The viability of a currency change and the loss of “monetary sovereignty” are frequently discussed in the argument over dollarization in Argentina, but the most crucial aspect is sometimes overlooked: the peso is a failed currency.
Due to the common belief that “the dollar is rising” when the peso is falling, this important element is disregarded in the media in Argentina.
The peso is a failed currency. Why?
First, there are more than ten bogus peso exchange rates. The “dollar blue” is the closest approach to a real exchange rate that represents the real value of the currency. A country with ten or more exchange rates has a fictitious and failing currency.
Second, the demand for pesos on the domestic and foreign markets is almost nonexistent and far removed from the abnormal expansion of the monetary base. The demand for pesos is at its lowest level in 20 years, and it has been declining steadily since 2020, according to the Libertad y Progreso Foundation, but during that same time the money supply (monetary base) has increased by four times. According to the Central Bank of the Argentine Republic, the monetary base has grown by 443% since 2018 and by more than 1,961% over the course of ten years.
Third, at the close of this article, the Central Bank has issued remunerated debt (Leliqs, Pase) that exceeds 12% of GDP, which is a massive financial time bomb. In five years, the monetary base has grown by 1,050%, including the mentioned Leliqs, an impending monetary bomb, which means more printing when they mature and rising inflation in the future. Argentina’s citizens are aware that the relentless assault of an extractive and confiscatory monetary policy will cause their currency’s buying power to collapse.
A failed currency is evident when any restaurant will give you a discount of up to 30% if you pay with cash since they are aware that they will lose money when they receive the money from credit card bills from the bank.
Is it possible to dollarize?
Undoubtedly. In fact, Argentineans already dollarize everything they can to avoid the financial onslaught of the government. Keeping any pesos means literally losing money every day.
To dollarize, Argentina must close the exchange rate gap, as there is an enormous difference between the official rate and the real-unofficial one, and close the Leliq and Pase monetary gaps. The gap between the official and real exchange rates is almost two times the official value. To do this, an immediate reform must be implemented, and all export restrictions must be lifted in addition to the exchange rate clamp (cepo cambiario). In other words, opening the Argentine economy to generate reserves (dollars) is not difficult for a wealthy nation with plenty of options. The exchange rate clamp is another proof of a failed currency as the government tries to seize the few dollars that enter the economy rather than maximize the inflow of reserves with a free market and open economy.
Dollarization also requires the removal of financial and bureaucratic barriers. Governments in Argentina frequently disregard the notion that isolation and autarky only lead to poverty. A drastic adjustment to political spending must be made to remove the Central Bank of Argentina’s skewed incentive to keep monetizing unsustainable public deficits.
Numerous expenses that cover cronyism and political spending that can and should be cut account for around 20% of the budget. The government in Argentina spends more than 8% of the GDP on items that are pure political expenditures, and there are hundreds of completely unnecessary items that are lost in corruption. The country would achieve a fiscal surplus as a result of this change, enabling quick dollarization.
Furthermore, Argentina’s massive trade imbalance in the first half of 2023, despite having practically everything the world needs, is an economic aberration. For the first half, the trade imbalance exceeded $4.368 billion. It is unconscionable that a wealthy nation with great potential sees a 24.7% decline in exports because of the government’s misguided monetary and fiscal policies, which make exporting economically unviable. In a year when Argentina should be setting records for exports, we are talking about the largest trade deficit for a first semester since 2018.
A drastic shift in interventionist policies at the fiscal and monetary levels would result in a commercial and fiscal surplus for the nation, creating wealth and boosting the purchasing power of budgetary items like Social Security and retirement plans that shouldn’t be touched. In fact, these pensions and support programs would have far higher purchasing power with the infusion of reserves and monetary control.
Losing monetary sovereignty?
Why monetary sovereignty is desired is the question that we must ask ourselves. The alleged monetary sovereignty in Argentina has only contributed to widespread corruption, poverty, and the massive devaluation of the peso. Furthermore, the extractive monetary policy has long since destroyed any real monetary sovereignty. Argentina’s government and central bank lack legitimacy and demand as currency issuers, and as a result, lack sovereignty. You might assume that switching to a new administration would remedy this, but the evidence demonstrates that as soon as populist measures are reinstated, the monetary imbalance spirals out of control once more. Let’s not forget that Macri took over the government when the Central Bank had a financial hole in its issued debt totaling more than 22 billion equivalent US dollars.
Given that perpetual devaluation makes citizens more dependent and captives of political power, the issue with monetary sovereignty is that it grants control over the supply of currency to those who stand to gain from its depreciation, namely politicians. Populists blame supermarkets for inflation and position themselves as the solution to the crisis that politicians themselves caused. It is quite easy to make large-scale promises of subsidies with money that you do not have and to give them out in large quantities of constantly depreciating currency. The goal of monetary annihilation is not just to destroy money but also to absorb economic prosperity for the benefit of political power, which grows exponentially richer and, of course, in dollars.
What about boosting yuan-based trade with China? The issue in Argentina is not whether it should trade in dollars, euros, or Chinese yuan. With the current course of action, Argentina will not cease destroying the peso, which has lost almost 90% of its value versus the yuan and more against the US dollar over the past ten years.
Some people don’t seem to comprehend that the peso, rather than the dollar or yuan, is the problem and that Chinese businesses and governments won’t accept pesos for their international transactions. Contrary to what some populists may try to portray, China is a far stricter and more demanding lender. Argentina’s export potential and access to a free and open international financial system make dollarization relatively simple. China has capital controls and does not accept pesos as a security. Yuanizing is significantly more challenging, but doing so would require the same fiscal and trade adjustments I mentioned.
What about gold? Implementing a gold standard would help but Argentina has almost no gold reserves and it would not even matter. There is no confidence in the issuer of pesos to believe that it would be truly backed by gold reserves, just as there was no trust in the Petro in Venezuela, which ultimately vanished.
The populist governments’ inflationary impoverishment incentive can only be stopped by dollarization. More poverty and inflation will likely result from not dollarizing.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).