President Bukele Broaches Austrian Business Cycle Theory at CPAC

by
J.R. MacLeod
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President Nayib Bukele of El Salvador recently spoke at the Conservative Political Action Conference, receiving a hero’s welcome in the wake of his re-election victory. Yet he also delivered some hard truths as part of his speech that conservatives would do well to consider.

While conceding that high taxes are a problem, Bukele said the deeper problem is that Americans “pay high taxes only to uphold the illusion that you are funding the government, which you are not.” Related to this, he gave a brilliant concise description of how the American government is financed:

…by treasury bonds, paper. And who buys the treasury bonds? Mostly the Fed. And how does the fed buy them? By printing money! But what backing does the Fed have for that money being printed? The treasury bonds themselves! So basically, you finance the government by printing money out of thin air.

Thus, Bukele poses the question: “If the government can print unlimited amounts of money out of thin air, why do they collect taxes?” To attempt an answer, the government persists in collecting taxes, even though they are currently immaterial to government finance, because the collection of taxes is essential to maintaining government control. Forcing the population to hand over relatively large portions of their income, particularly if they cannot expect good services in return, shows who is in charge. Conversely, it gives the illusion of legitimate sovereignty, since many people believe that by paying taxes they are participating in government, and that government is controlled by and dependent on the population.

Beyond the problem with taxes, Bukele touched on the structural problems involved with this system of monetary policy, describing it in language familiar to Austrians as “a bubble that will inevitably burst.” When the money supply is increased artificially, interest rates are lowered. This distorts the inter-temporal structure of production, as investment flows to longer term projects because of the (supposed) low rate of time preference.

But since these projects aren’t backed by real savings and demand, but are instigated by artificial new money, they constitute a bubble formed by malinvestment. The sectors in which the artificial new money enters the economy form the core of the bubble. There are various possibilities for how and when the bubble is revealed as unsustainable, but eventually the bubble will burst, and recession or depression ensues as the painful process of recalibrating the capital structure to match genuine market supply and demand.

Inflation is an irritant to economic activity. Most people find it impossible to keep up with price rises. Inflation makes economic calculation, and thus entrepreneurship harder since prices are unstable and uncertain. In fact, inflation frequently bursts its own bubble, since price inflation begins to be priced into contracts, which debtors are unable to pay, rendering projects insolvent.

Bukele had previously garnered fame for his government’s recognition of bitcoin as legal tender. This is a potential solution to the monetary problems mentioned above, since bitcoin cannot be created ad infinitum by central banks. Further, Bukele’s introduction of bitcoin was very smart from the perspective of policy, running along the lines of the ‘competing currencies’ concept made famous by F.A. Hayek. Instead of wholesale chaos, if people can choose to move in and out of different currencies over time, at their discretion, hopefully bubbles will burst more gently, as people have partially insulated themselves from their effects (due to gradually structuring an increasing number of contracts in sound, non-inflationary money).

It is unclear as to whether Bukele has engaged in systematic study of Austrian economics, but he does have significant experience in private sector business. It is the Austrian school which aligns with common sense and entrepreneurial practice. Businessmen and consumers both want a stable medium of exchange. When they engage with it, the established system of money creation makes ordinary people uncomfortable, as the possibilities for corruption and mismanagement are abundantly clear.

If there is one criticism of Bukele’s speech, it is not so much with anything that he said, but with a possible lack of cynicism concerning his audience. Of course, Bukele is knowledgeable about the ignominious history of Washington’s interference in El Salvador, which has been ramped up against the implementation of his policies. And there are undoubtedly many people in the CPAC audience who loved everything he said, and many more who would be open to considering his ideas.

But undoubtedly there are also many Washington establishmentarians at CPAC, who are implacably opposed to granting bitcoin the same legal status as the dollar, friendly relations with China, and breaking out of the anachronistic cold war paradigm. Bukele repeatedly emphasized the need to fix problems, yet the establishmentarians - less radical, and involved with financing CPAC instead of simply attending - have no desire to fix problems. Along with their Democrat equivalents, they created the problems in the first place.

Perhaps even with this knowledge in hand Bukele’s open approach was the best course of action. Taking time out of your speech to critically analyze the political dynamics of your host organization isn’t a practical strategy. But Bukele’s speech was thoroughly disruptive of the Washington policy consensus, and it was fascinating to listen to a head of state who not only understands the flaws of Federal Reserve policy, but who has taken action against it.