Argentina has essentially no dollars. Which, as critics see it, is a major impediment to presidential front-runner Javier Milei’s plan to dollarize the crisis-ravaged economy. Even Milei’s own advisers are starting to get fidgety about how barren the vaults are.
But ask economist Francisco Zalles about this problem and he scoffs. Just go ahead and make the dollar the country’s official tender, he says, and do it fast. The faster the move, the faster inflation steadies. Then interest rates can come down, and dollars can start flowing in, paving the way for growth.
Zalles is no ordinary economist. He’s one of the few in the world who’s got experience carrying out such a process, having done so in his native Ecuador two decades ago. Conditions then — soaring inflation, plunging currency, stagnant growth — were broadly similar to those in Argentina today. And while Ecuador’s economic record has been uneven since, one thing is certain: The runaway inflation that was making people poorer month after month has disappeared.
“For Milei’s plan to work, he needs nothing,” Zalles, who’d go on to do a stint at Greylock Capital Management, said in an interview. “He just needs to dollarize.”
To many skeptics, Zalles’s vision is dangerously optimistic, even reckless. With no dollars to defend the exchange rate — Argentina has an estimated negative $10 billion in net international reserves — ditching the peso risks sparking a collapse in the currency that could lead to hyperinflation, a possible run on the banks and social unrest as savings vanish.
“Dollarizing without dollars is like saying you want the entire population to wear Nike sneakers, even though you don’t make them and you don’t have the resources to buy them,” said Alejandro Werner, a former IMF director for the Western Hemisphere. “It’s impossible.”
Zalles — and Milei — recognize dollarizing is a drastic move, but argue it’s the cure for what is, after all, a dire situation.
Inflation data Wednesday showed prices rising 12.4% on a monthly basis in August, the fastest pace since Argentina exited hyperinflation three decades ago. The economy is on the brink of its sixth recession in a decade; 40% of the population lives below the poverty line. The peso has tumbled almost 30% on the parallel market in the past month.
Since his surprise win in the August primaries, which prompted the government to devalue the peso by 18%, Milei’s radical plans have monopolized Wall Street’s attention. But key details, including exactly how those measures are going to play out, are still lacking. Some of his advisers have begun walking back some aspects of the proposals amid a barrage of criticism, saying he would not dollarize right away if there are no greenbacks in the central bank — which Milei doesn’t actually intend to shut either, they say.
Zalles shrugs off major concerns. There are gross reserves to tap, he says, and the growing use of dollars will help smooth the process. While Argentines haven’t yet resorted to paying for daily transactions in US dollars, large purchases — anything from apartments to cars, furniture, electronics and home appliances — are increasingly done in greenbacks. People are estimated to hold as much as $200 billion in cash outside the banking system within the country and hoard an additional $250 billion in overseas accounts.
Once you dollarize, that money will flow into the system, Zalles argues, and assuage fears over a potential bank run, similar to what happened in Ecuador in early 2000 when Zalles and two other economists oversaw the switch from sucres to greenbacks.
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Originally Posted by vita3
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I'm not a one-issue thinker... Trump is definitely not a libertarian, neither in his values nor in his policies, but I am mostly pro-Trump because, even though he bungles it somewhat, his support for traditional American values still ends up "sloshing over" and increasing liberty. Milei, AFAICT, definitely is a libertarian and, even if he bungles one or two issues, if he follows through on even 10% of what he has promised to do in his campaigning, he will do much more to increase liberty in Argentina than Trump managed to accomplish in the US.
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