Dollarization, like the magic potion

The discussion on the dollarization of the Argentine economy, which began in the 1990s with the government of Carlos Menem, was then put back on the agenda in 2018 and 2019 when I had to organize two major debates at the ‘University CEMA, and continues today with more force in the midst of the election campaign, given the monetary disaster that the government has made.

The debate should be divided into two parts. The convenience of dollarization and whether it is possible to do it today. Strictly speaking, Argentina is mentally dollarized after going through periods of high inflation, mega inflation and hyperinflation and now again with 3 digit inflation per year.

Thus, the peso ceased to be a currency for a long time, since hardly anyone considers it a store of value, and it loses its payment function in large transactions, mainly real estate and the sale of used cars.

The peso ceased to be a currency a long time ago, since almost no one considers it a store of value and it loses its payment function in large transactions.

It is also not very credible the idea that with a new law on the organic charter of the BCRA which will give it independence from the national executive power, it will generate credibility. In Argentina, it is common for populist governments to be the first to violate the laws they must uphold.

This independence has already been violated on other occasions. The convertibility law was eliminated with the stroke of a pen without a coherent economic plan behind it and caused a real macro and microeconomic disaster. Previously, the law on the intangibility of deposits had been violated. And the list continues.

In short, in Argentina, laws are just unimportant references for most governments, not something they must respect and enforce. Trying to generate confidence in an independent central bank by a simple law therefore does not seem viable, at least for the moment.

The other point to stress is that dollarization would imply the closure of a source of financing the National Treasury, which would limit, but not solve, the increase in public expenditure. It’s a restriction on top of populism or, if you want to put it another way, it’s one less tool governments have to make “little money projects”.

Jorge Avilaone of those who have been working on the subject for a long time, always points out that anchoring Argentina to international institutions is a good option for the country to start having an institutional seriousness and one of these institutions is the system monetary.

Conceptually, there is little doubt that today Argentina is not capable of having a credible currency.

But the other aspect to discuss is how to dollarize the economy given that the BCRA has no freely available reserves to save the currency, not the monetary base, only the pesos in the hands of the public, and what to do liabilities, including Leliq, Net Pass, etc. In other words, it’s one thing to provide the convenience of dollarization and another to be able to implement it.

The case of Ecuador is taken as an example. What is not said is that when this country became dollarized, the Central Bank had enough reserves to save the currency in circulation without having to ask the United States Treasury to lend it dollars to save the currency in traffic. Nor did it have the degree of indebtedness that the BCRA has through Leliq, which is already equivalent to two monetary bases.

When Ecuador dollarized, the Central Bank had enough reserves to save the currency in circulation without having to ask the US Treasury to lend it dollars.

Here comes the point, the dollarization which could be a good solution for the monetary problem that Argentina has, is sold as if someone reaches the government and the next day the BCRA closes and dollarizes. Or that, by a series of financial calculations, it can be affirmed that there are assets in the BCRA, which are Non-transferable Effects and Transitional Advances to the General Treasury of the Nation, which make it possible to pay the remunerated debts.

What is remarkable is that those who want to dollarize immediately begin to back off as specific questions are asked about how they would go about dollarizing. In other words, they begin to put forward confused and contradictory arguments which testify to a certain voluntarism.

Even assuming that a government that generates great confidence takes office tomorrow, wins the election with a large majority and has the best economists and the best plan, the questions are: where do the dollars come from to save the currency in circulation? ? And with what assets are the remunerated liabilities of the BCRA paid?

In this regard, it has been argued that people have enough dollars under their mattresses to dollarize the economy. True, but these dollars belong to the people, not the BCRA, and the one who needs dollars to save the currency is the monetary entity. Unless you plan on confiscating people’s money, this would be a rather counter-intuitive way to build trust.

Considering non-transferable bills and transitional advances to the Treasury as significant assets, which at their present value amount to $30,000 million, implies assuming that the value of all government debt to of the BCRA will not fall by increasing the supply of bonds that are put on the market. Sending 10% more debt to market in one move and assuming the value of those assets doesn’t go down is an untenable assumption.

On the other hand, regardless of the degree of confidence generated, the BCRA should expand the monetary base (increase its liabilities) to buy dollars on the market and then dollarize, unless currencies magically appear from somewhere.

And even if a new government generates a lot of credibility, it seems like a very strong assumption to say that it will issue to buy dollars in the market and that the demand for currency will not fall or even rise. Again, the value of the currency to be redeemed changes and the accounts that are made today lose value.

As much as a new government generates a lot of credibility, it seems like a very strong assumption to say that it will issue to buy dollars on the market and that the demand for currencies will not fall.

It’s easy to sell that you can join the government and the next day close the BCRA, dollarize and magically solve all the problems. It is a populist proposition that may very well sell electorally, but which does not have the slightest backing of serious economic technique.

It’s selling smoke like any other populist. Or say that in 6 months the economy can be dollarized. These are typical statements of irresponsible populists and people who lack basic knowledge of money and accounting.

Faced with this reality, what can be done, within the framework of a coherent economic plan and with strong political support, is to remove the forced tender of the peso and allow people to operate in the currency of their choice. In this case, it is likely that the economy will indeed dollarize, but without the closure, at least initially, of the BCRA.

In short, the benefits that dollarization, or rather competition between currencies, could have are not in question. What is debating is the seriousness of the proposals blithely formulated without reserve to save the working capital and the unusual calculations that are made on the value of the assets of the BCRA to save the Leliq.

They want to force dollarization so badly, like the magic potion, that they torture the BCRA numbers until they admit they are enough to dollarize. Argentina is in a critical economic situation and the legacy that the next government will receive will be catastrophic. If the populist positions of “I have the magic solution by dollarizing” prevail, this could lead the country to an economic disaster of an unsuspected magnitude.

If you want to solve the serious economic problem of the country, you must treat the problems seriously and accept the limits imposed by reality in order to go ahead with certain price stabilization measures.

Continue reading: