Argentina had a choice: Stick with a socialist and massive hyperinflation or try something else. Argentina chose wisely. Now what? 
Congratulations Argentina!
This morning I commented Congratulations Argentina for Electing the World’s First Libertarian President
Polls Wrong Again
It was supposed to be a very close election. But the polls got it wrong again.
Libertarian Javier Milei whomped Peronist Economy Minister Sergio Massa, by a margin of 56-44 percent.
Milei is pro-US dollar with plans to adopt the dollar and end Argentina’s central bank.
I commented …
It was a promise capitalism and free market reforms, not the dollar, that decided the election.
Dollarization will be hard. And unless that’s doable by decree, he may not even be able to get the legislature to do that.
It’s moot if Steve Hanke is right or I am right because the key question is the same.
MAGA Comparison
Excellent comparison. Click on “Show More” to see.
What is the Way Forward?
Milei cannot do this by decree. Argentina’s legislature would have to agree.
The Wall Street Journal discusses the setup in Argentina’s New President Wants to Adopt the U.S. Dollar as the National Currency
I strongly agree with some of the article and strongly disagree with other parts. And I have my own ideas about what Argentina should do and whether the IMF can help.
Let’s start with comments by President-elect Javier Milei. “Closing the central bank is a moral obligation,” Milei said late Sunday. “Never in pesos,” he said during the campaign. “That garbage isn’t even useful as fertilizer.”
The Hurdles Via WSJ
A major hurdle for Milei’s plans to swap out the peso is a divided congress in which no political faction holds a majority. The left-leaning Peronism movement that will rule Argentina until Milei’s Dec. 10 inauguration, as well as the center-right Together for Change coalition founded by former President Mauricio Macri, each hold less than half of the seats in the senate and lower house.
In his victory speech, Milei thanked the center-right coalition for helping secure his win, but he didn’t mention dollarization. It remains unclear how independents and moderates, who make up the remaining seats of the legislature, will respond to Milei’s agenda.
The courts are another challenge. In September, Supreme Court magistrate Horacio Rosatti told Spanish newspaper El País that replacing the peso with a foreign currency would be unconstitutional and violate national sovereignty.
Won’t Be Easy
I am in total agreement with all of the above.
In a report Sunday, Goldman Sachs economists said, “As with everything in economics, there is no free lunch, and adopting, preserving and benefiting from dollarization could be challenging.”
Assuming the legislature goes along, there is a Constitutional question.
But let’s assume for the moment Milei clears those hurdles.
Disagreement Over Flexibility
Without its own currency, Argentina would lack monetary tools to cushion external shocks, economists say.
“Argentina has no flexibility to absorb shocks like a sharp decline in export prices, agricultural price volatility, oil price increases, the impact of war on demand for your exports, political instability leading to withdrawal of deposits,” said Martin Castellano, head of Latin America research at the Washington-based Institute for International Finance.
Q: How does dollarization change that?
A: It doesn’t, other than improve things.
Argentina now has no flexibility to deal with export prices, oil prices, or anything else. It’s only method of trying was the printing press that led to hyperinflation.
In this regard, lack of currency printing press flexibility is a great thing.
And preventing runs on banks is easy, don’t lend out more dollars than people have on deposit and don’t leverage into borrow-short, lend-long duration schemes.
The US ought to try that. It would have prevented the collapse of Silicon Valley Bank.
The IMF Chimes In
Economists say the country doesn’t have the funds to carry out as ambitious a proposal as dollarization. In recent years, the country has lost access to global debt markets.
“To begin with, you need access to capital markets to convert the entire monetary base into dollars, and you don’t have them,” said Alejandro Werner, an economist who served as head of the Western Hemisphere department of the International Monetary Fund.
In general, the IMF is the problem, not the solution. It demands of bankrupt countries that they pay back everything the country owes in dollars.
Argentina’s External Debt June 2023
Debt vs Reserves
- Argentina has $262.2 billion in external debt.
- Argentina has $33.0 billion in foreign reserves.
The peso is worth about 10 cents on the dollar on the black market and the debt to reserves ratio shows why.
CATO Explains Dollarization
Please consider The Economist Gets It Wrong on Dollarization in Argentina
In a recent article, The Economist assures that inflation‐ridden Argentina should not and cannot dollarize. The publication’s anti‐dollarization stance is part of a broader warning against free market economist Javier Milei, who gained a surprise victory in last month’s primary elections and vows to dollarize the Argentine economy if he wins the presidency later this year.
The Economist misunderstands the most fundamental aspects of Milei’s plan to dollarize Argentina and shut down its central bank. This is, in fact, the best thought‐out and most urgent part of his political platform. It affirms, for instance, that “Argentine banks and households would need a float of dollars to get up and running, which Mr. Milei has no way of providing.”
As we explain in our recent policy brief, Argentina’s central bank might lack dollars, but Argentine citizens and companies do not. Private sector actors do try to shield themselves from the country’s frequent bank runs by holding dollars in other jurisdictions or under their mattresses. At the end of 2022, Argentines held over $246 billion in foreign bank accounts, safe deposit boxes, and mostly undeclared cash, according to Argentina’s National Institute of Statistics and Census. This amounts to over 50 percent of Argentina’s GDP in current dollars for 2021 ($487 billion). Hence, the dollar scarcity pertains only to the Argentine state.
To dollarize, Argentina needs to replace the peso‐denominated monetary base with the equivalent in U.S. dollars at — or slightly above — the free market rate of exchange. Dollarizing at a rate far above that of the free market would be counterproductive because it would produce even higher inflation levels for a prolonged period. On the other hand, dollarizing at a rate below the free‐market exchange rate would lead to a bank run because depositors would act to protect their savings from a forced devaluation.
In Argentina’s particular case, there is an official exchange rate—currently ARS $365—which most people cannot access. Hence, the black market exchange rate, known locally as the “blue dollar,” is the closest approximation to what a free‐floating peso would be worth in dollar terms. At the moment, ARS $740 will buy you one blue dollar.
The Mechanics of Dollarization
In both Ecuador and El Salvador, which dollarized in 2000 and 2001 respectively, dollarization involved parallel processes. In both countries, the most straightforward process was the dollarization of all existing deposits, which can be converted into dollars at the determined exchange rate instantly.
As Argentine economist Nicolás Cachanosky explains, when you dollarize deposits, the danger of a bank run is minimized insofar as dollarization takes place at the market rate and monetary transactions continue to take place within the banking system.
Crucially, in both Ecuador and El Salvador, dollarization not only did not lead to bank runs; it led to a rapid and sharp increase in deposits, even amid economic and political turmoil in Ecuador’s case. With the mere announcement of dollarization in January 2000, Ecuadorians began to deposit their dollars in banks even though the latter were so beleaguered they were paying negative interest rates.
What Argentina Shouldn’t Do
It is impossible for Argentina to pay back what it owes and should not even try.
Nor should Argentina accept any onerous strings from an IMF bailout.
The IMF accurately states Argentina does not have access to capital markets. But getting access via the enormous strings the IMF imposes is a mistake.
Anyone dumb enough to loan Argentina money despite repetitive bouts of hyperinflation deserves to lose that money.
What Argentina Should Do
- Argentina should declare all its foreign debts null and void.
- Adopt procedures along the lines of what CATO suggests above.
Stopping Bank Runs
The US does not have a gold-backed dollar. That went away long ago. President Nixon put the final end to it in 1971.
Unfortunately, we do not even have a 100 percent dollar backed dollar. This led to numerous borrow-short, lend-long schemes including the the recent run on Silicon Valley Bank.
Making a Truly Safe Bank
I have a number of suggestions on how to make a safe bank starting with a 100 percent dollar backed dollar.
For discussion, please see The Perfect Solution to the Banking Crisis Is to Make a Truly Safe Bank
One simple regulatory rule would have saved SVB, that being a 100% reserve requirement on deposits instead of a 0% reserve requirement on deposits.
Fed Policy, Zero-Reserve Banking
My follow-up article was Fed Policy: It’s Not Fractional Reserve Banking, It’s ZERO Reserve Banking
Money that is supposedly 100% payable on demand was in fact NOT payable on demand. It’s like leasing your car to two people simultaneously, banking on the notion one will not show up.
I recommend Argentina avoid this mistake.
I am in Argentina right now and the Dollar Blue is 1030 pesos per dollar!!!!
is this akin to a nation signing up to swap lines with the US? I suppose not quite, as you need a Central bank as a counterparty to the FED!
No country with a functioning Treasury, as the U.S. had 1790- 1913, has any need for a “central bank.” The entire key is resolving to live within your means so as not to have to report to trickery to juice things. It will take the courage of an Andrew Jackson, surrounded by a host of honest and brave friends to rid the system of these parasites, whose latest proposed scam is an all-digital currency regime.
he’s boxed in – yah people really NEED change
however legislature won’t allow his reforms
therefore he’s toast already
“ It’s like leasing your car to two people simultaneously, banking on the notion one will not show up.
”
This is silly.
With most modern central banks you can easily lease your car to at least 5 people simultaneously, probably more.
Argentina should become a full fledged EU member!! We have accepted and are willing to accept much, much worse than the Tango dancers, haven t we ? cf today’s, most corrupt country in the fc kn world; America’s money laundering, cannon fodder vassal named Whorekraine, for the time being. Of course, once in the corrupt EU circus, Argentina has to sign up with the criminal Nato gang….of course…
Ecuador has been dollarized since 2000 and they don’t seem to be any better off than the rest of SA. Interesting how SA never achieved the prosperity of NA. Seems like democracy took root in British based society, Magna Carta, yadda yadda but not Iberian/Roman Catholic dominated south.Or maybe just absence of a transcontinental state.What would US be like if the western side of the Rockies wasn’t US.
Anyway, the Argies have to reach a consensus for anything to succeed and that doesn’t seem to be in their DNA
Most of West of the Rockies is not in the US, it’s in neoliberalland and very very Woke.
The IMF and “World Bank” were created to administer the Bretton Woods currency system, which ended about 50 years ago. All countries should tell the IMF to go pound sand, and the NGO bureaucrats should go get real jobs.
Argentina would be better off if the IMF ceased to be. Actually everyone in the world would be better off without meddling bureaucrats who have no clue how to run a bank or a government.
NATO was created to fight the Soviet Union, which no longer exists. Aside from the US and Turkey (and during some periods the UK), the alleged member countries have not kept their solemn promises to fund and build militaries sufficient to perform NATO’s stated mission.
Now the defunct NATO exists to fight a non-existent enemy, with essentially non-existent armies… all the while keeping useless generals and bureaucrats employed with enormous expense.
Supposedly the cold war is over (at least according to official statements from all the G7 governments). So why do all these cold war bureaucracies still exist?
If we the taxpayers put all these useless bureaucrats on welfare, we would save a lot of money plus avoid a lot of wars, plus developing economies wouldn’t get unsolicited BAD advice.
I have heard that “Fear” is the coin of the realm, for the left…
I have heard that “War” is the coin of the realm, for the right…
Well “Fear” can bring upon “War” and of course “War” brings upon “Fear” nearly unanimously.
Perhaps both parties are more alike, than some may chose to admit to themselves… perhaps.
Contrary to popular belief, the IMF isn’t the one muscling into a poor victim country.
The country has to request the IMF for loans when all other options have been exhausted.
So yes, the IMF is the arm of the US government strip mining other countries, but not before said country has squandered her ability to pay the bills.
Now, showering the world with shiddy e-con theories to brainwash their hapless leadership is a US specialty, aptly aided by the Nobel prize NGO.
@Maximus — I stopped reading your comment when you claimed “So yes, the IMF is the arm of the US government…”
That is patently false, and signaled you don’t know what you are talking about.
The IMF, World Bank and UN are all NGOs (Non-government organizations). They do not report to any single government.
By tradition (but not any written agreement), the US government usually appoints the moron running the World Bank, while “Europe” (really France” appoints the moron to run the IMF. But that gentleman’s agreement has been challenged many times.
You need to actually read up on the organization before making another comment. Many people don’t know, but you obviously did ZERO research and just wrote crap that only signals your ignorance on the subject
Don’t worry, I know my stuff, but you obviously read everything literally.
This was a very heartening outcome and one, I think, presages more political upheaval as we head into 2024. people all around the world are sick of the government elite benefitting while they suffer.
As to Dish’s point, or CATO’s point, if they have that many dollars outside the official sector, my take is they will be able to withstand a relatively short period of difficulty and benefit going forward. this is especially so if he is successful in taking that chainsaw to the bloated government there.
“…more political upheaval as we head into 1214. people all around Britian are sick of the government elite benefiting while they suffer.”
Plus ça change, plus c’est la même.
Well, things could be much, much worse. They could be these poor souls.
link to youtube.com
Somewhat OT but maybe if the US and first world countries allowed some dollarization of countries like Argentina, then the immigration problem into the US wouldn’t be so bad. We are left with too many bad options if democracy and capitalism cannot co-exist. .
If the IMF wasn’t propping up zombie governments the way the Fed props up zombie banks and zombie car companies, all the zombie entities would collapse.
If socialist governments weren’t propped up by the IMF, those economies might have a chance to implement something that works, instead of a failed idea.
Most illegal immigrants are fleeing their homelands for better economic opportunity. If their homeland had better governments, instead of IMF “thought experiments” that are not experimental at all (the ideas are stupid and proven failures), the illegal immigrants could probably get good jobs at home.
The USD or gold are just accounting entries that (in theory) keep the politicians honest. Argentina’s government can’t manipulate the USD, so they would have to be honest about their books. The US Congress can’t manipulate gold (at least in theory), so they would have to be honest about their books. That’s why Nixon and Keynes didn’t like gold, because their accounting scams wouldn’t work — yes, I am saying Keynes was a con-artist. Nixon was just Nixon. Keynesian economics boils down to stealing from the future and fraudulently labeling it “debt” that won’t ever be repaid.
Even if Argentina does “dollarize”, that is not a panacea. It could keep Buenos Ares honest (by politician standards) or it might subject them to the chaos of another mismanaged currency…. Argentina was “pounded?” (play on British pound) and peso’d (Spain) during earlier reserve currency regimes. They counted on London’s finances post WW1, they were screwed. Uncle Sam’s finances are looking pretty shaky for the foreseeable future. The USD isn’t what it was 50 years ago when Nixon defaulted, much less when FDR defaulted. The USD is a lot closer, financially speaking, to the GBP in 1915
Keynesian economics boils down to paying the debts off with surpluses when the economy is doing well.
Only it didn’t work out that way as the children couldn’t stop spending.
Argentina tried pegging its peso to the dollar in 1992. That lasted until their financial crisis in 2001. A dollar peg ( or the adoption of the dollar as the national currency) puts the cart before the horse. Such a policy can’t happen until Argentina can borrow dollars internationally at reasonable rates of interest, and that can’t happen until Argentina runs years of a positive balance of payments, and that can’t happen until there is a substantial period of consumer deprivation (known in properly functioning economies as “savings”). Steve Hanke has been promoting this nonsense about “Argentina adopting the dollar” for decades. I thought he had been properly chastened by the financial collapse in the early 2000s, but apparently not. After a century of profligacy, Argentina has a terrible legacy to live down before it will be treated as a normal country to which normal lending standards can be applied. Good luck to Milei, but success will not come until his voters are prepared for the hard work that must precede prosperity.
In the end, it boils down to quality of the population, not economic principles arbitrarily showered on it.
Historically, Argentina has a large population from Italy, predominantly from the Southern part. I am sure, just a coincidence.
…at least the Mafia didn t(don t ) run deficits….not for long anyway….
Strangely, Argentina didn’t have the mafia problem. Maybe because the mafia is the normal way of life there?
Argentina has pretty much the same system, except you don’t have to be from Sicily.
It doesn’t have to declare the foreign debts null and void. Just freeze them so there is no urgency to repay them. Pay a nominal interest and in a few or many years when the country is economically sound then start paying off the debt at a modest pace. With a sound small government there is no reason why Argentina shouldn’t run strong trade surpluses that would make eventual debt payment viable. Then remain debt free.
It’s both cheaper, quicker and more final to null and void. Null and Void also provides greater deterrence against future governments and politicians ganging up with leeches from abroad to bleed Argentinians dry. And; it sets a positive precedent. For, amongst others, the US.
In a more enlightened (one can wish…) future, the obituary for what was, perhaps up to around 50 years ago, an attempt at civilisationby the Western world, will point out that what killed it, was financialization. Noone even pretending to bother repaying debts, makes financialization harder to pull off and sustain. Which is, hence, always and everywhere, an undifferentiated positive. Ideally, the Argies will put it front and center in their constitution, that only those politicians who specifically voted for a given debt issuance, have any obligation whatsoever to make lenders whole. Future voters, nor their representatives, have no such obligation at all. Not in Argentina, not in the US, not anywhere.
What killed us all was cellphones and social media.
This is not meant to be humorous.
Argentina external debt : to China ?
China will kick the can down to her VIP enslaved nations
US energy co are active in Argentina. Argentina stock market lost 85% of its value. YPF gap up today, possibly on the way to $70, 2005 high. Who needs the IMF. Wall street is buying Argentina at the lows.
Do you paint ceilings by chance?
Anyone dumb enough to loan Argentina money despite repetitive bouts of hyperinflation deserves to lose that money.
Reuters: “One of the three main bondholder groups currently formed includes AllianceBernstein, Amundi, Ashmore, BlackRock, BlueBay, Fidelity and T. Rowe Price.
Another, the Argentina Creditor Committee, includes distressed debt specialist Greylock Capital, as well as mutual funds, family offices, insurance firms and asset managers. The Exchange Bondholder Group has hedge funds HBK, Monarch Alternative Capital and Pharo Management among its members.”
The wizards of Wall Street.
You as a libertarian want deflation. Currently, in profit-making economic systems that is WAAAAY painful. If you want virtually universal BENEFICIAL and NON-PAINFUL deflation you’ll become a system’s philosopher to identify the correct problematic concept glomming everything up the MONOPOLY paradigm of Debt ONLY…and then implement a 50% Discount/Rebate policy at retail sale to break that monopoly paradigm up with beneficial price and asset DEFLATION.
The new libertarian paradigm of Monetary Gifting.
Get a grip on things. Stop commenting with nonsense I have already rebutted a dozen times.
You’ve attempted to rebut what I say only within the current paradigm’s various orthodoxies…like that deflation must always be economically painful for example. The way to problem resolution is integrative thirdness, not perpetual insistence on one side or the other of a dualistic orthodoxy. Rise above dualism with an operant applied concept thaty creates a third way…or wallow in pain and eventual chaos because things do not resolve.
Personally, I favor 120% rebates at the cash register.
We must energize the consumer economy.
Youre just a little bit too excited about this. 🙂
How many dollars would they need to dollarize the economy? Do they have that many dollars? How does a dollarized economy cope with major capital flight?
If you would have read what CATO said, you would not have asked these questions.
Please re-read.
They would _need_ ten bucks. Or less.
It’s utterly irrelevant how many units of whatever they have. What’s important, is that they, themselves, the government, the banks, no longer have a way of printing themselves more.
Cato put forth a strategy which tries to get as many dollars as they can get away with into the hands of Argentinian savers in the process. Which is a nice bonus, compared to starting off with the combined wealth of the entire country being ten bucks. But operationally, ten bucks would work, too. They’d just needlessly impoverish themselves vis-a-vis Americans.
But as long as the Argentine government, and the Argentine creditor class, can’t print; they will have removed what has become far and away the most significant mechanism for robbing and impoverishing people over the past 50 years. Even 97% taxation, would be mere roundoff compared to the theft and redistribution effected by current central banking.
Does this mean they could loan out nine of the ten dollars at interest?
Whoopee.
Can I sell my discounted cash flows for money in my pocket right now?
Asking for a friend.
The IMF and World Bank would have to forgive Argentina debts and have them start as if they are a new country. If this precedent happens, it means that any country can do this and that effectively debt means nothing.
Countries have done it before and they’ll do it again. That’s why bonds for those countries pay very high rates because of the risk of default.
The price for doing it of course is that those countries lose access to money as stated in the article above. At that point the country then needs to run a surplus economy since it will no longer be able to borrow internationally. That very well may be possible if the country has strong exports but is being crushed by debt payments. Argentina has a trade surplus of 7 billion so technically they should be fine doing what Mish suggests.
Excellent point by TT on current trade surplus.
Unfortunately it no longer appears to be true. But I think it can be rectified.
Chart of Trade Balance
link to tradingeconomics.com
Argentina will be thwarted because they understandably want to be free of dollar domination which is enforced by the monopoly paradigm of Debt ONLY. You have to go after that MONOPOLY paradigm…or the Banks will find a way to stop you.
With crashing currency, it is difficult to pay foreign debt denominated in US dollars. You have to be an export champion, but when you are an export champion, you do not rack up external debt.
Debt means something and debt per se is not the problem it is the monopoly paradigm of Debt ONLY. What we need is a rejuvenation and ethical ascension of profit-making systems…not the inevitably disintegrative path of a problematic paradigm.