizing) the use of new technologies, thereby propping up incumbents. Second, policy creates losers by redistributing value and economic capabilities to those favored politically. This means that policy has two primary effects on economic growth: it limits the creation of value and distorts its distribution.
Needless to say, this inequality is not beneficial for society overall, but only for those who are favored. It is the creation of winners by creating losers. This is not economic growth, which is accomplished by better economizing—increased ability to satisfy wants.
In a sense, political favoritism and the inequality it causes are the opposite of economic growth, since it creates winners (rich) at the expense of others (generally spread out across a larger population). It's just a redistribution of value already created by introducing inefficiencies into the system: productive capabilities are not allocated based on the creation of well-being but based on political clout. Over time, the economy is actually worse off because of this, so the process of economic growth suffers.
It is important to keep these two “sides” of the inequality coin in mind when discussing the problem. Simply pushing the stop button on economic growth will only accomplish politics’ increased influence over economizing. That's hardly beneficial, at least not for those other than the political class and insiders of the corporatist system. Rather, a solution would be to get rid of politically created and reinforced privilege and allow economic processes to readjust to reality: to target production of well-being instead of favors and influence. This will not do away with inequality as such, but will significantly decrease it and will do away with most of its harmful effects. It would mean an economy where entrepreneurs and workers alike would benefit from producing value for others. In other words, economic growth and higher living standards.
The alternatives are rather easy to understand, yet what's commonly on the agenda of pundits and political commentators is made-up alternatives, often ignorant utopias, that distort the meaning of both privilege and economic growth. The alternatives we have are the ones stated above, nothing else. Make your pick. Striving to realize impossible fairy tales is a waste of time, effort, and resources. That's not how we increase well-being and raise the standard of living. To me, the solution is quite obvious. Most people seem to pick the fairy tale.
[This article is an adaptation of a Twitter thread.]
Inflation, spending, and debt! Apparently, increasing these are the only way to restore normal market functions. Last week, in a speech called Navigating Monetary Policy through the Fog of COVID, Governor Lael Brainard, while explaining how the Fed aims to restore the flow of credit to households and businesses, extolled the virtues of inflationism as a formal policy.
Inflation has receded further below its 2 percent objective….Nonetheless, with inflation coming in below its 2 percent objective for many years, the risk that inflation expectations could drift lower complicates the task of monetary policy.
When central bankers discuss inflation, they speak as if they actively manage it through their intervention. However, another interpretation is: their lives are better when the cost of living is higher while our lives become more unaffordable. If the aim is 2 percent inflation, then by definition anything below 2 percent must be considered too low, therefore, not preferable. Of course, what seems never to be asked is, If 2 percent is good, why isn’t 4 percent twice as good?
Moving on to spending, Brainard noted that various indicators tracked by the Fed suggest:
household spending increased quickly in response to stimulus payments and expanded unemployment insurance benefits.
Much like the cost of living, which apparently should never go down, so too must households continually spend to keep the economy afloat. Just, how much money households should spend is uncertain for those not privy to the Fed’s data. What is clear, due to COVID-19, we still haven’t spent enough.
More revealing, is the link between money creation and spending increases:
Household spending stepped up in mid-April, coinciding with the first disbursement of stimulus payments to households and a ramp-up in the payout of unemployment benefits, and showed the most pronounced increases in the states that received more benefits.
Data suggests more debt for the nation means more spending for Main Street. On the subject of debt, a heightened risk of defaults has been linked to the crisis; yet there seems to have been a debt crisis even before COVID:
As the Federal Reserve Board's May Financial Stability Report highlighted, the nonfinancial business sector started the year with historically elevated levels of debt.
For many years, few policymakers have shown concern that, even in the “boom” before COVID, debt levels were on the rise. But why should the Fed worry considering that the solution to bankruptcy is simple:
It remains vitally important to make our emergency credit facilities as broadly accessible as we can in order to avoid the costly insolvencies of otherwise viable employers and the associated hardship from permanent layoffs.
Insolvencies can be avoided by taking on more debt? Perhaps it is true in the short term, but what about the long-term consequences?
If we combine a 2 percent inflation, perpetual increase in debt-fueled spending, and an overall increase in debt levels, it won’t take long for the USA to become distinctly unrecognizable. Asset prices such as real estate, stocks, and bonds, which remain outside the Fed’s purview, will be exponentially more unaffordable for the masses. As for the national debt, it will continue following the path of the money supply and the Fed’s balance sheet. In effect, everything must only go up! This becomes both sad and ironic, since a perpetual increase in prices and debt inevitably leads to disaster.
In recent weeks, we've been keeping an eye on weekly total deaths as they are reported by the Centers for Disease Control and Prevention (CDC). Weekly deaths—as opposed to COVID-19 death totals—provide some needed context. This is important, since we now know that doctors and health administrators are encouraged to be—in the words of Deborah Birx—"liberal" with counting COVID-19 deaths.
This week I'm looking at week 15 (the week ending April 11). The CDC says that week 16 data is "100% complete" but experience suggests that it will still be a week or two before we have 90 percent or so of the total.
Even week 15 will continue to adjust upward, but large adjustments for week 15 are unlikely at this point.
Looking at the data we do have, there were 65,524 total deaths in the US during the week of April 11. That's up 18 percent (or 10,338 deaths) over the week 15 average (55,186) for 2017–19. Using the average for 2017–19 as the baseline, "excess deaths" number about 10,000 or 0.0031 percent of the US population. Interestingly, no weekly total this year has yet equaled the total mortality for week 2 of 2018, which was a very bad flu year according to the CDC (week 1 is on the left in blue and week 15 is on the right in gray for each year):
Not surprisingly, a large portion of this is coming from New York State. In New York, the week 15 total was 4,156 death, which was 2,129 above the 2017–19 average of 2,027. So, about one-fifth of all excess death in week 15 came from New York. With excess deaths at more than 2,000 for week 15, that means deaths more than doubled the average for that week:
This isn't surprising, since, as we see here, COVID-19 deaths in New York are many times larger per capita than is the case in the rest of the nation. Indeed, as of late April, New York and New Jersey combined accounted for more COVID-19 deaths than all other US states combined. New York's excess deaths during week 15 amount to 0.01 percent of the state's population.
Many other states saw far more modest increases. In Florida, for instance, the data received through May 7 shows that there is still no sign of a New York-like surge for the week of April 11. Total deaths for week 15 of 2020 were 4,214, which was up five percent, or 134 deaths, over the 2017–19 average of 4,010. One hundred thirty-four deaths is 0.00054 percent of the state's population.
In recent weeks, we've been keeping an eye on weekly total deaths as they are reported by the Centers for Disease Control and Prevention (CDC). Weekly deaths—as opposed to COVID-19 death totals—provide some needed context. This is important, since we now know doctors and health administrators are encouraged to be—in the words of Deborah Birx—"liberal" with counting COVID-19 deaths.
This week I'm looking at week 14 (the week ending April 4) deaths for a second time as we wait for some more complete counting for week 15.
The week 14 data, which is now three weeks old, shows that nationwide total deaths were up by 4,512 over the 2017–19 average for week 14. In other words, "excess deaths" in week 14 now total about 0.0013 percent of the US population.
We also know that most of this is coming from the state of New York. New York now reports 3,373 total deaths for week 14. This means that for the week the death total was up by 1,385 over the 2017–19 average of 1,987.
This isn't surprising, since, as we see here, COVID-19 deaths in New York are many times larger per capita than is the case in the rest of the nation. Indeed, New York and New Jersey combined account for more COVID-19 deaths than all other US states combined.
The realm of politics is to coordinate solutions beyond what decentralized actors and organizations can themselves achieve. This is done through the power of the state (coercion). Thus, the scope and use of politics as a means is strictly limited to where it is the better solution for society and its constituents.
This means that the boundary of the proper use of politics and the state is identified by what can (and will) be coordinated through decentralized means. In other words, the boundary of politics is composed by our understanding for the mechanisms behind spontaneous orders and their emergence.
Chief among these is the price mechanism and economic calculation.
In other words, the "other side" of politics, which suggests where and to what extent the powers of the state should and can be used, is economics and, more broadly, economic literacy.
Economic theory explains how markets, the nondirected and unplanned coordination of decentralized efforts, work. Where markets work, and where the market order does not pose a problem that is unsolvable by market actors themselves, there is no reason for politics—other than as prescribed by the minority normative position that coercion is somehow preferred over voluntarism.
There are of course issues involved with defining the exact boundary of the proper realm of politics, and which issues are actual problems.
There is also a problem of "insiders" in the political system having more or less unlimited interest in expanding their sphere of influence (if not power). But the underlying problem, especially in democracies, is widespread economic illiteracy: if we do not (or will not) understand how markets work and how beneficial orders can arise spontaneously out of the actions of self-interested actors, whether individuals or families or businesses, then we undermine, expand, and will even dissolve the boundary of the proper realm for politics.
In other words, to use Franz Oppenheimer's old but insightful dichotomy, we invite the political means (coercion), along with the inefficiency and unproductive (if not destructive) incentive structures, to take over the proper space of the economic means (voluntarism).
That's problematic for all of us, if not for society overall, and poses an ethical problem, since the vast majority does not hold the position that "coercion is preferable to voluntarism."
A problem that can only be solved by learning how markets work, studying sound economics, and gaining economic literacy.
As Mises put it:
Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence. (Human Action)
The social function of economic science consists precisely in developing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks. (Economic Freedom and Interventionism)
Formatted from Twitter @PerBylund
According to new data from the US Bureau of Economic Analysis, the personal saving rate in the US in September 2019 was 8.3 percent. That puts it near a six-year high, and comparable to the saving rate we saw during the early 1990s.
Indeed, the personal saving rate has been heading upward steadily for the past eighteen months. And that's a bit of an unusual thing. For at least the past fifty years, the saving rate has tended to increase when the economy is doing poorly, and decrease when the economy is doing well.
We saw this in the last 1970 and early eighties during the age of stagflation and the 1982 recession. We certainly saw it in the wake of the 2008 financial crisis, when the saving rate quickly rose from a near-low of 3.8 percent in August 2008, more than doubling to 8.2 percent during may of 2009.
But if the BEA's numbers are correct, that pattern appears to be over, and Americans appear to be more willing to save even when job growth continues to head upward.
This change could be a result of several factors. It could be Americans are less confident about their prospects for future earnings, even if the current job situation appears bright. Many could be less confident that the assets they do have will provide a cushion in case of crisis. For example, many Americans may have learned their lesson about the myth that "housing prices always go up."
The fact that these numbers are averages makes it especially hard to guess. After all, surveys suggests a very large numbers of Americans are saving very little.
For example, CNBC reported in January that "Just 40 percent of Americans are able to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, with their savings..."
A separate survey "found that 58 percent of respondents had less than $1,000 saved."
Regardless of who is doing it, however, increased saving can be a good thing for the economy overall. For instance, even if only the rich are the ones saving more, their saving increases the amount of loanable funds, decreasing the interest rate, and making lenders more likely to lend to riskier borrowers. That's good for farmers and small business owners.
Moreover, as the wealthy refrain from spending, they increase the value of cash held and spent by people at all income levels. For example, if the rich are spending less on restaurant meals and pickup trucks, this means the prices for those items are not being bid up as much. When the rich save, that means fewer dollars chasing goods and services, which can lead to more stable, or even falling prices. That can be good for many people at lower income levels.
Nonetheless, many mainstream economists continue to get hung up on the idea that saving "too much" hampers economic growth. For example, in a recent article at the Wall Street Journal titled "Americans Are Saving More, and That Isn’t Necessarily Good" Paul Kiernan writes:
if saving outstrips investment opportunities for a long time, some economists say, it can hold down interest rates, inflation and economic growth. Such “secular stagnation” may leave less room to cut interest rates, making it harder for the Federal Reserve to boost growth during downturns.
“Rather than being a virtue, saving becomes a vice,” said Gauti Eggertsson, an economist at Brown University.
This is an old story we've been hearing for years, and the idea that there is too much saving certainly received its share of promotion during the 2001-2002 recession, and during the 2007-2009 recession.
Economists do recognize that more saving helps increase loanable funds — and thus puts downward pressure on interests rates — and reduces inflation. But more saving does not, as they think, reduce real economic growth.
True, it might reduce economic growth as measured by government stats which mostly just add up money transactions. But properly understood, economic growth increases with saving, because the capital stock is increasing, making it easier for entrepreneurs to deliver new goods and services — and more goods and services — to consumers. As Frank Shostak explains, we need more saving to create more and better goods:
What limits the production growth of goods and services is the introduction of better tools and machinery (i.e., capital goods), which raises worker productivity. Tools and machinery are not readily available; they must be made. In order to make them, people must allocate consumer goods and services that will sustain those individuals engaged in the production of tools and machinery.
This allocation of consumer goods and services is what savings is all about. Note that savings become possible once some individuals have agreed to transfer some of their present goods to individuals that are engaged in the production of tools and machinery. Obviously, they do not transfer these goods for free, but in return for a greater quantity of goods in the future. According to Mises, "Production of goods ready for consumption requires the use of capital goods, that is, of tools and of half-finished material. Capital comes into existence by saving, i.e., temporary abstention from consumption."
The common view among many economists today, however, is that it's better for economic growth to make sure more people spend every last dime on trinkets at the discount store. Those who have been around long enough to remember previous business cycles will remember that this idea manifests itself during times of recession as pundits insist it's our patriotic duty to spend more, in order to create economic growth.
In truth, in a time like today, the best thing people can do is save more. We live in a time of multiple economic bubbles and non-productive sectors of the economy fueled by inflationary monetary policy. When recession finally does come, vast amounts of debt will never get paid back and immense numbers of "assets" held on balance sheets will evaporate. The result will be a lot of lost jobs and a lot of failed businesses. The only real cushion will be real savings which will be badly needed in a time of recession.
Not that QE ever really went away, but the European Central Bank is taking it up a notch with today's rate cut. According to the Wall Street Journal today :
The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases Thursday that lays the ground work for a long period of ultraloose monetary policy, jolting European financial markets and triggering an immediate response from President Trump.
The ECB’s pre-emptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions. It is the ECB’s largest dose of monetary stimulus in 3½ years and a bold finale for departing President Mario Draghi, who looks to be committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years.
But the move triggered opposition from a handful of ECB officials, according to people familiar with the matter, while leaving key practical questions unanswered. Primarily: How long can the ECB keep purchasing bonds without significantly enlarging the pool of assets it can buy? Some analysts estimated it might be less than a year.
Meanwhile, the president attempted to use the move to put additional pressure on the Fed to ratchet up its own QE plans, writing: "European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!"
European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!— Donald J. Trump (@realDonaldTrump) September 12, 2019
Trump, apparently is unconcerned by the effects of negative rates on the banking sector or on family budgets.
For example, the European banking sector has been hit hard by negative rates, as shown by Maurus Adam recently at mises.org:
Low interest rates make credit for private banks — and in turn, for consumers — cheaper. But at the same time, the low return on government bonds makes investment in these long-term options unattractive. Inflation and low return on investment options discourage people from saving and investing capital but encourage spending. Moreover, the low interest rates result in a low return for banks on the credit they grant to consumers. High consumption, low investment, and low profit on all banking activities strongly affects the ability of European banks to compete. Consequently, Markets Insider reports :The extremely low interest rates in the Eurozone hit the bank’s investment branch hard...
The bank has struggled financially amid rock-bottom interest rates in Europe and fierce competition in the German banking industry, limiting its ability to invest and expand in line with US rivals.
And, as reported by Matt Egan at CNN:
Deutsche Bank's struggles have also been amplified by something the 149-year-old lender never imagined, mostly because it had never happened before in modern history: negative interest rates. In 2014, the European Central Bank wanted to boost the sluggish economy but interest rates were already at zero. The unconventional decision to take them into negative territory was aimed at encouraging growth and avoiding deflation, but it meant banks were charged a fee for parking their reserves with the central bank. The ECB's extreme policies may have injected some life into Europe's sleepy economy, in turn giving Deutsche Bank and other lenders a boost. However, negative rates are also crushing the profitability of all banks, Deutsche Bank included. And this unorthodox policy — one that the ECB is on the verge of doubling down on — is making it awfully difficult to revive the champion of Germany's banking system. But rates don't have to be negative to have a negative impact on savers and pensioners. In order to see any meaningful gains from saving in an economy with ultra-low rates, an investor must engage in yield chasing. but that;s much more difficult for ordinary households who don't have the tools of wealthy investors at their disposal - tools that allow for a variety of risky investments that may bring sizable returns. Ordinary people, in contrast, can't gamble their savings in that way, and can't even access hedge funds and other tools designed to seek out returns in an environment with so few opportunities for yield.
Moreover, pension funds that rely on more safe and traditional investments must pursue riskier investments, or do without the sorts of gains they need. That means future retirees will face far fewer returns and a falling standard of living.
None of this concerns the president, apparently, as he now appears to be champing at the bit to get his over version of European style QE.
Just yesterday, he was demanding the Fed cut the federal funds target rate "down to ZERO, or less":
The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet.....— Donald J. Trump (@realDonaldTrump) September 11, 2019
That is, the president apparently believes savers should have to pay to save money, as is potentially the case under a negative-rate regime.
The president might also want to consider the fact that even after a decade of extreme easy-money policies, the European economy is still weak, and the euro zone's growth has slowed to under one percent.
This won't surprise hawks who understand that easy money is not exactly a miracle formula for economic growth. But this fact is seemingly irrelevant to the president who sees monetary policy as little more than a tool to spur exports.
Although the Fed is now expected to cut its own target rate later this month, one can only hope that it keeps to only 25 basis points.
After all, the good news here is that, with a target rate of 2.25 percent, the US's central bank looks relatively sane compared to the ECB and the Bank of Japan, both of which are employing negative rates. The Fed is even clocking in at well above the Bank of England's target rate of 0.75 percent.
So long as the Fed does not significantly increase its own balance sheet and other QE efforts in response to the ECB and other central banks, the dollar will continue to look relatively attractive compared to other currencies. Predictions that the dollar will quickly devalue in relation to other currencies are likely overstated. It is true that larger geopolitical trends, such as de-dollarization efforts among some major world economies , are a threat. But these efforts lie outside run-of-the-mill monetary policy right now which continues to point to a relatively sound dollar.
A summary of the most recently set rates:
- USA: 2.25%
- Canada: 1.75%
- UK: 0.75%
- Australia: 1.0%
- ECB: -0.5%
- Japan: -0.1%
Note: All graphs by Ryan McMaken. Here are the specific key rates discussed here, with links: