Next 22 October a presidential election will take place in Argentina, South America's second-largest economy and three candidates are competing for the job, Sergio Massa, the incumbent, Patricia Bullrich, from the traditional opposition when two coalitions prevailed in the Argentine political system, and Javier Milei, a declared libertarian, economist, and if published Argentine opinion polls can be trusted, the front runner.
Mr. Javier Milei, an outsider to traditional politics has caught the ear of a frustrated, exhausted, disenchanted electorate with pledges to end the privileges of the political cast, to eliminate corruption, end government meddling in all aspects of Argentine business and enterprise, (156 taxes), ensuring liberty prevails making Argentina and its 'freed' people again a global economic, cultural and innovative power as it was a century ago. For this he has anticipated several drastic measures, one of them the so called dollarization, that is eliminating the current devalued inflationary Peso, and adopting the US dollar or whatever currency people choose. For this the closing down of the Argentine central bank and its money printing obsession is crucial, but the initiative is highly controversial, from local economists to the same IMF, the crutch currently helping the Argentine economy to crawl along. Milei in this column, invitation from The Economist, explains the reasons for his initiative.
In 1935 the Central Bank of the Republic of Argentina (better known by its Spanish-language acronym, BCRA) was created. It marked the beginning of one of the greatest swindles in our country’s history. In the years following the BCRA's founding, annual inflation rose to double digits, violently redistributing income and reducing workers’ purchasing power. The peso, which previously had been one of the world’s strongest currencies, started its ignominious decline, laying the foundations for the rise of Peronism.
In 1946 the military government fully nationalized the BCRA. In the decades that followed, Argentina suffered three hyperinflationary bouts, with inflation averaging 250% per year, and several currencies came and went, destroyed by the monetary chaos. It was only in 1991 that we rediscovered sound money, with the adoption of a new currency regime that pegged the peso to the dollar through a convertibility board. We went from having the highest inflation rates in the world to having the lowest.
However, Argentine politicians did not like the idea of politics without soft money, so they undid the convertibility regime, as it was known, plunging the economy into its worst recession since 1930. The governments led by Néstor and Cristina Kirchner between 2003 and 2015 resorted to the old monetary tricks, and inflation started to creep up. When Mauricio Macri became president in 2015 the annual inflation rate exceeded 30%. The situation is much worse today: we have double-digit monthly inflation and, based on consensus estimates, we will end the year with an annual inflation rate close to 180%.
If we add to this mix the monetary overhang generated by Argentina’s foreign-exchange restrictions and the ballooning financial debt of the BCRA, it becomes clear that we are on the verge of another hyperinflationary bout. The question, therefore, is no longer “Should we dollarize?” but instead “Why should we keep the peso?” I challenge anybody to defend the peso. As Vladimir Lenin pointed out almost a century ago, there is no surer way of undermining the foundations of a capitalist society than debauching the currency. This is exactly what politicians have done in Argentina.
We need to consider other issues. The first is moral. It would be a crime if I printed counterfeit banknotes to buy goods. Why, then, do we let the BCRA falsify pesos? The answer is: because the state, which has the monopoly on power, has imposed the peso as legal tender. In other words, it is okay if a politician steals but it is a crime if an ordinary citizen does. What the BCRA has done at the behest of politicians is theft. It not only condemns Argentina to economic decline but is also morally wrong.
The second issue is a theoretical consideration. No one carries their money to the afterlife. Money is an indirect exchange commodity that allows consumption over time: spending today, tomorrow, the day after. The path of this spending, in turn, is determined by preferences, endowments and technology—the fundamental parameters of the economy that determine agents’ decisions. When considered in these terms, the real demand for money is actually a derived demand, and therefore the BCRA, by setting the nominal quantity of money, can only determine the nominal scale of the economy (ie, the price level).
Moreover, there is no such thing as an optimal monetary policy, nor a way to design one with the available information. Any action taken by a central bank, therefore, will always be harmful. How much is a bottle of wine worth in a society of teetotalers? The same could be asked of the peso. Whatever action the BCRA takes will drive prices out of control.
Third, there is a problem concerning the insolvency of the BCRA: its net international reserves are negative and its financial debt to the banking system is so large that it has tripled the monetary base. Along with my advisers I am studying several possible ways to resolve this problem, and we have received proposals from international investment funds that could help us in a transition period.
It must be made clear that the debt of the BCRA is an actual debt of the Argentine treasury, ie, it is not worthless. Otherwise, we risk spiraling into another hyperinflation. The implicit inflation rate under a dollarization scenario is much lower than that under alternative stabilization plans. Our solution offers a path to more stable prices and a higher probability of success.
Considering these issues and Argentina’s history, the question is “Why shouldn’t we close the BCRA?” And this is where politics come in. In the past 20 years the country’s politicians and their puppet-masters, who benefit from the status quo, have stolen billions of dollars from hard-working Argentines through the inflation tax. Under the current administration the number is close to US$ 90bn. We estimate that, in the past year alone, politicians have stolen in excess of 5% of the country’s GDP by debasing the peso.
Eliminating the central bank is essential. There is no future for Argentina with the peso. The tyranny of the status quo is defended by corrupt politicians, abusive businessmen, union leaders who betray workers, journalists addicted to state advertising and paid-for articles, and pseudo-intellectuals who provide support to this government-sponsored Ponzi scheme. On the other side, we have the hard-working Argentines, some of whom live in such poverty that they cannot afford to eat, despite working more and more, while others see their children leave the country for lack of opportunity. You know where I stand in this epic struggle. ■”