The leading candidate in the Argentina presidential election promises dollarization.
Libertarian Javier Milei Leads Polls After Primary Shock
Reuters reports Milei Leads Polls in Argentina Election After Primary Shock
Argentina’s pollsters, caught out by the surprise win of radical libertarian Javier Milei in August’s presidential primary, now show him easing to first place in an Oct. 22 general election, likely ahead of ruling party economy chief Sergio Massa.
Milei, an economist and former TV pundit, has rattled the political elite with loud, sometimes expletive-ridden critiques of his rivals, along with pledges to shutter the central bank, slash the size of the government and dollarize the economy.
“The result of the primaries was shocking, and the result of the general election will be shocking whatever its result is,” said Analogias communication director Marina Acosta, citing the race being “colored by political novelty.”
Milei, who made a name for himself as a “shock jock” TV commentator, has struck a chord with angry Argentine voters grappling with 113% inflation, a cash-strapped government, sagging economy and some four-in-ten people in poverty.
His closest competitor now appears to be Massa, part of the ruling center-left Peronist coalition, seemingly offering two opposing economic models for the embattled country.
“Milei’s and Massa’s strategies are meant to be polar opposites from the other,” said political analyst Julio Burdman from consultancy Observatorio Electoral. “They are doing that quite well, which is letting them both make gains.”
What Is Dollarization, and Why Is Argentina Considering It?
Bloomberg addresses the question What Is Dollarization, and Why Is Argentina Considering It?
- What is dollarization?
It means adopting the US dollar as the legal tender and unit of account. Full dollarization means all local currency in circulation is exchanged for greenbacks, and all assets and contracts are converted to dollars. A country can make such a move unilaterally, without consultation with the US.- Who uses the dollar besides the US?
Four sovereign nations that have abandoned their currencies to adopt the dollar are: Panama, Ecuador, Timor-Leste, El Salvador, which in 2001 effectively dropped the colon — still an official currency, but not in circulation — for the dollar. In 2021, El Salvador added Bitcoin as another legal tender.- Why would a country do this?
By adopting another currency, a country gives up the power to print more money and thus eliminates the main driver of inflation. That’s why dollarization is in part an act of political capitulation: It acknowledges a loss of faith in the ability of elected and appointed officials to maintain a sustainable fiscal policy.- Why is dollarization a topic in Argentina?
It’s been proposed by Javier Milei, a libertarian economist and flamboyant populist who has emerged as the leading candidate in Argentina’s presidential campaign. (The first-round vote is Oct. 22.) Dollarization is one of his campaign pledges aimed at putting a lid on inflation that’s running at more than 110% a year. “The peso melts like ice in the Sahara Desert,” Milei often says of the currency’s rapid depreciation.- What’s the downside?
The biggest problem associated with dollarization is the loss of an independent monetary policy. Countries that adopt the greenback can’t adjust interest rates to regulate the supply of money in response to changing economic conditions. That function is essentially outsourced to the US Federal Reserve, which sets rates according to the needs of the US economy. At times, that can mean misaligned priorities. At present, for instance, Argentina’s economy is expected to contract by more than 2% in 2023, according to a Bloomberg survey, while the Fed is maintaining a tight monetary policy to fight inflation. Also, dollarization does not, by itself, impose fiscal discipline on government leaders; it merely eliminates the ability to avoid default by printing money.
There are more points in the Bloomberg article. I put a spotlight on five of them.
Six New Countries to Join BRICS, Including Argentina
At the 15th annual BRICS summit, which concluded August 24, the group agreed to admit six new nations: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, United Arab Emirates.
BRICS is acronym that stands for Brazil, Russia, India, China, and South Africa.
Despite the preposterous hype about “new global order”, a Gold-Backed-BRICS currency, and dollar avoidance, the only result was adding another six nations to the block that have little in common.
Argentina Political Labels
The Economist and Reuters label Javier Milei as a “Libertarian”. The Guardian calls Milei a “far right outsider”.
At lest one of those characterizations is wrong. Libertarians are not “far right”.
No Details Hype Headlines
- India Times, June 23, 2022: BRICS Working on New Global Reserve Currency
- Fox, Oct 29, 2022: Russia, China May be Preparing New Gold-Backed Currency
- Business Insider January 17, 2023: Russia and Iran are Working on a Gold-Backed Currency
- DC News, April 8, 2023: New World Currency? How BRICS Nations could impact U.S. Dollar
- Foreign Policy, April 24, 2023: A BRICS Currency Could Shake the Dollar’s Dominance
Those headlines and dozens if not hundreds more like them are are more than a bit silly.
The worst of the lot is the Business Outsider hype silliness about a gold baked BRIC currency.
And of course these silly stories get repeated over and over
Supposedly, It’s Official!
Gold Standard Back!?
“BRICS Planning to Introduce New Trading Currency Backed by Gold at August Summit“
If you see headlines and Tweets like those, there are two proper responses. 1) Laugh out loud and 2) Openly mock them, in advance.
More Gold Backed BRIC Currency Silliness on Dethroning the Dollar
I did so in advance, on July 7, in More Gold Backed BRIC Currency Silliness on Dethroning the Dollar
Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US
I discuss the anti-dollar sentiment in Dollar Weaponization Expands – FDIC Message to Foreign Depositors Is Don’t Trust the US
It’s understandable that nations, especially Russia, want to avoid dollars. There is mistrust for many good reasons.
But is that any reason to trust a GBRIC, “trading currency“?
Let’s see the details on how this will work in practice, whether the GBRIC is convertible on demand, and who gets to use it.
Expect to be underwhelmed, but expect more hype anyway. Hype is sexy. So is predicting the collapse of the dollar.
“Expect to be Underwhelmed“
I believe it’s safe to say “underwhelmed” was, if anything, understated.
The summit offered nothing about a gold-backed currency. Heck, it offered nothing about a BRICS currency at all.
Indeed, India and Brazil nearly sabotaged the whole thing.
11th-Hour Hurdle
On August 23, with one day left in the summit, Reuters noted BRICS expansion faces eleventh hour hurdle as divisions persist.
A deal to expand the BRICS group of leading developing countries appeared stuck in eleventh hour negotiations at a leaders summit on Wednesday, threatening to undermine the bloc’s ambition to give the “Global South” more clout in world affairs.
BRICS countries have economies vastly different in scale and governments with often divergent foreign policy goals, a complicating factor for a bloc whose consensus decision-making model gives each member a de facto veto.
Russia’s President Vladimir Putin, who is wanted under an international arrest warrant for alleged war crimes in Ukraine and is attending the summit remotely, is keen to show Western powers he still has friends.
Brazil and India, in contrast, have both been forging closer ties with the West. Brazil’s President Luiz Inacio Lula da Silva on Tuesday rejected the idea the bloc should seek to rival the U.S. and Group of Seven wealthy economies.
The BRICS country official said that admission criteria India’s Modi proposed included requiring members not be the target of international sanctions, ruling out potential candidates Iran and Venezuela.
Modi was also pushing for a minimum per capital GDP requirement.
De Facto Vetos
The more nations the BRICS add, the more unwieldy the group will become. The EU and UN are prime examples.
27 nations in the EU each with veto power makes nearly impossible to get anything done.
It took the EU over two decades to work out a trade agreement with Canada because two small nations had veto power and used it.
What good has the UN ever done?
There Will Not Be a BRICKs Currency
There will not be a BRICS currency, at least a successful one.
That the Euro barely works is a case in point. A single currency and interest rate policy for Germany, Italy, France, and Greece nearly blew up for Greece. And an interest rate that makes sense for Germany doesn’t make sense for Italy.
What About a Trading Currency?
If you understand trade, the problem with a trading currency is huge and obvious: Trade is between individuals not nations.
Brazil’s president, Luiz Inácio Lula da Silva, wonders: “Every night I ask myself why all countries are forced to do their trade backed by the dollar. Why can’t we do trade based on our own currencies? Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”
This is more than a bit amusing. No one is forcing Brazil, Russia, India, and China to do trade in dollars.
Countries Don’t Trade!
For starters, Countries Don’t Trade.
- Only individuals, separately and in voluntarily formed groups such as firms, create or take advantage of economies of scale, of scope, or of both in production; countries, as such, do not.
- Only individuals, separately or in voluntarily formed groups such as firms, spend, save, and invest; countries, as such, don’t.
- Only individuals experience income, wealth, or welfare gains and losses; countries as such experience nothing.
- Of course, we can – and do – talk, for example, about “America trading with China,” about “Germany having a comparative advantage in the brewing of beer,” about “India’s national income rising,” and about “Peru’s trade deficit falling.” But all this talk merely describes the largely unintended, aggregate results of countless choices and actions each made by a particular, flesh-and-blood person.
- And also, of course, governments do perform many of these activities – for example, spend. But no government is a country. Each government is merely a particular organization run by particular, flesh-and-blood persons according to a certain set of formal and informal rules.
Trade Example
- A Brazilian soybean producer sells soybeans to a merchant in China.
- A Brazilian scooter manufacturer buys Lithium batteries from a Chinese merchant.
- The soybean producer buys nothing from Chinese merchants.
- The Chinese battery producer buys nothing from Brazilian merchants.
Why would the Brazilian soybean producer want to hold yuan, especially given that the yuan doesn’t even float?
Why would the Chinese battery producer want to hold the Brazilian Real?
No one is forcing the soybean producer or the battery producer to do anything. By choice they prefer to trade in dollars, which is instantly convertible to any currency the producers may wish to hedge in.
This has nothing to do with rooting for the dollar. It’s simple trade math. But it has everything to do with why all the hype over BRICS is seriously misguided.
What Would it Take for a BRIC-Based Currency to Succeed?
On August 25, I addressed the question What Would it Take for a BRIC-Based Currency to Succeed?
I discuss two alternation definitions of success. The first a BRICS currency will displace the dollar. The second is avoidance of US sanctions.
The first won’t happen. The second likely will. And I will cheer when it does. See the above link for details and discussion.
Meanwhile, avoid all the silly talk of a gold-backed BRIC. The notion remains laughable.
Source: https://mishtalk.com/economics/hoot-of-the-day-argentina-a-brics-nation-may-adopt-the-dollar/
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