Under Fire 

Doug Nolan


The week had an ominous feel. 

Ten-year Treasury yields dropped another seven bps to 1.29% - completely disregarding much stronger-than-expected reports on consumer and producer prices. 

German bund yields fell another six bps to a three-month low negative 0.35%. 

Equities were down for the week in Europe, but the notable equities weakness was posted by the broader U.S. market. 

The Midcaps dropped 3.3%, and the small cap Russell 2000 sank 5.1%. 

Risk aversion typically leaves its initial mark at the “Periphery.” 

Treasury market notwithstanding, inflation has become a problem in more ways than one. 

Consumer Prices (CPI) jumped 0.9% in June, versus expectations of a 0.5% increase. 

Year-over-year CPI was up 5.4% (expectations 4.9%), the strongest jump since 2008. 

And for analysts with issues with year-over-year “base-effects”, consumer inflation was up 3.3% in only five months. 

Core CPI also gained 0.9% for the month, with a 4.5% y-o-y increase. 

Producer Prices rose a data series record 7.3% y-o-y. 

Import Prices jumped 1% for the month and 11.2% y-o-y. 

University of Michigan one-year Inflation Expectations rose to 4.8%, the high since the summer of 2008. Also, at 4.8%, the New York Fed’s survey of one-year inflation expectations jumped to the highest level in data back to 2013.

To this point, inflation has not been an issue for the markets. 

It has become a problem for millions of Americans. 

For the institution of the Federal Reserve, it’s a metastasizing malignancy. 

I understand why each Fed official sticks tightly with the party line “inflation will be transitory.” 

They don’t want to rattle the markets with thoughts of a traditional tightening cycle. 

And I think I understand why they adopted their framework aiming for a period of above target inflation – and why they swore off responding to incipient inflationary pressures. 

Again, they sought to retain flexibility to remain highly accommodative monetary policy, ensuring financial conditions would remain exceptionally loose (and markets high).

Now they’re in a pickle. 

Things are not proceeding according to plan, and many, including Washington politicians, have serious issues and questions. 

For starters, what does the Fed mean by transitory? 

When would heightened inflationary pressures move beyond transitory? 

And, regarding the new inflation framework, how much beyond target would be too much? 

And for how long? 

The Fed does not have answers for some pretty fundamental questions.

Our central bank is trudging into a mine field. 

I’m concerned about climate change, inequality and racial injustice. 

But those are not within the Fed’s purview. 

The Federal Reserve has an incredibly important role in our society – to maintain sound money and price stability. 

It’s an exceptionally challenging responsibility. 

It’s no exaggeration to suggest the consequences of failure are calamity. 

The world was in the throes of momentous change, while finance was evolving. 

They needed to be razor fixated on financial stability, but lost their focus. 

Once our “activist” central bank ventured into bolstering the securities markets and using unconventional measures to reflate the economy, it was going to be extremely difficult to refrain from venturing into all types of measures to support various groups and causes. 

Add QE to the toolkit, and it will become virtually impossible not to be compelled to allocating Fed money to satisfy political interests. 

After buying Trillions of Treasuries, supporting markets in MBS, muni bonds, corporate debt, ETFs and stocks was going to be inescapable.

The Fed basically risked everything. 

They thought the changing world meant no more worries of surging inflation and actual tightening measures. 

Keeping the markets elevated became their unstated priority. 

They’re now on the wrong side of a losing bet, a predicament that became increasingly clear this week with Chair Powell’s beltway testimony. 

The Fed, understandably, is Under Fire for surging inflation. 

The institution and its beloved QE have also ensured it today sits right in the middle of an epic political battle. 

Fiscal conservatism has awakened from a prolonged deep coma. 

The Republicans have a cause that will increasingly resonate. 

They see Fed QE financing the liberal agenda. 

Inflation provides the Republicans with additional impetus to confront Federal Reserve policies and doctrine. 

The Fed risked their credibility and independence. 

One can see their credibility erode in real time. 

Before this is over, their institutional independence will also be in tatters. 

This is especially distressing considering the collapsing trust in many of our principal institutions. 

For posterity…

Pennsylvania Senator Pat Toomey: 

“The Fed's policy is especially troubling because the warning siren for problematic inflation is getting louder. 

Inflation is here, and it’s more severe than most, including the Fed itself, expected. 

And it is more than offsetting the wage gains, so leaving workers worse off despite their nominal wage increases.

For the third month in a row, the Consumer Price Index was higher than expectations. 

Core CPI… was up 4.5% in June; the highest reading in almost 30 years. 

And to be clear, this is beyond the so-called base effects. 

The two-year change in Core CPI was at a 25-year-high. 

And with housing prices absolutely soaring in many places to completely unaffordable levels, I have to ask why on Earth is the Fed still buying $40 billion in mortgage-backed bonds each month? 

Now, the Fed assures us that this inflation is transitory, but its inflation projections over the last year have not inspired confidence. 

Last June, the Fed projected that PCE… would be 1.6% for the 12 months ending 2021. 

Then in the December the Fed raised that figure up to 1.8%. 

And how the Fed's most recent PCE forecast for 2021 year-end is 3.4%, more than double what the Fed thought inflation would be a year ago… 

I'm very concerned that the Fed's current paradigm almost guarantees that it will be behind the curve in inflation does become problematic and persistent, for several reasons.

First..., the Fed has consistently and systematically underestimated inflation over the last year. 

Second, the Fed has announced it will allow inflation to run above its 2% target level. 

Well, it’s already well above 2%. 

And third, the Fed insists that the inflation we’re experiencing now is transitory, despite the fact that recent unprecedented monetary accommodation has certainly driven the inflation that we’re witnessing. 

And since the Fed has proven unable to forecast the level of inflation, why should we be confident that the Fed can forecast the duration of inflation…?”

The Fed's current monetary approach seems based on the premise that it needs to prioritize maximum employment over price stability… 

And when the Fed subordinates its price stability mandate to try to maximize employment, the Fed runs the risk of failing on both fronts because you need stable prices in order to achieve a strong economy and maximize employment.

Lastly, I just want to acknowledge the unique and crucial role played by the Fed in our economy, and some of the responsibilities that attend to that. 

The ability to direct interest rates and control the money supply is of course an extraordinary power, and Congress has given the Fed a great deal of operational independence in order to isolate it from political interference. 

But Congress also gave the Fed a narrowly defined mission. 

I am troubled by the Fed… misusing this independence to wade into politically charged areas like global warming and racial justice. 

I'd suggest that instead of opining on issues that are clearly beyond the Fed's mission and expertise, it should focus on an issue that clearly is its mandate, controlling inflation. 

If it doesn't, the Fed will find that its credibility and independence may also have turned out to be transitory…

Let me turn to housing prices a bit. 

The Case-Shiller Home Price Index showed housing prices across the U.S. as a whole increased in May by more than 15% from the previous year… 

Fifteen percent, clearly, is making housing less affordable, more out of reach for more people. 

So, a number of voices within the Fed seem to be increasingly concerned about this. 

The St. Louis Fed president, James Bullard, said just this week that he is… ‘a little bit concerned that we’re feeding into an incipient housing bubble…’ Dallas Fed President Robert Kaplan said that the Fed should begin tapering to begin offsetting ‘some of these excesses and imbalances’… 

The Boston Fed president, Eric Rosengren, raised alarms that the Fed's mortgage-backed security purchases may be contributing to the current boom in real estate prices, citing the potential financial stability implications… 

I’ve been clear for a long time I’ve been very skeptical about the ongoing mortgage-backed purchases. 

Are you at all concerned about the unintended consequences that are associated with $40 billion worth of mortgage-backed security purchases that continue month after month?”

Chair Powell: 

“So, housing prices are going up, as you mentioned, around 15%. 

This is a very high rate of increase. 

A number of factors are contributing. 

Monetary policy is certainly one of those factors. 

There are also other factors. 

People have very strong balance sheets that they’re able to make down payments. 

There are also supply factors that are constraining the supply, at least temporarily.”

South Dakota Senator Mike Round: 

“I understand that clearly you’ve made it your mission to adhere to the guidance for the Fed, in which you work to maintaining 2% inflation over a period of time, as well as full employment. 

And when we talk about it, it’s always a combination of which one you’re more focused on and how you maintain that, while at the same time responding appropriately in a nonpolitical way to the actions of Congress and the administration.

I'm just curious, with regard to today’s position, we’re coming out of a pandemic. 

We’ve put a lot of fuel into the economy with direct payments and so forth, and people are trying to get back to work right now. 

And yet we’ve got inflation, which right now in this current state seems to be above a 2% rate. 

Can you talk a little bit about the measurement time period that you believe is appropriate for shooting for a 2% goal, and if there is a concern that you would express or that you follow-up with when we talk about overinflating or perhaps putting fuel in.

What concerns you would have and how you would respond to congressional activity?”

Powell: 

“So, the inflation that we have today, what we’ve said is that if inflation runs below 2% for an extended period, we want inflation to run moderately above 2% for some time. 

This is not moderately above 2%, by any stretch. 

This is well above 2%, and we understand that. 

And it’s also not tied to the things that inflation is usually tied to, which is a tight labor market, a tight economy, that kind of thing. 

This is a shock going through the system associated with reopening of the economy, and it’s driven inflation well above 2%, and, of course, we’re not comfortable with that. 

In terms of the test that we articulate, we said we wanted inflation to average 2% over time. 

We didn’t tie ourselves to a formula. 

What we really want is inflation expectations to be anchored at 2%, because if they’re not, there’s not much reason to think that inflation will average 2%. 

So that’s really how we're thinking about it.

But the challenge we’re confronting is how to react to this inflation which is larger than we had expected, or that anybody had expected. 

And to the extent it is temporary, then it wouldn’t be appropriate to react to it. 

But to the extent it gets longer and longer, we’ll have to continue to reevaluate the risks that it would affect inflation expectations and will be of a longer duration. 

And that’s what we’re monitoring.”

Tennessee Senator Bill Hagerty: 

“Chairman Powell, this environment suggests to me that the emergency posture that I understand the Fed adopted back during the depths of the pandemic seriously needs to be reconsidered right now, and I’m very worried that the Fed’s continued level of asset purchases and balance sheet expansion is facilitating this runaway spending that the Democrats are imposing upon us, and adding to the inflationary pressures that these trillions of additional dollars are going to continue to add to our economy and continue to add to the debt that our children are going to continue to bear, and it’s amazing to me that not one Democrat in Congress is willing to speak out about this. 

So, Chairman Powell, why is the Fed maintaining its emergency monetary policy posture right now? 

And why do I understand that it may continue well into 2023?”

Powell: 

“We’re watching the evolution of the economy. 

We are noting that there’s still an elevated level of unemployment. 

We note that inflation is well above target, and we’ve discussed that. 

And we’ve said that we would begin to reduce our asset purchases when we feel that the economy has achieved substantial further progress measured from last December, so we’re in active consideration of that now. 

We had a full meeting last month to discuss that. 

We’ve got another meeting coming up in two weeks. 

So, we’ll be making that assessment, and as we assess the progress of the economy toward that goal, we will begin to reduce our asset purchases. 

We’ve set a separate test for raising interest rates, which is a higher test. 

And so that’s how we’re thinking about this today.”

North Carolina Senator Thom Tillis: 

“I’ve got to beat the inflation drum for just a minute here. 

The FOMC members insist inflation is transitory but it hasn’t inspired a lot of confidence in me. 

There were a couple of statements by President Mary Daly: In February, she declared ‘the pressures on inflation now are downward.’ 

In May, when inflation readings were at 3.9%, she said ‘the higher inflation readings would mean 2.4% to 2.6%.’ 

In June, she was predicting that inflation ‘could go above 3%.’ 

And despite months of relatively lowball projections, in response to Tuesday's high inflation readings, she confidently declared ‘we expect a pop in inflation like this.’ 

So I hope, from our perspective, you could see that we’re skeptical about some of the inflation projections. 

And I’ve spoken with a number of people in financial services industry, and when I ask them the question about transitory, I’m getting more of a response of ‘transitoryish’. 

So, can you give me a reason why you believe the Fed’s position on it being transitory, that it will snap back, why that’s still well-founded?”

Powell: 

“So let me start by saying that no one has any experience of what it is to reopen the economy after what we went through. 

And, so all of us are going to have to be guided by data and our views are going to have to be...”

Tillis: 

“Let me interrupt you for a second. I’d also like for you to answer that question in the context of the flow of money that’s been passed in the prior COVID relief packages. 

And we heard an announcement this week from the Speaker of the House and Senator Schumer that they have an agreement on another $3.5 trillion. 

I’m a part of a working group for infrastructure that could add about another $600 billion. 

So, answer the question in the context of how that future… 

How does that all fit into the credibility of future inflation projections?”

Powell: 

“So when we look at inflation, we look in the basket of things and we say ‘which of the hundred-plus things in the CPI basket are causing the inflation -- high inflation reasoning?’ 

And it comes down to really a handful of things, all of which are tied to the reopening – it’s used, rented and new cars, it’s airplane tickets, it’s hotel rooms and it’s a handful of other things, and they account for essentially all of the overshoot. 

And we think that those things are clearly temporary. 

We don’t know when they’ll end but they’ll go away. 

We don’t know when they’ll go away. 

We also don’t know whether there are other things that will come forward and take their place. 

What we don’t see now is broad inflation pressure showing up in a lot of categories. 

The concern would be if we did start to see that. 

We don’t see that now. 

We’ll be watching carefully, and we won’t have to wait a tremendously long time to know whether our basic understanding of this is right. 

We will know because we'll see if inflation is spreading more broadly, that’ll give us information...”

Alabama Senator Richard Shelby: 

“Chairman Powell, we’ve been talking about inflation, and it’s not going to go away, I think, for a while. 

So, we’re going to continue to talk about it, and you'll be concerned with it. 

In June, U.S. inflation accelerated at its fastest pace in 13 years. 

Consumer prices increased by 5.4% from a year ago. 

Americans are now paying higher prices for many of the goods and services that they cannot do without… 

Yet, in the midst of the increase in consumer prices…, the Biden ministration is proposing trillions more in government spending. 

The Fed’s ability to maintain price stability is threatened, I believe by actual inflation or the expectation of inflation… 

When taking all this into consideration, which you have data that we probably don’t have, do you believe that our nation is facing a real problem with inflation? 

And if not, why not? How do you justify it?”

Powell: 

“I think we’re experiencing a big uptick in inflation; bigger than many expected; bigger than certainly than I expected. 

And we’re trying to understand whether it’s something that will pass through fairly quickly. 

Or whether, in fact, we need to act one way or the other. 

We’re not going to be going into a period of high inflation for a long period of time, because of course, we have tools to address that. 

But we don’t want to use them in a way that is unnecessary or that interrupts the rebound of the economy. 

We want to put people to get back to work. 

And there are a lot of people who are not back to work yet. 

But let me say we’re very well aware of the risks from inflation and watching very carefully. 

And if we come to the view that or if we see inflation expectations or the path of inflation moving up in a way that’s troubling, then we will react appropriately.”

Shelby: 

“Are you concerned about all the things that I just related? 

All the price increases unprecedented in recent years. Or are you just putting that aside?”

Powell: 

“No, I mean, we’re, of course, night and day, we’re all thinking about that... and really asking ourselves whether we have the right frame of reference, the right framework for understanding this.”

The $670 Billion College-Industrial Complex Is Under Threat From Online School

The global health crisis took a big bite out of higher-education revenue. But the pandemic’s long-term effect on colleges and universities may be the changing attitudes about remote learning. Hundreds of American colleges are at risk.

By Spencer Jakab



College Inc. is facing a reckoning.

American colleges and universities recorded their largest drop in cash inflows in decades this past academic year, thanks to a big drop in enrollment and a lack of room-and-board revenue from the students who did enroll but took their courses online.

But that was just the start. Now that a generation of would-be applicants has grown used to online learning, the business of higher education will likely never be the same again.



The affected schools are mostly not-for-profit, but they represent a huge enterprise with $670 billion in collective revenue, more than $300 billion in debt and about 3 million employees. 

During the height of the outbreak, between February 2020 and February 2021, they laid off about 13% of their workforces. 

And researchers at The Federal Reserve Bank of Philadelphia estimate that higher-education institutions will lose revenue of between $70 billion and $115 billion over the next five years as a result of the pandemic.

Many schools already were facing financial stress before the pandemic as they doled out more scholarships to offset stagnating enrollment. 

Many also were hurt by fewer foreign students paying full-freight amid former President Donald Trump’s less-friendly visa policies.

With millions of students switching to remote learning, institutions that specialized in online education got a boost. 

They have suffered from a stigma in the past, in part because of the sometimes low standards and predatory behavior of for-profit online colleges that make most of their money from federally subsidized loans and grants. 

But more respectable not-for-profit schools—like Purdue Global, Southern New Hampshire University and Arizona State University—now rival them in online enrollment.

“We grew significantly in the last year, partly as a result of Covid,” says Jon Harbor, the provost of Purdue Global, the online adult education division of Purdue University. “A lot of institutions have faced financial stress.”

The online threat has even appeared at the high end. 

Minerva Institutes at KGI, which rotates its student body between rented sites globally but is taught by remote staff and has its own admissions tests, received 25,000 applications for the class of 2024, admitting less than 1%—far more selective than even Ivy League schools. 

It is cheaper too.

And perhaps most alarming for the college-industrial complex, Google has launched certificate programs that it says it will treat as the equivalent of four-year college for hiring purposes.

Every student that opts for an online college degree—or the Google equivalent—is another student that won’t be shelling out for the far-higher cost of a traditional education. 

And fewer students necessarily mean fewer colleges.

Residential colleges won’t disappear entirely—many young people relish the experience. 

Big state universities as well as name brands with global snob appeal and huge endowments can survive the additional pressure piled on by the pandemic. 

But hundreds of smaller institutions facing precarious finances—yes, maybe even your alma mater—might not if tuition and enrollment pressure outlast the pandemic.

They were giving it the old college try, but Covid-19 has forced higher education to face economic reality. 

You’re Vaccinated for Covid-19, and You Just Tested Positive. Now What?

Although the risk of vaccinated people becoming infected with the coronavirus is low, it can still happen, the C.D.C. says. Here’s what you need to know.

By Johnny Diaz

A vaccination site in El Paso, Texas, in May. Although the risk of vaccinated people becoming infected with the coronavirus is low, it can still happen, according to the Centers for Disease Control and Prevention and doctors.Credit...Jose Luis Gonzalez/Reuters


Like millions of Americans, Kevin was vaccinated against Covid-19 in March to protect himself. 

But the Tuesday after visiting bars with friends over a rainy Memorial Day weekend in Provincetown, Mass., he had a running nose and some congestion.

“I thought it was typical springtime allergies in New England,” said Kevin, 42, who spoke on the condition that his last name not be used. 

The symptoms worsened to headaches, body aches and sleepless nights. 

His doctor told him that it might be the flu but suggested a coronavirus test. 

The result was positive.

“You don’t think it will be you,” said Kevin, who isolated in his Provincetown townhome for 10 days.

“At the end of the day, the vaccination still worked,” he said. 

“I didn’t get as sick as people who got Covid prior to the vaccination being available.”

‘Breakthrough’ cases are rare.

If you’re one of the small number of fully vaccinated people who later test positive for Covid-19, what should you do?

Covid vaccines have been highly effective in preventing Covid-19, especially hospitalization and death, and are generally working as expected, doctors say.

The vaccines also reduce the risk of spreading the virus.

Although the risk of vaccinated people becoming infected with the virus is low, it can still happen, experts said.

“Yes, this will happen, unusual but will happen,’’ said Dr. Sandro Galea, dean of the Boston University School of Public Health.

Those rare cases are called breakthrough infections and as of April 30, there were more than 10,000 of these infections reported from 46 American states and territories, according to the Centers for Disease Control and Prevention. 

The C.D.C. has stopped recording such infections if there are no severe symptoms, so the number for cases, including mild ones, is most likely higher.

What to do if it happens to you?

A fully vaccinated person who experiences symptoms consistent with Covid-19 should isolate themselves from others, the C.D.C. said.

“Broadly, someone who tests positive should isolate for 10 days,” Dr. Galea, noting C.D.C. guidelines, said.

Dr. Eric Cioe-Peña, director of Global Health at Northwell Health in New Hyde Park in New York, said the guidelines were not much different from those for someone who tested positive before the vaccines were available.

“You still have to isolate,” he said. 

“You still have to contact trace with the understanding that your peace of mind is a little bit better.”

People should also inform their health care provider of their positive result. If you leave home to go to the doctor, wear a mask and practice social distancing.

“Fundamentally, though, someone should isolate and then retest, with the latter probably in consultation with a provider,” Dr. Galea said.

But what about people in your home?

The infected person should stay in a separate “sick room” or area and use a separate bathroom, if available.

“If possible, maintain six feet between the person who is sick and other household members,” the C.D.C. said.

This is important because an infected person — even one without symptoms — could pass the virus to someone who is unvaccinated, including children under the age of 12 or people who cannot get a vaccine because of immune-related or other health issues.

The center noted that the coronavirus spreads between people who are in close contact through respiratory droplets that are produced when someone talks, coughs or sneezes. 

The virus also spreads through respiratory droplets among people who share the same indoor space.

But, Dr. Cioe-Peña said, the level of virus in the nose and droplets are not as contagious in a vaccinated person.

“You probably aren’t going to pass this on,” he said.

Residents should frequently disinfect touched surfaces in the household if someone is sick or has tested positive for Covid-19.

It might be helpful to turn on fans and open doors and windows for fresh ventilation in the residence. 

And do not share household items such as utensils, cups and towels for the quarantine period, the C.D.C. said.

How serious are breakthrough symptoms?

Dr. Cioe-Peña said an infected person who had been vaccinated might have mild symptoms or no symptoms at all.

“In the post-vaccine era, testing Covid-positive is a lot less scary,” he said. 

For “the vast majority of people — 99.9 percent of the time — I am going to be OK. 

I am going to have a mild case. 

I may not even notice.”

The most serious symptoms include nasal congestion and mild body aches, said Dr. Sunil Sood, a pediatric infectious disease specialist at South Shore University Hospital in Bay Shore in New York.

“It would be the mildest of the end of the spectrum of Covid-19,” he said. 

“It may be just a mild common cold.”

But this may be different in vaccinated individuals with weak immune systems like older adults and people with certain medical conditions or those who take certain medications.

There have been some high profile cases.

The TV host Bill Maher was fully vaccinated when he tested positive last month during weekly staff testing, prompting HBO to reschedule the taping of two of his shows. 

At the time, he said he felt “perfectly fine.”

On June 10, two fully-vaccinated passengers aboard a Celebrity cruise ship tested positive and had to isolate, according to the Royal Caribbean Group. 

The passengers were asymptomatic.

And in May, the Yankees’ two-time All-Star shortstop, Gleyber Torres, tested positive after vaccination, as did three coaches and four staff members.

While most infections are likely to produce mild or no symptoms, many of these cases would not have been discovered without routine screening.

Will this become more common?

“We are going to see people pop up and be positive, but it’s not meaningful because your chances of passing it to someone are much lower,” Dr. Cioe-Peña said. 

“Certainly, we will hear stories — my friend’s neighbor got vaccinated and tested positive. 

If we continue to get people vaccinated, we will hear these stories of one-offs.”

Still, doctors emphasize the effectiveness of the vaccines and encourage people to be fully vaccinated as supplies and appointments are now widely available in the United States. 

This is particularly true as the new highly contagious Delta variant becomes more widespread during the summer travel season.

“It provides a solid degree of protection,” Dr. Sood said. 

“It provides the freedom to move around and go on with your daily life and activities almost before it was this pandemic.”


Johnny Diaz is a general assignment reporter covering breaking news. He previously worked for the South Florida Sun Sentinel and The Boston Globe.

In Bitcoin We Trust?

Coordinated cross-border policies are needed to ensure that cryptocurrencies don’t do more harm than good in developing countries. Unless both the public and private sectors embrace critical reforms, people and governments will increasingly be attracted by low-cost, high-risk, and murky alternatives to traditional banking.

Paola Subacchi


LONDON – Many regard the market for Bitcoin – the world’s leading cryptocurrency – as a game of winners and losers played out among hedge funds, amateur investors, geeks, and criminals. 

The huge risk inherent in a highly volatile anonymous digital currency is best left to those who understand the game well, or who don’t really care because they can mitigate the risk or absorb any losses. 

But Bitcoin recently has become more attractive for countries and individuals with limited access to conventional payment systems – that is, those least equipped to manage the underlying risk.

Earlier this month, El Salvador became the first country to adopt Bitcoin as legal tender, enacting legislation that will take effect in September. 

This means that Bitcoin can be used to pay for goods and services throughout the country, and recipients are legally obliged to accept it.

Salvadorans are not new to this type of monetary experiment. 

The US dollar became legal tender in El Salvador in 2001 and is the currency used in domestic transactions. 

At that time, the government of President Francisco Flores allowed the dollar to circulate freely alongside the national currency, the colón, at a fixed exchange rate.

Dollar advocates argued that the expected benefits of macroeconomic stability would outweigh El Salvador’s loss of economic sovereignty, monetary independence, and even seigniorage – the difference between the cost of producing coins and banknotes and their face value. 

But purchasing power suddenly plummeted and left the economy even more dependent on remittances, which have averaged about 20% of GDP per year over the past two decades.

Using Bitcoin as legal tender will exacerbate the monetary constraints that dollarization revealed – notably, the lack of an independent macroeconomic-institutional framework around which to shape domestic policies. 

Moreover, Bitcoin is much more volatile than the dollar. 

Between June 8-15, its value swung between $32,462 and $40,993, and in the period from May 15 to June 15, it ranged from $34,259 to $49,304. 

Such wide fluctuations – and the fact that they are entirely market-driven, with no scope for policymakers to manage the swings – make Bitcoin an unsuitable instrument for macroeconomic stabilization.

El Salvador’s president, Nayib Bukele, tweeted that Bitcoin will facilitate remittance transfers and considerably reduce transaction costs. 

The fees that migrants must pay to send their money home are scandalously high, despite many calls by the United Nations and the G20 to reduce them. 

According to the World Bank, the average global cost of sending $200 internationally is approximately $13, or 6.5%, well above the Sustainable Development Goal target of 3%.

Nonetheless, in 2020, low- and middle-income countries received remittances of $540 billion – only slightly less than the 2019 total of $548 billion, and much larger than these countries’ inflows of foreign direct investment ($259 billion in 2020) and overseas development assistance ($179 billion in 2020). Reducing the fees to 2% could increase remittances by as much as $16 billion per year.

The large but globally fragmented remittance business relies on electronic transfers via commercial banks’ payment systems, and banks charge hefty fees for the use of this infrastructure and the benefit of a safe and reliable international network. 

But high fees are not the only issue. 

Many migrants don’t have a bank account in the country where they work, and their families back home may also be among the 1.7 billion unbanked people worldwide. 

Furthermore, some migrants may need to transfer money to countries that either are not integrated into the international payment system or are restricted in their ability to receive cross-border transfers – for example, Syria or Cuba.

Bukele is right about the need to challenge this system, including by providing low-cost and low-risk alternatives. 

But Bitcoin is the wrong tool. 

Yes, it allows people to transfer value directly and globally, without the costly third-party intermediation. 

But its volatility makes it at best an asset – and an extremely risky store of value – rather than a means of exchange. 

The risk of a sudden drop in its price means that migrants and their families back home can never be sure about the amount transferred.

Rather than dismiss El Salvador’s Bitcoin adoption as just another example of the crypto craze, we should reflect on why many people around the world are willing to embrace cryptocurrencies for non-speculative purposes. 

Perhaps the answer lies in the fact that the current international financial system serves them either poorly or not at all.

Innovations in digital money, such as the M-Pesa mobile money service in Africa, have made significant inroads into many developing countries’ payment systems. 

But more needs to be done to provide the infrastructure and regulatory frameworks to support digital money. 

For now, the terrain remains patchy.

Coordinated cross-border policies are urgently needed to ensure that Bitcoin and its variants don’t do more harm than good in developing countries. 

Unless both the public and private sectors embrace critical reforms and make basic banking services available to all at low costs, people and governments will increasingly be attracted by Bitcoin and other low-cost, high-risk, and murky alternatives to traditional banking.


Paola Subacchi, Professor of International Economics at the University of London’s Queen Mary Global Policy Institute, is the author, most recently, of The Cost of Free Money.