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Monetary Policy. Can someone explain how a country plans to implement a monetary policy (e.g. inject new currency during a recession to fund expansion) when th

Monetary Policy. Can someone explain how a country plans to implement a monetary policy (e.g. inject new currency during a recession to fund expansion) when they don’t control their national currency (Bitcoin).

azinman2 5y ago
It seems their monetary policy is remittances. My guess is ppl will quickly cash out to dollars. But how will the dollars get back to the local exchanges unless people are buying bitcoin there? This seems like a disaster in the making.
- toomuchtodo 5y ago
  Indeed, but it’s still a natural experiment to observe.
  - azinman2 5y ago
    On a very poor population where even a 1% swing in valuation can make a huge difference in someone’s life. There’s also no recourse for fraud here — the industry has all kinds of scrupulous players and isn’t as locked down as traditional banking. To me, it seems like El Salvador should have created a MoneyGram competitor and left it at that. They could remove/reduce commission without all the rest of the risks.
    - toomuchtodo 5y ago
      To your point, they could've partnered with TransferWise/Wise.com or OFX to build a white label app that allowed for frictionless remittance and fiat management for their citizens and "wallet management" (ie deposit accounts), and your usual fintech wallet accounts. This would be no different than the UK's Faster Payment's service being a managed service by Vocalink [1]. Some have proposed the US Fed issuing FedAccounts, deposit accounts held at the Fed with no fees, to sidestep inequity and predatory behavior from commercial banks. This would be very similar, except the El Salvador government outsourcing these functions (as they rely primarily on the US dollar as their currency) and the cross border exchange. Onboard citizens using their DUI (Documento Único de Identidad) or Passport number, voilà, they're banked and can store or transfer monetary value. Subsidize physical hardware for those who can't afford a smart phone. Does El Salvador need a blockchain or crypto? No, of course not. They need inexpensive facilitation of domestic financial services and cross border remittance to reduce currency import drag. Instead, inept politicians (for various reasons out of scope for this thread) are going to cause a lot of suffering, but it will be helpful to have a case study to point to in order to demonstrate the nation state policy failure. This is worse than being reliant on another country's monetary policy and central bank. You're tying your economy to a speculative asset with few governance mechanisms. C'est la vie. [1] https://www.vocalink.com/payment-processing/real-time-payments/ https://www.vocalink.com/payment-processing/real-time-paymen...
      - Karrot_Kream 5y ago
        They can still do this. It's not like BTC is the only legal tender here. They still continue to use USD as legal tender.
  - lottin 5y ago
    It isn't exactly natural though.
- thehappypm 5y ago
  My guess is that this will dramatically drop the value of Bitcoin, as has happened many times before when a government tries to introduce a new currency. Scenario: I want to send my mom $1,000. That would cost me $200 with a remittance, but it's only $20 with Bitcoin. Success! I send her the $9980. Now my mom has $9980 equivalent in Bitcoin. So she goes to the store. The local grocery store has to accept Bitcoin, so she buys up stuff. Success! Suddenly the grocery store needs to pay its bills. It pays its suppliers in Bitcoin. Success! The suppliers' suppliers, who are importing many of these goods from abroad, say FUCK NO and don't accept Bitcoin, they need hard cash. Or perhaps the farmers who grow the crops need to purchase fertilizer from abroad, same story. Okay, the suppliers need to convert their Bitcoin to dollars, piece of cake, right? Suddenly there's a problem: Bitcoin is converted to dollars only when dollars are going to be sent out of the country, and suddenly all of those Bitcoin transactions need to be backed up by USD. USD which never flowed into the country in the first place, because I sent BTC and not USD. Suddenly USD is much more scarce than BTC. That sinks the exchange rate.
dmichulke 5y ago
What if I told you that injecting currency not only "helps" in a recession but also causes the next recession? Or so Austrian economic theory goes. Similarly, there is not really a reason that interest rates should be fixed by a central banks. Markets can do that as well.
0x000000001 5y ago
> inject new currency during a recession to fund expansion that's a relatively new concept that hasn't exactly worked out so well for anyone that's ever done it
stickfigure 5y ago
El Salvador already does not control its own currency; it has been using USD since 2001. Adding BTC doesn't change anything in that regard. BTW Panama has been on USD since 1903.
- Ancapistani 5y ago
  > Adding BTC doesn't change anything in that regard. I’d argue that while it remains outside their control, it does change things substantially. USD has effective tools to impact monetary policy; using USD puts El Salvador at the mercy of the US. Bitcoin does NOT have effective tools to impact monetary policy - that’s part of the reason for its existence. That puts El Salvador at the mercy of the Bitcoin network as a whole. Moving from USD to BTC would be equivalent to saying “it’s better to have no monetary policy than to have a monetary policy controlled by the US”. That’s not what they’re doing here - they’re adding BTC as an option. Doing that means that they have the ability to react (relatively) quickly if they ever reach the point where they no longer trust the US to perform that function.
otoburb 5y ago
El Salvador might be ahead of the curve here on learning to deal with (a lack of) control over their monetary policy in this situation because prior to the addition of this second legal tender the country was already fully dollarized[1]. They switched from the Salvadoran colón to the US Dollar in 2001[2]. [1] https://en.wikipedia.org/wiki/Currency_substitution https://en.wikipedia.org/wiki/Currency_substitution [2] https://en.wikipedia.org/wiki/Salvadoran_col%C3%B3n https://en.wikipedia.org/wiki/Salvadoran_col%C3%B3n
99_00 5y ago
Ability to implement monetary policy comes from monetary sovereignty. Monetary sovereignty is a spectrum, with countries having high degrees of MS and low degrees of MS. Since El Salvador pegs its currency to the US dollar it has a low degree of monetary sovereignty. Having a low degree of monetary sovereignty is the reason countries like Greece ran into so much trouble after the 2008 financial crisis. Greece doesn't control its currency. Where as the US does and it did much better.
- el-salvador 5y ago
  Our currency is the USD. The former local currency only exists in collectors hands or old laws.
  - 99_00 5y ago
    Thanks for the correction. Do you know how remittances to El Salvador work in practice? Do people use regulated money transfer services (Western Union) or do they use informal trust based money transfer services? https://en.wikipedia.org/wiki/Informal_value_transfer_system https://en.wikipedia.org/wiki/Informal_value_transfer_system
lawn 5y ago
Plenty of countries already don't control their own currency.

azinman2 5y ago

It seems their monetary policy is remittances. My guess is ppl will quickly cash out to dollars. But how will the dollars get back to the local exchanges unless people are buying bitcoin there? This seems like a disaster in the making.

toomuchtodo 5y ago
Indeed, but it’s still a natural experiment to observe.
- azinman2 5y ago
  On a very poor population where even a 1% swing in valuation can make a huge difference in someone’s life. There’s also no recourse for fraud here — the industry has all kinds of scrupulous players and isn’t as locked down as traditional banking. To me, it seems like El Salvador should have created a MoneyGram competitor and left it at that. They could remove/reduce commission without all the rest of the risks.
  - toomuchtodo 5y ago
    To your point, they could've partnered with TransferWise/Wise.com or OFX to build a white label app that allowed for frictionless remittance and fiat management for their citizens and "wallet management" (ie deposit accounts), and your usual fintech wallet accounts. This would be no different than the UK's Faster Payment's service being a managed service by Vocalink [1]. Some have proposed the US Fed issuing FedAccounts, deposit accounts held at the Fed with no fees, to sidestep inequity and predatory behavior from commercial banks. This would be very similar, except the El Salvador government outsourcing these functions (as they rely primarily on the US dollar as their currency) and the cross border exchange. Onboard citizens using their DUI (Documento Único de Identidad) or Passport number, voilà, they're banked and can store or transfer monetary value. Subsidize physical hardware for those who can't afford a smart phone. Does El Salvador need a blockchain or crypto? No, of course not. They need inexpensive facilitation of domestic financial services and cross border remittance to reduce currency import drag. Instead, inept politicians (for various reasons out of scope for this thread) are going to cause a lot of suffering, but it will be helpful to have a case study to point to in order to demonstrate the nation state policy failure. This is worse than being reliant on another country's monetary policy and central bank. You're tying your economy to a speculative asset with few governance mechanisms. C'est la vie. [1] https://www.vocalink.com/payment-processing/real-time-payments/ https://www.vocalink.com/payment-processing/real-time-paymen...
    - Karrot_Kream 5y ago
      They can still do this. It's not like BTC is the only legal tender here. They still continue to use USD as legal tender.
- lottin 5y ago
  It isn't exactly natural though.
thehappypm 5y ago
My guess is that this will dramatically drop the value of Bitcoin, as has happened many times before when a government tries to introduce a new currency. Scenario: I want to send my mom $1,000. That would cost me $200 with a remittance, but it's only $20 with Bitcoin. Success! I send her the $9980. Now my mom has $9980 equivalent in Bitcoin. So she goes to the store. The local grocery store has to accept Bitcoin, so she buys up stuff. Success! Suddenly the grocery store needs to pay its bills. It pays its suppliers in Bitcoin. Success! The suppliers' suppliers, who are importing many of these goods from abroad, say FUCK NO and don't accept Bitcoin, they need hard cash. Or perhaps the farmers who grow the crops need to purchase fertilizer from abroad, same story. Okay, the suppliers need to convert their Bitcoin to dollars, piece of cake, right? Suddenly there's a problem: Bitcoin is converted to dollars only when dollars are going to be sent out of the country, and suddenly all of those Bitcoin transactions need to be backed up by USD. USD which never flowed into the country in the first place, because I sent BTC and not USD. Suddenly USD is much more scarce than BTC. That sinks the exchange rate.

dmichulke 5y ago

What if I told you that injecting currency not only "helps" in a recession but also causes the next recession? Or so Austrian economic theory goes. Similarly, there is not really a reason that interest rates should be fixed by a central banks. Markets can do that as well.

0x000000001 5y ago

> inject new currency during a recession to fund expansion that's a relatively new concept that hasn't exactly worked out so well for anyone that's ever done it

stickfigure 5y ago

El Salvador already does not control its own currency; it has been using USD since 2001. Adding BTC doesn't change anything in that regard. BTW Panama has been on USD since 1903.

Ancapistani 5y ago
> Adding BTC doesn't change anything in that regard. I’d argue that while it remains outside their control, it does change things substantially. USD has effective tools to impact monetary policy; using USD puts El Salvador at the mercy of the US. Bitcoin does NOT have effective tools to impact monetary policy - that’s part of the reason for its existence. That puts El Salvador at the mercy of the Bitcoin network as a whole. Moving from USD to BTC would be equivalent to saying “it’s better to have no monetary policy than to have a monetary policy controlled by the US”. That’s not what they’re doing here - they’re adding BTC as an option. Doing that means that they have the ability to react (relatively) quickly if they ever reach the point where they no longer trust the US to perform that function.

otoburb 5y ago

El Salvador might be ahead of the curve here on learning to deal with (a lack of) control over their monetary policy in this situation because prior to the addition of this second legal tender the country was already fully dollarized[1]. They switched from the Salvadoran colón to the US Dollar in 2001[2]. [1] https://en.wikipedia.org/wiki/Currency_substitution https://en.wikipedia.org/wiki/Currency_substitution [2] https://en.wikipedia.org/wiki/Salvadoran_col%C3%B3n https://en.wikipedia.org/wiki/Salvadoran_col%C3%B3n

99_00 5y ago

Ability to implement monetary policy comes from monetary sovereignty. Monetary sovereignty is a spectrum, with countries having high degrees of MS and low degrees of MS. Since El Salvador pegs its currency to the US dollar it has a low degree of monetary sovereignty. Having a low degree of monetary sovereignty is the reason countries like Greece ran into so much trouble after the 2008 financial crisis. Greece doesn't control its currency. Where as the US does and it did much better.

el-salvador 5y ago
Our currency is the USD. The former local currency only exists in collectors hands or old laws.
- 99_00 5y ago
  Thanks for the correction. Do you know how remittances to El Salvador work in practice? Do people use regulated money transfer services (Western Union) or do they use informal trust based money transfer services? https://en.wikipedia.org/wiki/Informal_value_transfer_system https://en.wikipedia.org/wiki/Informal_value_transfer_system

lawn 5y ago

Plenty of countries already don't control their own currency.