Published November 27, 2023
Hoover Institution economist (and colleague) John Cochrane has an excellent long post on dollarization in Argentina.
One highlight:
Dollarization is no panacea. It will work if it is accompanied by fiscal and microeconomic reform. It will be of limited value otherwise. I’ll declare a motto: All successful inflation stabilizations have come from a combination of fiscal, monetary and microeconomic reform. (italics in original)
That reminds me of what Michael K. Salemi wrote about what has been learned about ending hyperinflations. He wrote the entry “Hyperinflation” in The Concise Encyclopedia of Economics. While Argentina is far from having hyperinflation, which, as Salemi notes, is typically used “to describe episodes when the monthly inflation rate is greater than 50 percent,” Argentina does have very high inflation, in excess of 100% in the last 12 months. So the same principles for ending hyperinflation apply for ending, or at least substantially reducing, Argentina’s inflation.
Here are Salemi’s two key paragraphs on ending hyperinflations:
How do hyperinflations end? The standard answer is that governments have to make a credible commitment to halting the rapid growth in the stock of money.
Proponents of this view consider the end of the German hyperinflation to be a case in point. In late 1923, Germany undertook a monetary reform, creating a new unit of currency called the rentenmark. The German government promised that the new currency could be converted on demand into a bond having a certain value in gold.
Proponents of the standard answer argue that the guarantee of convertibility is properly viewed as a promise to cease the rapid issue of money.
An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation.
According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. The second is a commitment to bring the government’s budget into balance.
This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation. If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future.
Thomas Sargent, a proponent of the second view, argues that the German reform of 1923 was successful because it created an independent central bank that could refuse to monetize the government deficit and because it included provisions for higher taxes and lower government expenditures.
Another way to look at Sargent’s view is that hyperinflations end when people reasonably believe that the rate of money growth will fall to normal levels both now and in the future.
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SOURCE: www.econlib.org
RELATED: Argentina needs to default, not dollarise
A Milton Friedman tribute act is not the answer to the country’s problems
Javier Milei, Argentine presidential candidate, during a campaign event in Buenos Aires, Argentina, on Wednesday, June 7, 2023. More than 31% of voters have a positive image of Milei, who scores higher than President Alberto Fernandez or any other potential Peronist candidate, a February poll by consulting firm Management & Fit in Buenos Aires found. Photographer: Maria Amasanti/Bloomberg via Getty Images
Published November 27, 2023
Milton friedman looms large in the personal and political life of Argentina’s probable next president. Javier Milei’s ideas, which carried him to an unexpected victory in the country’s primaries in August, take cues from the 20th century’s most prominent free-market economist.
Friedman influenced both Mr Milei’s opinions on the ideal size of the state (tiny) and its role in the economy (non-existent). So deep is Mr Milei’s admiration that he has christened one of his four pet mastiffs in Friedman’s honour.
The former economics lecturer told The Economist in a recent interview that Milton and his other dogs, all of which are named for economists, make “the best strategic committee in the world”.
The most far-reaching of Mr Milei’s Friedman-influenced proposals is to dollarise the economy.
This would involve replacing the peso with the greenback, and mean getting rid of Argentina’s central bank, which Mr Milei calls “the worst thing in the universe”. He exaggerates, but only a little. Argentina’s economy is in tatters. Annual inflation is at 113%.
The central bank has exhausted its dollars. The peso’s value against the American currency has halved since the beginning of the year. In short, the time for radical thinking has arrived. Unfortunately, dollarisation is more likely to be a curse than a solution to Argentina’s problems.
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SOURCE: www.economist.com
RELATED: Milei’s Path to Dollarization: Riddled with Doubts
Published September 11, 2023
BUENOS AIRES — Javier Milei’s core idea, the one that has made him the apparent frontrunner to be elected Argentina’s next president, is dollarization: a plan to dissolve Argentina’s central bank, eliminate the peso and adopt the US dollar as legal tender, thus ostensibly eliminating the runaway inflation that has held the economy prisoner for years.
But is the idea viable?
Independent analysts, economists and opposition figures consulted by AQ expressed doubts, noting the central bank has virtually no dollars in its coffers at present. A past attempt failed 24 years ago when President Carlos Menem’s plan for dollarization didn’t move forward as an economic crisis and a run on the peso caused the collapse of a currency board.
Argentina already has trouble paying the International Monetary Fund (IMF) a $57 billion loan agreed on in 2018 and renegotiated in 2022, making a further aid package to support dollarization highly unlikely. And ultimately, they warn, dollarization will not by itself solve the core fiscal imbalances that have led Argentina to default on its debt nine times, including three in the past two decades.
“I think that (dollarization) is not feasible in the short term,” Alejandro Werner, former director of the Western Hemisphere Department of the International Monetary Fund (IMF), told AQ.
“Argentina does not have the dollars to dollarize, and it does not have access to the financial market to obtain dollars. The only thing this would do is inject more Argentine securities into the hands of the international private sector, directly or indirectly, therefore further lowering the value of Argentine securities.”
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SOURCE: www.americasquarterly.org
