Yes, I do still favor it, but here is part of the problem, as I explain in my latest Bloomberg column:
The simplest way for Argentina to dollarize would be to inflate the peso even more. For purposes of argument, imagine a peso inflation rate of one billion percent a year. Pesos would be worthless, and transactions would be consummated with US dollars (or in some cases in crypto, which also is popular in Argentina). The problem is that current peso holders would be left with nothing. That would be unfair, and it also might torpedo support for other parts of Milei’s agenda.
To put it in more general terms: The question is not how to adopt a new currency, it is how to adopt a new currency and retain a reasonable value for the old one. Argentina, according to some estimates, would need about $30 billion to back the retired pesos.
And now here is the key practical issue:
Another question is how to choose a rate of conversion for pesos to dollars. The government might look to current black market rates as a rough guide — but the correct rate, post-policy shift, would not be the same as the market rate right now. If the government were to peg the peso too high, in the short run prices in Argentina would have to adjust downward, if only because the demand for pesos would be rising (let’s generously assume the peg is credible). That would lead to deflationary pressures, which would likely harm the economy.
Alternatively, if the government pegged the peso too low to the dollar, there would be even more inflation in the short run, as people would be all the more inclined to unload their pesos.
The government is more likely to overshoot, pegging the peso too low in order to avoid a deflationary recession and because it would require raising fewer dollars. In this case, the peso would lose even more value right now, and the rate of inflation would accelerate. In fact, this is the most likely scenario for the early months of the Milei administration.
It would be a version of the first plan mentioned above — namely, dollarization through the outright destruction of the peso, whether intentional or not. Either the value of the peso would collapse, or the higher inflation rate would induce Milei to advance dollarization as quickly as possible, even if it is done at quite unfair rates.
Worth a ponder, roller coaster ahead. One way to put it is that an unexpected dollarization and an expected dollarization have somewhat different properties, with the latter in some ways being more difficult. Here is the Spanish language version of the column.
The post Why Argentina’s dollarization is likely to come in sudden, messy ways appeared first on Marginal REVOLUTION.
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