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 weight 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.
That’s why Milei’s message hit home. “End with the inflation It is possible, we just have to take away the monetary weapon from the politicians”, He launched the most voted in the August primaries in allusion to the currency issuance mechanism 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.
“It would be good to dollarize. With this devaluation I sell half and only the big speculators win”, says Iván Abl, who has been trading fabrics in Buenos Aires for 30 years. But then he hesitates: “With the dollar, all the ‘Yankees’ would handle it, right?”
Chronic dollar shortage
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 mechanism of “convertibility” which established a 1-1 parity between the peso and the dollar, supported by privatizations and a total opening of the economy.
Annual inflation fell to single digits but the increase in imports increased the debt in foreign currency, ruined the industry and caused a severe recession. The “convertibility” It 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 inflations. They are all historically and hysterically linked.”defined in 2017 the then Peronist president Cristina Kirchner.
“Only 10,000 million”
“It has never been so cheap to dollarize, it only costs US$ 10,000 million”, 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.
The independent economist Juan Manuel Telechea said that the exchange of pesos, in 2022, already demanded some US$55.300 million.
“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 they remain in BCRA debt instruments, explains the Center for Argentine Political Economy (CEPA) in a blog that raises questions about the feasibility of dollarizing.
“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 the volume of US currency that Argentines hoard outside the local circuit at US$244 billion.
“It is impracticable”says Nicolás Ferreyra, an employee of a chain of electrical appliances. “We did the math with the vendors and they told us that we are going to earn US$20 or US$30 per month.”
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.
Question of confidence
Argentine economist Ivan Werning, from the Massachusetts Institute of Technology (MIT), co-author of the study “Chronicle of an announced dollarization”acidly maintained that “Dollarizing with a dollar shortage sucks.”
Instead, Werning argues, “The country must primarily address its chronic fiscal problem and not lose the ability to have a currency that allows it to react to an external shock.”
“Dollarizing is crazy. There are other solutions”Nicolás Ferreyra insists on his side in the appliance store. “But for us Argentines to trust the peso again… measures must be taken.”
Source: AFP
Source: Gestion
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