El Salvador and bitcoin

El Salvador recently announced that it will accept bitcoin as well as the US dollar as legal tender in that country.

I initially read saw this move through a traditional post-WWII developing economy lens. The strategy, perfected by Japan and subsequently imitated around the world, was to make its primary economic tool a peg of the local currency to the US dollar–and leave everything else to fall out as it may. This move ensured that the export-oriented industries a country pinned its hopes to would not be undermined by currency movements. It also robbed local politicians of the ability to manufacture inflation to paper over operating problems powerful local industrial interests might have. At the same time, however, the peg tended to also usher in a period of general economic austerity–which could be blamed on Washington rather than past mistakes by the local government.

Over more than a half-century this strategy worked spectacularly well in Asia. Not so much in Latin America, though. There, governments have almost always, it seems to me, succumbed to pressure from powerful local interests hurt by economic transition to abandon the dollar peg before tangible positive results could be seen.

..which brings us to El Salvador, about which I’m far from being an expert.

My reading has been that El Salvador has begun to sour on the US dollar and has therefore turned to cryptocurrency as an alternate source of stability. El Salvador wouldn’t be alone in doing so. The Nikkei recently described how Trump’s attempt at violent overthrow of the government, and the continuing large-scale Republican support in Congress of this effort, have deeply shaken foreign confidence in the safety of US Treasury securities. To me, foreigners’ worries seem less about revolution itself than about the economic illiterate who would then be in charge. Their view appears close to what’s expressed in a recent Deadspin article about how Trump destroyed the XFL.

One of my sons has pointed out to me that this may be far too old-school. I may be overthinking the whole thing. One key aspect of El Salvador’s move is that in that country bitcoin is no longer an investment asset subject to capital gains tax. So the decision may have a much simpler motive. El Salvador may just want to become a tax haven for crypto firms.

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