Milei and dollarization
I try not to blog about stuff I don’t know much about, but sometimes I can’t help myself. This is one of those times, so caveat lector. This could be way off base. Do not quote this to your friends. Do not train your AI on it.
Argentina’s libertarian President Javier Milei has made noises about dollarizing the Argentine economy. I have no idea if this would be a smart thing to do, but let’s assume it is.
One argument against dollarization is simply that you can’t dollarize without getting your hands on lots of dollars, to replace existing pesos with. The economy needs currency to function, and even rapidly depreciating pesos are better than barter. Here is Tyler Cowen:
Another concern, more significant, is that dollarization would be a huge upfront cost to the government of Argentina: Someone would have to actually come up with all the dollars to serve as currency. Keep in mind, however, that the economy of Argentina would also be acquiring a valuable asset — namely, dollars. The net cost should be zero; realistically, acquiring the dollars should prove a net positive. Argentina’s government needs to invest in the future of its citizens, and introducing a stable currency is one of the best ways to do so.
Cowen seems to think acquiring dollars shouldn’t be an insuperable problem. I’m not sure what he has in mind here, maybe he’s thinking that it would be a wise decision for Argentina to borrow greenbacks. The problem is that Argentina is on the brink of another debt default, so finding a lender might not be so easy.
But here is my question: why shouldn’t the United States just give Argentina the dollars it needs to dollarize? We print a bunch of dollars and digital equivalents, give them to the Argentine government, which then exchanges them for pesos. The dollars then circulate in Argentina, greasing the wheels of commerce. What cost is there to us, other than printing and shipping greenbacks?
It seems unlikely that this will happen, of course, because the optics would be terrible. (“Why are we giving billions of dollars to Argentina when we have so many problems here at home?”) But really, what would the cost be? Indeed, why shouldn’t we offer free dollars to any country that wants to dollarize? If dollarization is really a good policy, we can help our neighbors and appear very generous without, in fact, incurring any significant costs at all. What am I missing?
I don’t think you’re missing much. You certainly nailed this objection: “Why are we giving billions of dollars to Argentina when we have so many problems here at home?” Another objection I can imagine is: “Printing that many dollars and handing them out will create hyperinflation in the US.”
I can’t speak to the merits of the proposal, but the objection of Trump is easy to foresee: “How does this enrich me?” And the GOP, which has now become the Trump Cult, will follow in lockstep the solipsism embodied by their Dear Leader. Sad.
Look no farther than yesterday’s Faux News monkeys masturbating President Biden hosting a state dinner for the Japanese Prime Minister “when we have so many problems here at home?”
My point is that giving dollars to Argentina for dollarization will not cause hyperinflation (or any inflation) here, because to a first approximation the dollars will just circulate in Argentina. They won’t cause any more inflation here than the circulation of pesos currently does.
@Eric,
Understood. I wasn’t raising it as a legitimate objection, but anticipating the “objections” of the obstructionist right, which can’t see interests beyond its own visual field.
kramer
for what it’s worth I think that much is right. as long s the dollars go to Argentines in exchange for real production there should be no problem..dollars would still be in proportion to product. but i know nothing about the mechanics of how the dollars get there. and expect a great deal of corruption would just result in bad guys using the dollars for purchases of American product or property to their own enrichment and pricing Americans out of their own product.
well, i don’t know what i am talking about either. but imagine this scenario:
we print money (paper dollars or credit lines in a ledger) and somehow (how?) give it to (someone) in Argentina. presumably they spread it among the population by declaring it legal tender and denominating credit and debt in dollars. so far no problem. the people go about their businesses and exchanges denominated in dollars (that do not inflate for whatever reason pesos did), and as long as they create value for the dollars they receive, so far no problem.
but suppose a bunch of “elite” person get a bunch of paper dollars or electronic dollars and go to a nice town in, say, Oregon, and buy up all the farmland…by making offers to the owners (usually anymore the worthless sons of the real farmers now deceased, who do not want to be farmers or even landowners bothered with the business of crop sharing) they can’t refuse.
now we have a lot of very rich former farmers-sons, and land prices that ordinary workers cannot afford. what happens to workers, wages, and the freedom to take your dog for a walk on someone else’s property?
and why did those pesos get inflated anyway?
btw, don’t the new rich former farmer sons now have a lot of dollars they, and nowone else, created value for. they take it to Las Vegas (creators of value of a sort) and spend it into the economy, increasing the money supply without increasing GDP. does this cause inflation of the dollar. or just a redistriubtion of dollars away from manufacturing jobs to whatever it is the girls in Las Vegas do for…and with..their money? [if one watched “The Big Short” one might guess they use it to buy collateralized debt obligations.]
Dollarization is not hypothetical. There is already plenty of historical experience with dollarization: Ecuador, El Salvador, Zimbabwe, The British Virgin Islands, the Turks and Caicos, Timor and Lest, Bonaire, Micronesia, Palau, Marshall Islands and Panama. So far, it hasn’t crashed the dollar or led to hyperinflation in the US. The dollar remains the world’s reserve currency and US Treasuries are still selling. Of course, Argentina’s economy is larger than any one of those and probably larger than all of them put together.
Dollarization successfully ended hyperinflation in Zimbabwe for years. Then, Zimbabwe reintroduced their own currency and outlawed official use of the US dollar. Inflation there is currently ca. 55%.
joel
thanks. i was wondeing about all that. can’t say i know how it works.
To follow up on my earlier comment, Panama dollarized in 1904, Ecuador dollarized in 2000 and El Salvador in 2001. So dollarization is not only not hypothetical, it’s not even new. There are data.
From what I’ve read, the chief risk of dollarization is for the country that gives up control of its currency in favor of the dollar, because the Fed decisions will always be based on US economic considerations and not the concerns of the dollarizing nations.
Joel
I made a very brief search to find an explanation of how this works, because it seems to me to be potentially more complex than “it works” or “has worked”. no luck. i may not be able to get back to it. so if “it works” works for you, good for you. but then why did kramer bother to write a post about it?
the concerns expressed in my comment about “imagine this” are a product of my general feeling that economists satisfy themselves with the first explanation that comes to mind and never look at what else happens. i can’t say i feel that “economics” is working very well for people’s real needs.