Has Argentina given up on dollarization?

That is the topic of my latest Bloomberg column.  Here is the opening bit:

The good news is that President Javier Milei seems to be backing away from plans to dollarize the Argentine economy. That is also the bad news.

Don’t get me wrong: Dollarization would be great — if the country had a spare $30 billion to back each peso with dollars. But Argentina doesn’t have that extra money ready at hand, and so the Milei regime is looking for some form of dollarization that can both work and be worthy of the name.

In a recent speech, Milei seemed to suggest that formal dollarization — as seen in El Salvador, Panama and Ecuador — isn’t going to happen. His remarks are somewhat confused, so it might be helpful to review different types of dollarization and what they mean.

And the main argument:

A third path is currency competition, a concept Milei mentions early in his remarks. In this scenario, which seems to be Milei’s primary new plan, the dollar and the peso would circulate side by side and compete with each other. As the economy grew, the use of the dollar would increase, while the peso would fade away.

This plan satisfies Milei’s desire for a broadly libertarian solution, but it doesn’t stabilize the value of the peso. It is already the case that both currencies, plus a lot of crypto, circulate in Argentina. And dollars have been subject to a lot of regulations and non-market, fixed exchange rates in the past. It might be good to remove many of those restrictions, as Milei has, but such deregulation will not itself lower the rate of inflation. In fact, if the peso is going to fade away, it will lose all the more value upfront, as markets come to expect its eventual euthanasia.

In reality, this scenario resembles the Zimbabwe path too closely for comfort. Until Argentina’s fiscal problems are solved, peso inflation must continue, if only to service the national debt. In fact, to the extent currency holders can shift into dollar holdings more easily, inflation may even accelerate. The base of peso holdings to be taxed by inflationary seigniorage would grow ever narrower, necessitating an ever-higher inflation tax to keep the government in business.

In sum:

There is no way around it: If a government has fiscal difficulties, a stable currency — whether it be the peso or the dollar — costs a lot of money. As tempted as he might be, Milei cannot afford to ignore this fact.

Recommended.

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