Argentina: The Urgency and Viability of Dollarization
Commentary: The discussion surrounding dollarization in Argentina often focuses on the impact on monetary sovereignty and the viability of a currency change. However, one crucial aspect that is often overlooked is the failure of the peso as a currency. This important factor is often disregarded in the media in Argentina, where the belief that the peso is falling while the dollar is rising persists.
So why is the peso considered a failed currency? Firstly, there are more than 10 different exchange rates for the peso, which creates a sense of fictitiousness and instability. The closest approach to a real exchange rate is the “dollar blue,” which accurately represents the true value of the currency. Secondly, the demand for pesos in both domestic and foreign markets is almost nonexistent, despite the significant expansion of the monetary base. According to the Fundación Libertad y Progreso, the demand for pesos is at its lowest level in 20 years and has been steadily declining since 2020. Meanwhile, the money supply has increased by four times. The monetary base has grown by 443% since 2018 and over 1,961% in the span of 10 years, according to the Central Bank of the Argentine Republic.
In addition, the central bank’s issuance of remunerated debt, such as Leliqs and Pase, exceeds 12% of GDP, which poses a significant financial risk. Over the past five years, the monetary base has grown by 1,050%, including these impending monetary bombs. This continuous expansion of the monetary base, combined with a confiscatory monetary policy, undermines the purchasing power of the peso.
The failure of the peso is evident in everyday transactions, such as restaurants offering discounts of up to 30% for cash payments due to the loss they incur from credit card bills. Argentines are well aware that holding onto pesos means losing money each day.
It is possible to dollarize the Argentine economy, and in fact, many Argentines already dollarize their assets to protect themselves from the government’s financial policies. To achieve dollarization, Argentina must address the enormous gap between the official exchange rate and the real-unofficial rate, as well as close the gaps in the Leliq and Pase monetary systems. This requires implementing immediate reforms, lifting export restrictions, and removing barriers to trade and bureaucracy.
Moreover, Argentina must address its massive trade imbalance, which is a result of misguided monetary and fiscal policies. By adopting a more interventionist approach and focusing on fiscal and monetary surpluses, Argentina can create wealth and enhance the purchasing power of social security and retirement plans.
The idea of monetary sovereignty in Argentina has only contributed to corruption, poverty, and the devaluation of the peso. It grants politicians control over the supply of currency, enabling them to benefit from its depreciation. Switching to a new administration does not solve the issue, as populist measures often lead to further monetary imbalances. Therefore, dollarization is the solution to prevent further devaluation and to break free from the cycle of inflation and poverty.
Trading in yuan or adopting a gold standard would not address the underlying issues with the peso. China does not accept pesos in international transactions, and Argentina’s lack of gold reserves undermines trust in any gold-backed currency.
In conclusion, the failure of the peso as a currency necessitates dollarization in Argentina. Failure to do so will result in further impoverishment and inflation. It is time to acknowledge the peso’s shortcomings and embrace a more stable and reliable currency.
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