Overwhelmed by the umpteenth inflationary crisis, many Argentines are tempted to try the extreme and unexplored formula of the ultra-liberal presidential candidate Javier Milei to solve their economic problems: abandon the peso and adopt the dollar.
In a country with more than 100% annual inflation that destroys the purchasing power of wages, the dollar is a refuge.
“It would be good to dollarize. With this devaluation, I sell half and only the big speculators win,” Iván Abl, who has traded fabrics in Buenos Aires for 30 years, told AFP. But then he doubts: “The ‘Yankees’ would handle everything with the dollar, right?”
What happened in Argentina?
In Argentina, a house, a car and even household appliances are sold in dollars.
After two episodes of hyperinflation in 1989 and 1990, the country applied a “convertibility” mechanism that fixed a 1-1 parity between the peso and the dollar, supported by privatizations and a total opening of the economy.
Annual inflation dropped to single digits, but the surge in imports increased the debt in foreign currency, ruined the industry and caused a severe recession. The “convertibility” ended tragically in 2001 with a massive social protest whose repression left some 40 dead. Then, the country declared itself in default and governments succeeded each other at the beginning of the century.
“The bi-monetary economy unites all crises: the shortage of dollars, the currency run, devaluations and inflation. They are all historically and hysterically linked,” defined the then Peronist president Cristina Kirchner in 2017.
What is Milei’s proposal?
“Ending inflation is possible, we just have to take away the monetary weapon from politicians,” launched Milei, the most voted in the August primaries, alluding to the mechanism for issuing currency to finance the state deficit, a fundamental cause according to him of the chronic devaluation of the peso.
Milei also proposes to eliminate the Central Bank, which issues currency, but also monitors the financial system. His idea of embracing the dollar centralizes the debate towards the October general elections, and is rejected by most local economists, including other liberal opponents.
“Dollarization has never been so cheap, it only costs US$10 billion,” assures Milei, who states that this mechanism —also applied by Ecuador and El Salvador— will take time to be implemented.
The 52-year-old economist, who presents himself as an expert in monetary theory, goes around the media explaining his economic salvation project. Removing pesos from circulation using central bank assets and replacing them with dollars is the first step.
“Where are they going to get the dollars to dollarize?” asks his pro-government rival and Economy Minister, Sergio Massa, in a context of permanent erosion of Argentina’s international reserves.
The central bank (BCRA) has sufficient instruments to make the transition, argues Milei. Independent economist Juan Manuel Telechea told AFP that the exchange of pesos, in 2022, already demanded some US$55.3 billion.
“It would not be enough to replace only the monetary base (ndlr, circulating money), but there is a stock of pesos that, although they are not in circulation, are the backing of bank deposits in national currency” and that are kept in instruments of the BCRA’s debt, explains the Center for Argentine Political Economy (CEPA) in a blog that raises questions about the feasibility of dollarizing.
From the field of Milei, they retort. “Whether or not we are going to dollarize is an irrelevant discussion because it has already been dollarized”argued to CNN Radio Emilio Ocampo, the economist Milei was inspired by for his proposal and today the candidate’s advisor, referring to the predilection of Argentines for the green ticket.
The central bank itself estimates in US$244,000 million the volume of US currency that Argentines hoard outside the local circuit.
By replacing pesos with dollars at a market price, higher than the official dollar controlled by the Government, Milei’s proposal would imply, by simple mathematics, the reduction of wages measured in foreign currency. The division could be almost one tenth, alert CEPA.
Source: Larepublica
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