Monday, September 10, 2018

Dollarize Argentina

Argentina should dollarize, says Mary Anastasia O'Grady in the Wall Street Journal -- not a peg, not a currency board, not an IMF plan, just give up and use dollars.
Another currency crisis is roiling Argentina... The peso has lost half its value against the U.S. dollar since January. Inflation expectations are soaring. 
The central bank has boosted its overnight lending rate to an annual 60% to try to stop capital flight. But Argentines are bracing for spiraling prices and recession. 
...the troubles have been brewing for some time. On a trip to Buenos Aires in February, I got an earful from worried economists who said Mr. Macri was moving too slowly to reconcile fiscal accounts. 
In 2016 and 2017 the government continued spending beyond its means and borrowing dollars in the international capital markets to finance the shortfall. That put pressure on the central bank to print money so as not to starve the economy of low-priced credit ahead of midterm elections in 2017.... 
A sharp selloff of the peso in May was followed by a new $50 billion standby loan from the International Monetary Fund in June. With a monetary base that is up over 30% since last year, in a nation that knows something about IMF intervention, that was like waving a red cape in front of a bull. 
The peso was thus vulnerable when currency speculators launched an attack on the Turkish lira last month and the flight to the dollar spilled over into other emerging markets, including Argentina. After decades of repeated currency crises, Argentines can smell monetary mischief. A peso rout ensued.
Conventional Wisdom these days -- the standard view around the Fed, IMF, OECD, BIS, ECB, and at NBER conferences -- says that countries need their own currencies, so they can quickly devalue to address negative "shocks." For example, conventional wisdom says that Greece would have been far better off with its own currency to devalue rather than as part of the euro. I have long been skeptical.

It's not working out so great for Argentina. As Mary points out, short term financing means there can be "speculative attacks" on the currencies of highly indebted countries that run their own currencies, just as there can be runs on banks. And Conventional Wisdom, silent on this issue advocating a Greek return to Drachma, was full in that the Asian crises of the late 1990s were due to "sudden stops," and such speculative machinations of international "hot money."

Well, says CW, including the IMF's "institutional view," that means countries need "capital flow management," i.e. governments need to control who can buy and sell their currency and and who can buy or sell assets internationally.  Yet Venezuela and Iran are crashing too, and not for lack of capital flow "management." My understanding is Argentina does not allow free capital either. Moreover, if there is a chance you can't take your money out, you don't put it in in the first place. There is a reason the post Bretton Woods international consensus drove out capital restrictions.

So I agree with Mary -- dollarize. Just get it over with. What possible benefit is Argentina getting from clever central bank currency manipulation, if you want a dark word, or management, if you want a good one? Use the meter and the kilogram too.

There is a catch, however, not fully explicit in Mary's article. The underlying problem is fiscal, not monetary. To repeat,
"Mr. Macri was moving too slowly to reconcile fiscal accounts. ...In 2016 and 2017 the government continued spending beyond its means and borrowing dollars in the international capital markets to finance the shortfall." 
So, I think it's a bit unfair for Mary to complain that Argentina's problem is that it "has a central bank." I don't know what any central banker could do, given the fiscal problems, to stop the currency from crashing.

If the government dollarizes, it can no longer inflate or devalue to get out of fiscal trouble. Argentina has pretty much already lost that option anyway. If the government borrows Pesos, inflating or devaluing eliminates that debt. But if the government borrows in dollars, a devaluation or inflation taxes a much smaller base of peso holders to try to pay back the dollar debt.

Still, a dollarized government must either pay back its bills or default. That's how the Euro was supposed to work too, until Europe's leaders, seeing how much Greek debt was stuffed into French and German banks, burned the rule book.

So the underlying problem is fiscal. With abundant fiscal resources, the government could have borrowed abroad to stop a run on the Peso. And without those resources, dollarization will not solve its debt and deficit problem. Dollarization will force the government to shape up fast, which may be Mary's point.

Dollarization will insulate the private economy from government fiscal troubles. This is a great, perhaps the greatest, point in its favor. Even if the government defaults, companies in a fully dollarized, free capital flow economy, can shrug it off and go about their business. Forced to use pesos, subject to sharp inflation, devaluation, capital and trade restrictions, the government's problems infect the rest of the economy.

Last, CW likes devaluation and inflation because it supposedly "stimulates" the economy through its troubles surrounding a crisis. That strikes me as giving a cancer patient an espresso. Argentina is getting both inflation and recession, not a stimulative boom out of its inflation.

Dollarization is not a currency board, which Argentina also tried and failed. A currency board is a promise to keep the peso equal to the dollar, and to keep enough dollars around to back the pesos. Alas, it does not keep dollars around to back all the governments' debts, so the government soon enough will see the kitty of dollars and grab them, abrogating the currency board. Dollarization means the economy uses dollars, period, and there is no pool of assets sitting there to be grabbed.

46 comments:

  1. Question: I understand El Salvador and Ecuador have dollarized, as well as Panama (since TR promoted the secession), and a few Caribbean island governments. How has that worked out for them?
    Isn't the impulse for a government to issue its own scrap paper an aspirational manifestation of "nationalism," and promoted by politicians as such for their monetary toy box?

    ReplyDelete
    Replies
    1. A comment below speaks for Ecuador. I would argue that dollarization has helped Ecuador circumvent what could have been the problems of being a "Dutch-diseased economy" often run by populist socialists. Against this backdrop they have done fairly well. Panama has done even better, dollarization having complemented the country's competitive advantage as a financial center. That is not to say that Argentina's transtion to a dollarized economy would be easy or that success is assured. But its future citizens and future creditors deserve to be giving a choice at a future where delusion is not the only choice.

      Delete
  2. For a long time, the private economy was dollarized, at least for large transactions. Ever heard of anyone buying an apartment in Buenos Aires with pesos? Even after the previous government made dollar transactions illegal? I haven't.

    Maybe the least worst of all worlds is to pay taxes and government workers with scrip called pesos and have the private economy operate on USD. Then, let the peso/USD exchange rate float.

    ReplyDelete
  3. Do you think of dollarization as substantially different from the gold standard that was all the rage in the 1920's & 30's? I suppose you could argue that the gold standard is more like a currency board than dollarization... Maybe we should have reverted back to using gold coins for everything back then?

    Bonus question: If you dollarize, you gain a certain amount of currency stability, but don't you open yourself up to, for lack of a better term, bullying, from the country that "owns" the dollar?

    ReplyDelete
    Replies
    1. You are correct. And one of these days the US will be forced to do it for the same reasons as Argentina.

      Delete
  4. The risk of the currency board failing due to government avarice reminds me of the "Kirchner nationalized private pensions in late 2008" story.
    https://www.nytimes.com/2008/10/22/business/worldbusiness/22argentina.html

    Tangible private pension assets were converted into government Peso promises by the government. In hindsight, this event should have tempered all future investment in Argentina.

    ReplyDelete
  5. You didn't mention that spontaneously using the dollar would sacrifice the seignorage flow. In 1980, Israel negotiated a rebate with the US to cover the seignorage that would otherwise be transferred from Israel to the US. But the plan never went into effect--the Bank of Israel used conventional tight monetary policy to bring inflation under control

    ReplyDelete
    Replies
    1. Yes, and that is the argument for a currency board as well. As you suggest, perhaps some rebate could be negotiated. On the other hand, it's not clear seignorage is that important -- in a non inflationary steady state. Non-interest-bearing currency is a small fraction of GDP, and nominal interest rates are pretty small these days.

      Delete
    2. As far as I am aware, the plans to dollarize the Argentinean economy in the late 90s fell through because the US was unwilling to rebate part of the seignorage; I don't know how important this is in economic terms, but it certainly is in political ones.

      Delete
    3. Also, "dollarization" doesn't have to involve US dollars. Euros or Yens would work--and would be less tainted of "American Imperialism". Argentina could also negotiate a rebate with, say, the ECB or the BoJ.

      Delete
  6. Rogoff makes the same point quite succintly here :
    https://www.project-syndicate.org/onpoint/crash-time-by-kenneth-rogoff-2018-09
    " ... central bankers do not live in a world of their own. They may have a measure of independence when it comes to setting interest rates and targeting inflation; but at the end of the day, they are basically wielding a very liquid form of government debt. Monetary policy is simply one side of fiscal policy. ... "
    And yet, if one assumes that a country is "endowed" with a majority predatory population that wishes to grab as much as it can from what it considers to be the "haves", to supposedly pass it to the "have nots", what can the government possibly do but run perennial deficits and hope enough of the predatory clan are close enough to the source of money to buy things before the rest get their new money and drive prices up. Thus, government can get them to keep voting for it to stay in power ? Most pre-modern societies operate in a frame of mind that industrial societies have forgotten about. In pre-modern societies, conditioned for glacial rates of productivity growth, the only way to get ahead is predation, not production, or, as Bastiat would have it, plunder. If plunder can be made legal, so much the better.
    US university Economics professors have no idea of the prevalence of plunder, legal or otherwise, in most of the rest of the world. Thus, they keep dreaming that countries such as Argentina or Greece can get rid of their predatory majority by a suitable fiscal policy. This hope is utterly unrealistic.
    George J. Georganas

    ReplyDelete
  7. I do agree with you and O'Grady - dollarization for Argentina is probably best. But... Argentina's fiscal problem are so woefully big, that it is not clear that they can do it overnight, if at all. The Argentinian state is so big, the provinces take so much money from central government, the (Peronist) trade unions so powerful, that it is almost impossible to solve.
    That is what happens after 70 years of Peronist misrule. Lobby groups, rent seeking groups, including private companies that live off government contracts, government money, all of that is so powerful in Argentina that it is beyond repair.
    The military government from 1976-1983 tried the fixed exchange rate regime, and succumbed to fiscal issues (among other issues, of course). The government that followed it (Raúl Alfonsín) well intended, ended up with hyperinflation and had to leave 6 months early to leave room to Carlos Menem. Menem's government, after some false starts, introduced the currency board system, which was abandoned in 2001 - again because they could not get the fiscal issue under control. Remember how the currency board ended, by a standing ovation of the Argentinian Parliament repudiating the country's foreign debt.
    This was followed by the horrible Kirchner misrule, so much so, that nobody knows what the true accounts of the Argentinian state really are.
    And here we are. Argentina has such a gigantic - no, ginormous - fiscal problem, that I am really not sure that a dollarization is possible.
    Argentina is a lost cause. They must get rid of the root problem first, the Peronist mindset. Not before then, it will not work.

    ReplyDelete
  8. I have retired to Ecuador, which dollarized in 2000. It was mostly a collective act of the people, starting around 1998. The gov't simply went along with the fait accompli. I have not met a soul who regrets that change. A man about my age runs a nearby hardware store, he still keeps sucres (the old money) in his wallet as a reminder.

    ReplyDelete
  9. A fascinating footnote to the Argentine peso: According to my records, which begin in October 1916, you could buy 2 pesos for one dollar at that time. If that same unit of account were still in existence today (they've changed the currency 4 times since), one dollar would get you about 370,000,000,000,000 (370 trillion) pesos. In other words, over the last century Argentina has lopped off no fewer than 13 zeroes from its currency!

    There is only one explanation for this: uncontrolled money printing. Whatever portion of the government's fiscal deficit that is not financed by legitimate borrowing is instead financed by directing the central bank to "print" money. This shows up on the central bank's balance sheet as a "loan" to the government which is of course never repaid. In the past year, the Argentine monetary base has increased by 46%. Is it any wonder that the peso has dropped by over 50% during that same period?

    I agree that dollarization would be the best solution in theory, but in practice there is a huge problem that needs to be solved first, and that is how to finance or eliminate the government's fiscal deficit, which is currently on the order of about 4% or so of GDP, or roughly $25 billion.

    ReplyDelete
  10. It seems to me that the issue of "dollarization" in Argentina is increasingly being discussed out of the country. Maybe more even so than inside in Argentina itself, where the conventional wisdom (CV) rejects any discussion of the idea.

    Also, the fact that we can imagine a properly managed central bank (in Argentina) as described by the CW does not mean it will happen.

    I agree that the underlying issue is fiscal, and that there is only so much a central bank can do in that situation. If only to trigger a deeper discussion about economic and political reform, a proposal of dollarization can be of help.

    PS: A blueprint of a proposal from a few years ago: http://www.independent.org/publications/tir/article.asp?a=1032

    ReplyDelete
    Replies
    1. Nicolás,
      The problem in Argentina is Peronism and its mindset. Argentinians must get rid of that Peronist mindset, that is deeply embedded populist demagogue mindset, that tries to be everything to everybody, and promises everything to everybody, and misrules the country now for 70 years or more. Peronist thinking and the Peronist mindset is so etched into the Argentinian way of life, that unless they get rid of that first, nothing will happen.
      Fortunately, there are lonely voices in the desert that yell from the rooftops that exact thing, like your economist uncle Roberto Cachanosky, or the journalist Eduardo Feinmann, but those are lonely voices in a sea of Peronist voters and people.

      Delete
  11. Argentina looks so promising in the first months of the Macri administration.

    I wonder to what extent dollarization would drive anti-American sentiments that could ultimately contribute to President Macri's political downfall.

    Perhaps a change of government could ultimately be for the better. A left-wing/left-of-centre president might be much better positioned to sell austerity.

    I agree with Manfred; the Peronista mindset is toxic. Dangle the Nordic social democracies in front them as one way of doing freemarket capitalism really well, and the Argentinian left will not bite.

    Relative to its potential, Argentina has stagnated so long in the post-war period it is difficult to imagine a time when Argentinians will play well together and do so without constantly cheating each other.

    -Erik

    ReplyDelete
  12. If Argentina adjust it's fiscal deficit, the current account deficit will decline. A real exchange rate depreciation will be required. With Argentina dollarized, you need a deflation. This will be painful if you have wage and price indexation. A nominal depreciation can adjust the real exchange rate.

    ReplyDelete
  13. Seignorage depends more on the demand for money than on interest rates. If the base in local currenvy is , say, 15 percent of gdp, multiplier and velocity stable, then 4 percent growth and 3 percent inflation would produce 1.05 percent of gdp for free. I tell my students in Malaysia to pity Cambodia, Laos and Myanmar for being largely dollarized. Almost no revenue from seignorage.

    ReplyDelete
  14. Best decision ever in Ecuador was dollarization. The whole country changed for better life style. Thanks to that currency change, last failed goverment didn't broke the economy causing a collapse similar to Venezuela.

    ReplyDelete
  15. Fiscal indiscipline and populism will not disappear with dollarization. In periods of good terms of trade, spending and wages (set by trade unions, not flexible) rise to levels that cannot be sustained under average crop prices. The only difference is that, with dollarization we would end up in economic depresion and a full blown banking crisis, not just a run on the currency.

    ReplyDelete
  16. I am a US ex-pat living and working in Argentina.

    You present a good overview of the theory and argument for a dollarization scheme in general but I don't think it will work in Argentina for two reasons. First, to implement such a scheme a government must have reliable access to dollars, mainly through net trade. Not only does Argentina have a relatively insulated economy with trade being only 25% of GDP (quite low for a G20 nation), but exports to the US is only 8% ($4.7B) of total exports but imports are 13% ($7B) of total imports. With already paltry foreign reserves, Argentina simply cannot retain enough dollars to make dollarization practical. Dollarization only really works for small nations with closer integration with the US economy.

    Second reason, the average Argentine does not have a favorable opinion of the US. I don't see them accepting the US Dollar as their currency without severe political costs to the administration that implements it.

    As the US has been ignoring the Southern hemisphere in recent decades, I actually think it more plausible that Argentina would adopt a link to the Chinese Yuan (perhaps leading to eventual "Yuanization") than to go the route of dollarization. The Sino-Argentine relationship is getting warmer and China is increasing its investment into the country, and, importantly, has recently become a larger net trading partner than the US. I don't really think that will happen, either, but it would make more sense IF other trade partner nations in SE Asia and Africa also begin Yuan-denominated trade relationships.

    Ultimately, the answer to a stable peso will be exactly what president Macri is trying to do, return to fiscal orthodoxy, root out corruption, assert the independence of the central back, build confidence in institutional strength and clearly demonstrate the rule of law and a court system that will defend investor's capital.

    Thank you for the opportunity to present my own personal view of the issue.

    Sources for data: World Bank, MIT

    ReplyDelete
    Replies
    1. You are right that I am showing a typical US parochialism. The euro might be a better choice, or maybe the swiss franc. China still does not have a freely exchangeable currency, though on the other hand accepting Yuan might be a very clever way to attract a flood of foreign investment from Chinese people trying to get money out of their country.

      Delete
    2. Unfortunately not the case now that capital controls are back in full swing in China. The speculative attack against the Yuan worked (the PBOC burned USD 1 trillion in reserves fighting it) and the PBOC had to tighten controls to maintain their ability to set the direction of the exchange rate.

      Delete
  17. Prof. Steve H. Hanke of the Johns Hopkins University email: hanke@jhu.eduSeptember 11, 2018 at 5:12 PM

    John,

    You make the same mistake that most economists make. Argentina did not have a currency board in the 1991-2001 period. It had a Convertibility System. The Convertibility System allowed for a great deal of discretion, which the BCRA exercised with reckless abandon. In contrast, currency boards allow for absolutely no discretion. See my Oct. 1991 WSJ article and my Central Banking Article of 2008 (and there are many others, probably over 100 articles in which I made similar points). You are not alone. Kurt Schuler, in a 2005 Economic Journal Watch article, discovered that some 97 percent of major professional economists misidentified Argentina's Convertibility System, too. If economists would bother themselves to look at the balance sheets of monetary institutions, they would not fall into this misidentification trap. Sir John Hicks was right when he said that there was nothing more important than a balance sheet.

    Steve

    Links to above mentioned articles:

    Oct. 1991 WSJ:

    https://poseidon01.ssrn.com/delivery.php?ID=999110013020003102090115094066115065028075037051019060102005080028114086006112112101124013053029106045002086124090068021092113007001075005054064112085025017031039085051000103115121088114113113074094001016006076109125022029090084077114071019025084&EXT=pdf

    2008 Central Banking:

    https://object.cato.org/sites/cato.org/files/articles/hanke_feb2008_argentina_currencyboard.pdf

    Schuler 2005 EJW:

    https://econjwatch.org/file_download/86/2005-08-schuler-tyranny_statquo.pdf?mimetype=pdf

    ReplyDelete
    Replies
    1. Steve: Thanks for writing and setting the record straight. Still, I have lost faith in currency boards, because though 100% of currency may be backed, no government can back 100% of its outstanding debt. The currency board assets will always be there, waiting to be seized.

      Delete
    2. So am I wrong in summarizing this whole debate by saying that places like Argentina adopt fixed exchange rates as a way of committing to a stable monetary and fiscal policy? If so, should we just think about currency stabilization systems, currency boards and dollarization as increasingly binding commitment mechanisms? (BTW, thanks for reminding us of what Argentina actually did.) But the thing I really don’t get is just how serious a commitment is a country making when they dollarize. I’m pretty sure they have been lots of examples of countries that permitted partial dollarization (allowing people to hold dollar-denominated accounts and assets) but then forced de-dollarization. But I’m not sure if there are countries who eliminated a national currency and then later reintroduced a currency and forced people to convert. That seems like a really tough thing to do. If so, total dollarization is really good commitment device.

      Delete
  18. Very bad idea. Dollarization would do nothing as any new government could issue a new currency and mandate that this currency should be taken at par with US dollars.

    ReplyDelete
  19. No, please no. No dollarization. The underlying problem is not fiscal, it is institutional. How exactly will dollarization discipline weak and corrupt institutions? By which mechanisms will dollarization really force the country to manage its finances better? Yes, it will be a new restriction on governments, but I can already see 100 different ways to inflate debts (from IOUs to forcing people to accept some sort of quasi-money). The credit crunch will be enormous and the economic damage will make weak institutions ever more fragile. People will hoard bank notes, the financial system will colapse and I can already foresee a civil war and/or the establishment of a new currency.

    ReplyDelete
    Replies
    1. RodZ: I agree, the heart of the problem is institutional. But the whole point of dollarization is to force discipline on weak and corrupt institutions. In a truly dollarized economy the government's ability to run a deficit is limited by the willingness of outsiders to loan them dollars. That's tough discipline. Your "100 different ways to inflate debt" amount to reneging on dollarization. That could be done, but it's not simple. (An alcoholic can break the lock he puts on the liquor cabinet but installing the lock and throwing away the key makes back-sliding more expensive.) One can argue that dollarization is a useful first step to reform, not a substitution for reform.

      Delete
    2. But Argentina has done it before! It had a currency board that was almost dollarization. It happened in a credit crunch and a financial crisis (surprise surprise). So your argument that reneging would be hard? It was done in the same country! And why is nobody talking about the downside of dollarization? Again, look at Argentina. A huge economic crisis that preceded the abandoning of the currency board. All caused by the deflationary aspects of a dollarized economy. Dollarization leaves a country open to contagion from foreign crises. Imagine what would have been the effect on Argentina in 2008 if the country was dollarized. Dollarization takes away monetary policy autonomy, which is fine as long as the disciplining effect works and there is no contagion from foreign crises. Argentina has already walked the dollarization path and it indeed badly (before dollarization was abandoned the country had negative growth rates in the previous 3 years). Why repeat it? A bit of fiscal discipline and high interest rates can solve this currency crisis much more easily than full-blown dollarization. Sorry, but even as a Latin American economist who grew up during hyperinflation, no. Dollarization is not the answer to macroeconomic mismanagement. Throwing away the baby with the bathwater is not the answer.

      Delete
    3. BTW, what is a country supposed to do in the (inevitable) instance of a financial crisis?

      Delete
  20. What would prevent the government from giving up dollarization in times of crisis, like Greece or any other country giving up the €? In other words, is there anything that makes dollarization more credible than a currency board?

    ReplyDelete
  21. The idea behind the WSJ column, John’s blog and many of the (thoughtful) comments seems to center around the question of whether dollarization, a currency board or some other sort of commitment to fixed exchange rates can improve the economic mismanagement in Argentina. But what if the government doesn’t care about getting things right? Just for fun, try the following thought experiment:

    A Latin American country has become Ayn Rand’s worst nightmare. The Moochers have unlimited government power and use it to extract everything possible from the Producers. They want to set tax rates so as to be at the peak of every Laffer curve. They provide only the level of public goods to the Producers that maximizes the amount of goodies available to be taken and transferred to the Moochers. Against that background answer three questions:

    Question 1: What is the one public good the Moochers would absolutely want to provide to everyone?
    Answer: A type of money that serves as a stable unit of account and reliable store of value. (Unstable money hurts Moochers and Producers. Stable money makes the Producers more productive and so makes them more profitable to exploit.)

    Question 2: What is the easiest way to do this?
    Answer: Dollarize. (Moochers are a well-understood group of people in emerging markets. No one believes that any currency they create will be stable. Sure, there’s a seignorage penalty but as John points out, that’s not a particularly big deal.)

    Question 3: Why don’t the Moochers just do it?

    First Conjecture: Adopting the currency of the Evil Americans will be a blow to national pride that will undermine the Moochers authority. (Maybe, but the Europeans dumped their currency without too much fuss. If the Moochers really want to feed tribalism, they can fix a few soccer games—FIFA works cheap.)

    Second Conjecture: If the Moochers could just roll back time and start with a dollarized economy, they would. But given current circumstances, the transition to a dollarized economy would be too painful. (For one thing, a dollarized economy needs a bullet-proof banking system since the Central Bank can’t be the lender of last resort. More importantly, the Moochers would need to run a balanced budget—which is why Cochrane, Mary O’Grady and the other do-gooders want them to try it. The Moochers just don’t have a tax/regulatory infrastructure in place that would enable them to exploit the Producers in a low-inflation, balanced budget world.)


    Third Conjecture: The answer to question 1 is wrong, Moochers just don’t care about providing a stable money. You can’t monetize a deficit in a dollarized country and monetizing the deficit is an important way the Moochers exploit the Producers. (Maybe. If all that matters are the Very Important Moochers—say, the Head Moocher, his wives, children and cronies—then extraction by monetization is a great idea. The VIM’s can protect their assets from inflation. But otherwise the evidence is pretty clear that a stable currency is a good thing in normal high-tax/transfer welfare states.)

    ReplyDelete
  22. What a mess. Dollarizing may end being painful in the short term but I suppose it will force some fiscal discipline. Or will it? Will we see a repeat of a Greek Tragedy? (Austerity.)

    ReplyDelete
  23. I don't agree with this point of view. The cost and benefits of dollarization are clear, and from my perch, costs outweigh benefits. Please use Google Translate for this article, which is really interesting: http://focoeconomico.org/2018/07/25/la-dolarizacion-es-una-mala-idea/

    ReplyDelete
  24. For the 12 months ending last Friday, the growth of Argentina's Monetary Base was no less than 55%. For the past 10 years it has averaged well over 30% per year. This is the problem. Unchecked expansion of the money supply at a time when demand for pesos is falling is a deadly combination. Since April the BCRA has sold about $36 billion of its scarce reserves to accommodate capital flight (ostensibly to "support" the peso). Yet despite the huge outflow of capital from the country the peso money supply continues to surge. This growth is fueled by what the central bank labels "advances to the federal government" in its balance sheet.

    One simple method of restoring sanity would be to forbid the central bank from making advances to the government. Simply put, the central bank should not be allowed to issue pesos without the banking of some hard (dollar-based?) asset. Might that not be easier than implementing a currency board?

    Of course, the problem always boils down to whether the Argentine government can be trusted to honor its pledges and its laws. If it can't be trusted, then nothing will work. That's been the lesson of the past century. Will Macri be able to change that? That is the question of the day.

    ReplyDelete
  25. John,

    "Dollarization will force the government to shape up fast, which may be Mary's point."

    Like Puerto Rico??

    ReplyDelete
  26. The trouble with any well-meaning scheme to rein in fiscal profligacy is the enormous number of people dependent for their very survival on this very fiscal profligacy. Focusing on monetary and exchange rate remedies just detracts from the essential problem. In the words of Abraham Lincoln : "too many piglets for the tits". This is the real problem and no amount of obfuscation about money or foreign exchange can address it.
    George J. Georganas

    ReplyDelete
  27. @mike davis: Interesting thought experiment.

    In real life, the Producers often call for expansionary fiscal and monetary policy that some might characterize as risky. (Then there is mind-numbing
    call for annual balanced budgets that comes out of the business sector on occasion.)

    Take the USA for example. It conducts dual mandate monetary policy. Employment -- on the Producer side -- is targeted.

    The dual mandate supports a large cadre of well-educated, well-paid economists. Are they Producers or Moochers?

    From a Neo-Marxist perspective, Moochers are important in order to forestall the inevitable (sic) crisis of overproduction and economic crisis. I mention this because sometimes I have trouble distinguishing between conservative populists and Neo-Marxist inspired populists. Example: President Trump's Marxist-Keynesian fiscal policy.

    -Erik

    ReplyDelete
  28. Basically the problem starter from an excessive ambition of politicians when assume gobverments, each politician applies owns recipe to solve economic problem.
    As one of the reason Macri applied the economic mechanisms takeover as much possible Argentine pesos on the circuit through Lebacs, offering a high interest rate, without considering the originated of foreign currencies. Causing major of investment of Lebacs, one thing is to take pesos and other dollars, where being changed to pesos for Lebacs.
    Government in its ambition of money (effect of ludopatia) continued with this strategy even when have win elections with repeated and unfulfilled promises, causing fallen into its own trap underestimates the inflationary indexes, beginning a falling stage.
    By the other hand one of the biggest problem of Argentina is it own financial system demanding dollars from the reserves to solve demands and not for covering deficit issues as its budget citing sustainability of retirements, etc., when problems becomes from a containment of the dollar where every Argentine people on day by day doesn't have any relationship with the dollars.
    In conclusion, dollar problems mainly becomes from a few and the government by the own mistakes and paided by each Argentine.
    So Argentina economies is already dollarized, but differences government dollarized services tariffs and products and goods already are subject to the dollar currencies.
    So if dollar will be controlled by the treasure of the USA economy situation will not change anything, It will be worse for Argentines people on in their economy where remotely see a dollar!
    Just important point:
    Macri re-election it seems no possible as the current political situation it make more possible to a popular candidate, as these happens could revert political decision to dollarize and control from US treasure, therefore have considering these point IFM and US treasure?
    The other point these kind of decision should be passed and approved from Argentine congress what it think these idea Argentina go to the dollarized economy could be possible

    ReplyDelete
  29. I am no economist but i doubt dollarization, yunanization, currency boards would accomplish much because it is dubious that whatever path this government chooses a subsequent government will follow -- this has been going on in Argentina for over 100 years. Let's all remember the private pension funds a la Chile and how a subsequent government looted them. I think economists refer to this phenomenon as a time inconsistent action by government.

    ReplyDelete
  30. @RodZ wrote: "A bit of fiscal discipline and high interest rates can solve this currency crisis much more easily than full-blown dollarization."

    Can both the government and the central bank credibly commit to an effective course of painfully tight fiscal and monetary policies? That is the key question and post-war Argentinian history tends to suggest that answer is "no".

    ReplyDelete
    Replies
    1. If the answer is no, then dollarization won't help as well. It is a commitment device for which the escape clause is painful but doable. But again, the solution is fiscal discipline (first and foremost) and high interest rates (already happening). Anything else will create many more problems down the road.

      Delete
    2. Good answer RodZ. Here is wishing Argentina all the luck in the world. (Perhaps best not to use Argentinian vulgar slang for 'luck'... it could be misinterpreted.)

      Delete
  31. Why the dollar rather than the Chilean peso? Chile has sub-3% inflation and low public debt. It's dangerous to tie Argentina's monetary tightness/looseness to America's. Argentina and Chile are right next to each other and both export a lot of commodities. This could even improve trade between the two countries, and encourage Argentina to make its economy more like Chile's.

    Argentina would still wind up borrowing in a different currency, but what seems to be important is that the government can't print money to cover its shortfalls.

    ReplyDelete

Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.