Javier Milei is causing a stir with his proposal to adopt the US dollar in place of the Argentine peso.
Argentina has been plagued by runaway inflation (over 100%) and a currency that has lost over 50% of its value against the dollar this year. Economic chaos has been a significant factor leading to the surprise win by Javier Milei in the recent open primary election. With a background as an economist and little political experience, the populist and anti-establishment candidate describes himself as an “anarcho-capitalist.” Milei has suggested that the country should ditch the peso, eliminate the country's central bank, and use the US currency instead. As radical a move that may seem, since Melei is now the odds-on favorite to win the presidential election in October, his idea of replacing the peso must be taken seriously.
Why Argentina May Dollarize:
- Argentina inflation has been running at levels over 100%.
- The Argentine currency has lost half its value against the US dollar this year, moving from 175/dollar to 350. Ten years ago the Argentine peso to USD was trading at 10 to the dollar.
- The Argentine central bank's reserves of dollars hit a record low this year, as the Argentine authorities have so far been unable to get the International Monetary Fund (IMF) to approve new lending to sustain the status quo.
Argentines are rightfully angry about rampant inflation and the drop in the peso’s value. In response to the dollar/peso(USDARS) exchange rate, many Argentines have been purchasing and hoarding dollars as a hedge against the peso’s loss of purchasing power. It is believed that Argentines lead the world in holdings of physical dollars.
The Dollarization of Argentina:
- Argentina will not be the first country to adopt the dollar. Ecuador, Panama, El Salvador, and a handful of non-Latin American countries already use the dollar as their official currency.
- Using the dollar would mean eliminating the Argentine central bank.
- Argentina would be subject to future fluctuations in the value of the dollar.
- At least one leading economist, Robin Brooks of the Institute of International Finance, has called for Argentina to peg its currency to the Brazilian real instead of the dollar. Even as early as January this year, there was talk of Argentina and Brazil creating a common currency.
Pros and Cons of Dollarization
- Reduced uncertainty: Argentines will no longer experience the recent peso volatility that affects every consumer and business in the country. Businesses will be able to plan ahead based on a relatively stable currency.
- Reduced inflation: Adopting the dollar would result in a much more stable currency as inflation would be limited to the amount experienced in the US.
- Increased investment: Foreign investors would be more likely to invest in Argentina as they would be less concerned about the risk of investments losing value due to inflation or currency depreciation.
- Simplified trade: Since the dollar remains the preferred currency for international transactions, using the dollar would make it easier for Argentina to trade with other countries.
- Loss of monetary policy independence: Argentina would lose the ability to set its own monetary policy. This could make it more difficult to manage the domestic economy.
- Increased dependence on the US: Argentina's economy would be much more closely linked to the US. This could make Argentina more vulnerable to economic shocks in the US.
- Loss of national identity: The peso is a symbol of Argentina’s independence, and many argue that replacing it with the dollar would be a form of neo-colonialism.
At this time, dollarization is just a proposed path for the future. There will undoubtedly be many studies done to examine the potential effects before any concrete action is taken.
The process of dollarization, if it occurs, will almost certainly be implemented in gradual steps. There should be plenty of time for affected entities to plan for the changes that will happen.
If Argentina successfully adopts the dollar, it may make other countries consider following suit. This could have major implications for the global economy and slow the current trend toward less reliance on the dollar.
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