That’s the subject of my latest column for Bloomberg. Here is the first part:
The good news is that President Javier Milei seems to be backing away from plans to make Argentina’s economy in dollars. This is bad news too.
Don’t get me wrong: Dollarization would be great – if only the country had a total of $30 billion to replace each peso with dollars. But Argentina does not have that extra currency ready, so Milei’s regime is looking for some kind of dollarization that would work and be worthy of the name.
In a recent speech, Milei appeared to suggest that official dollarization – as seen in El Salvador, Panama and Ecuador – would not happen. His words are somewhat confused, so it may help to review the different types of dollars and what they mean.
And the main argument:
The third way is to compete for money, an idea that Milei mentioned at the beginning of her speech. In this scenario, which appears to be Milei’s new master plan, the dollar and peso will circulate together and compete against each other. As the economy grows, the use of the dollar will increase, while the peso will decrease.
This plan satisfies Milei’s desire for a comprehensive liberal solution, but it does not stabilize the value of the peso. It is already the case that both currencies, as well as many cryptos, circulate in Argentina. And dollars have been subject to many regulations and non-market, exchange rates have fluctuated in the past. It may be good to remove many of those restrictions, as Milei has done, but such removal will not reduce inflation. In fact, if the peso is going to disappear, it will lose a lot of value beforehand, as the markets will expect its eventual execution.
In fact, this situation resembles the Zimbabwean way too closely for comfort. Until Argentina’s financial problems are resolved, peso inflation must continue, if only to serve the national debt. In fact, to the extent that holders of currency can easily convert into dollars, inflation may accelerate. The base of the peso that will be taxed due to inflation will grow and shrink, requiring a higher inflation tax to keep the government in business.
Total:
There’s no way around it: When a government has financial problems, the stable currency – whether it’s the peso or the dollar – costs a lot of money. No matter how tempting it is, Milei cannot ignore this fact.
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