El Salvador’s move to classify bitcoin as legal currency has the potential to completely collapse its economy, Steve Hanke, professor of applied economics at Johns Hopkins University, said in a Kitco News interview on Tuesday.
After describing President Nayib Bukele and members of government who voted to pass the bitcoin law as “stupid,” Hanke raised doubts about whether the cryptocurrency could work smoothly for everyday use in a country where most citizens don’t have bank accounts.
The economist, who served on former President Ronald Reagan’s council of economic advisers in the 1980s, suggested criminal interests may have helped bring about the Latin American nation’s adoption of cryptocurrency.
“The criminal element wants to be able to get in and actually obtain real legal greenbacks,” he said. “They want greenbacks. And greenbacks are, in fact, the legal tender and money in El Salvador.”
Hanke predicted bitcoin holders in Russia or China would exploit El Salvador’s citizens to cash out their holdings, ultimately draining the country of US dollars.
“It has the potential to completely collapse the economy, because all the dollars in El Salvador could be vacuumed up and there’ll be no money in the country,” he said. “They don’t have a domestic currency.”
Governments and central banks around the world will be watching El Salvador’s experiment to see whether bitcoin becomes part of daily life for payments and remittances.
But Hanke called the idea crazy, saying the digital asset will need to be converted to US dollars to be used anywhere. “You’re not going to pay for your taxi ride with a bitcoin, it’s ridiculous,” he said.
“If grandma is down in El Salvador waiting for her remittances, and you want to send it with bitcoin, that’s fine. What does she do? She has to go to the ATM to get dollars, because that’s the only way you can buy something,” Hanke said.
The unemployment rate is falling, but nearly 10 million Americans who lost their jobs to the pandemic remain unemployed. A speedy vaccine rollout promises to reopen many sectors of the economy, but the national debt is on the rise. School and daycare closures have hit mothers, especially Black and Latinx ones, hard – but a new child tax credit promises to lift millions of families out of poverty.
As yet another stimulus package leaves the Oval Office with a signature – and the IRS sends an unprecedented third stimulus check to many Americans – one could be forgiven for wondering what to make of it all.
So we asked Jan Eberly, a professor of finance at Kellogg and senior associate dean of strategy and academics, for her take. The last time the US was pulling itself out of a recession – the Great Recession – Eberly was assistant secretary and chief economist at the Treasury. The experience gave her a clear view of the power and challenges of using public policy to restore jobs, incomes, and the broader economy.
Eberly explained that there is plenty that policymakers are doing to encourage a quick recovery. But it is important to understand just how different this crisis is from other economic crises.
“We can address what is happening in the economy,” she said. “But the underlying issue is the pandemic. Fundamentally, this is a public health shock and that must be first and foremost in the recovery.”
Here, Eberly offers her take on this strange, new pandemic economy.
Job losses have been stark but uneven
Prior to March 2020, the US economy was humming nicely, and weekly unemployment claims numbered just a few hundred thousand. Then, the coronavirus hit, and seven million jobs were lost seemingly overnight. Over March and April, losses climbed to 22 million.
New unemployment claims have since come down. “But there are still nearly 10 million people who have not returned to their jobs nor found a new job in the pandemic economy,” said Eberly, “which is more people than were unemployed at the height of the Great Recession.”
Moreover, she explained, job losses were not spread evenly over the economy. Unlike in previous downturns, where people pressed “pause” on purchasing durable goods like cars or furniture, two-thirds of the decline in consumer spending this time was on services. In particular, it’s the in-person services – restaurants, hotels, airlines, barbers – that have been absolutely clobbered. And because of the low wages associated with most in-person services work – as well as the overrepresentation of Black, Latinx, and women workers in these industries – the pandemic has been absolutely devastating for those already struggling economically. Women were also disproportionately impacted by school closures and the loss of childcare.
Given that the pandemic’s effect on the economy has not been equally shared, policymakers needed to focus not so much on “stimulus” as on “insurance,” said Eberly. After all, the map of the pandemic economy is so unusual that using traditional stimulus can even be counterproductive if it channels support to parts of the economy that are already spared or even thriving in a remote environment.
Instead, “it’s more like FEMA and emergency relief: effectively, a hurricane hit the economy, and you try to target policy on the people and parts of the economy that are most affected,” said Eberly. “But targeting is hard to do at the scale of the US, especially when the ways in which the pandemic hit are different than in the past. So policymakers have had to innovate or try to use existing programs in novel ways.”
The relief provided has been targeted
How have policymakers been targeting their efforts – and to what effect?
Most prominently, there was expanded unemployment insurance, which was of course targeted to precisely those individuals who had lost their jobs. The expansion boosted the size of the unemployment checks, how long they could be collected, and – for the first time – even who was eligible in the first place.
The pandemic was a “wake up to reaching the gig economy!” Eberly said. “The expanded unemployment insurance was also available to people who didn’t have formal employment. It was really a transformation in availability of unemployment insurance.”
Another targeted policy: the foreclosure and eviction moratoria, which protect homeowners and renters who have been directly affected by the pandemic. During the Great Recession, the housing market was at the epicenter of the financial crisis; during the pandemic economy, fueled by low interest rates and different living needs, housing has proven to be a relative strength. Still, that is cold comfort for the many individuals who have lost their jobs and might otherwise lose their homes.
In Eberly’s view, there is reason for cautious optimism that the moratoria are doing exactly what they are intended to do.
“The early research on this says that we’re not seeing people losing their homes – that they own or that they rent – as we did during the financial crisis,” she said. However, as the moratoria end, there is a lingering question of whether and how the accumulated arrears will be paid, and how renters, borrowers, and also smaller landlords will fare as the bills come due.
In addition, each of the three rounds of the stimulus relief checks have had income restrictions, which target them to individuals who earned less than either $100,000 or $80,000 (depending on the round) but provide broad support.
There have also been multiple rounds of funding to the Paycheck Protection Program (PPP), which was intended to support smaller businesses than those that usually benefit from broad credit relief. In Eberly’s view, this is a case where a potentially innovative program was hampered by the lack of existing connections to quickly target funds to those most in need.
With this latest round of stimulus relief, state and local funding is finally getting a boost. Earlier relief packages danced around the issue, assisting badly battered states and cities by providing funds for schools, vaccines, testing, and food assistance. But this time, money is going straight to state and city coffers. “Three hundred fifty billion for state and local governments that have been hit hard by the pandemic is what states and cities were asking for,” Eberly said. The funds “give them more flexibility to buttress programs and needs that arose during the pandemic, especially after the exhaustion of their rainy-day funds.”
Finally, and perhaps most surprisingly, the latest round of stimulus also provides targeted relief to families with children in the form of an enhanced child tax credit. For all but the highest earning families, the credit will be increased to $3,600 for kids under six, and $3,000 for kids under 18 – and critically, it will be refundable and paid out throughout the year, meaning that families who don’t ordinarily earn enough to benefit will still receive periodic checks for the full amount. Some estimates suggest that the benefit could lift 40% of children out of poverty.
“The group in the US most exposed to poverty is children,” Eberly said. “The credit is helping families with children who were especially vulnerable during the pandemic because they were vulnerable already.”
This could be transformational. If this credit is extended to subsequent years, she said, “it could reduce childhood poverty and distress for those who need it most – and where the benefits could change lives.”
What will be the long-term impact?
It is too soon to know whether economic changes, like work-from-home, and policy changes, like targeted fiscal support, will last. But the pandemic has forced action and innovation. The first CARES Act was passed in record time and provided crucial initial support. When the pandemic outlasted that first effort, policymakers came back with targeted support plus some broad measures intended to bridge the economy through a tough winter and on to post-COVID.
Eberly is optimistic that these measures will act as that bridge. Some sectors of the economy have already bounced back or are poised for a quick recovery. After all, many individuals who have remained employed throughout the pandemic have extra money in their pockets and will want to spend it. Savings are at record highs and some spending categories are already strong.
“As the underlying public health crisis recedes, some parts of the economy will come back energetically. People will be able to get out and travel and live their lives with more confidence,” Eberly said.
Still, she worries that other parts of the economy will be far slower to recover, and that many workers who have been the hardest hit will continue to struggle. One particular concern as the pandemic drags on is that, once individuals have been out of the labor force for a long time, it gets harder and harder to return. “When people talk about the ‘scarring’ of the economy, it’s usually around long-term unemployment,” Eberly said. This is especially true for groups that had higher unemployment rates to begin with and were just getting more economic traction pre-pandemic.
Small businesses, long shuttered, could run into similar problems as they try to reopen. And while new businesses will eventually step in to fill the gap, that all takes time. “We will see some good headlines, I hope. I’m optimistic about that,” she said. “But it won’t lift everyone simultaneously.”
What is Eberly not particularly concerned about at this time? The accumulated debt, which is paying for all of this relief. There is near unanimous consensus among economists that the national debt is large, and quickly growing larger. And there is concern that it may constrain our ability to act so aggressively in the future. But “the best thing we can do for future fiscal stimulus is to get the economy back on its feet,” she said. “Right now, there is a necessary focus on recovery. And with interest rates low, there is some breathing room to invest in a stronger, more resilient economy.”
Above all, Eberly hopes that the extraordinary moment will convince Americans that thoughtful, competently executed, and well-targeted government policies can go a long way toward building an economy that works for everyone. Amid the missed opportunities and unimaginable losses, there also came innovation and a deep commitment to help provide relief.
“If what people and policymakers learn is that governments can help – to intervene effectively to provide relief from a once-in-a-generation pandemic – that would be a success of policy,” she said.
Joe Biden’s presidency can expect to go through civil unrest and cyberattacks, “Dr. Doom” economist Nouriel Roubini told German magazine Der Spiegel on Friday.
Biden’s term will face more armed uprisings, especially from white nationalists, mainly to provoke the left-wing, the economist said in an interview with Tim Bartz.
According to Roubini, who is famous for his pessimism, Russia and China will launch cyberattacks against the US and circulate false information.
“That will shape the next four years,” he said, according to a transcript translated from German.
But in the short-term, the American economist is more worried that President Trump could strike an attack on Iran’s key nuclear site in Natanz – the only uranium enrichment plant in the country that’s allowed to operate under the nuclear deal.
Trump’s administration has engaged in aggressive foreign policy against Iran throughout his term and imposed a number of sanctions on a number of Iranian targets.
Biden, who will succeed Trump on Wednesday, has declared to return to the 2015 nuclear pact as long as Iran resumes strict compliance with it, according to Reuters.
Trump could execute military action against Iran’s key nuclear site to present himself as powerful to his supporters and make life more difficult for Biden, according to Roubini.
The economist also called for tighter regulation on Big Tech platforms, such as Facebook and Twitter, because of their power. Since antitrust rules are devised for traditional monopolies, separate rules should govern social-media companies that have distinct structures, he said.