Does Argentina’s Milei Fear Dollarization?
For a heavily indebted state, it’s expedient to keep running the peso printing press.
Mary Anastasia O’Grady
March 10, 2024 4:07 pm ET
WSJ
On the heels of the defeat of his sweeping 664-article omnibus bill in Argentina’s lower house last month, President Javier Milei has launched a new political strategy to advance his reform agenda. This one engages the country’s 24 governors, many of whom may support him thanks to the honeymoon his government still enjoys with the public.
Going around a Congress dominated by special interests to talk directly to the people who elected him is a savvy move. But it’s accompanied by a Milei decision to delay monetary stabilization. The president seems to be gambling that he can recover fiscal balance in government accounts first and that a steadier peso, and all the good things that come with it, will naturally follow. In the meantime, the public has to eat the high inflation that he promised to kill. He may succeed. But he’s playing with fire.
Long before his campaign for president, the self-described libertarian repeatedly denounced Peronism and all its empty promises. During the campaign, in his inauguration speech on Dec. 10 and in his January talk at Davos, he reaffirmed his radical vision for Argentina: Dismantle the welfare state, unleash the animal spirits and restore the nation to its former glory. On March 1, in his first speech to Congress, he again delivered a passionate defense of liberty, warning lawmakers that if he has to he’ll use executive decree to restore God-given rights usurped by the political class.
“The disaster” in which the country finds itself is no coincidence, he said in the televised address. Rather, “it is a conscious and planned scheme” involving “an intimate relationship between the privileges of politics and the discomfort of common Argentines.” It drives “high public spending, fiscal deficit, debt” and money printing. The political elite uses the system “to expropriate wealth from good Argentines and give it to their clients and friends.” This “business protected by lies” is the “regrettable material and spiritual state of our nation.”
After lambasting the legislators before him, the former television personality invited “governors and former presidents and leaders of the main political parties to lay down our personal interests and meet this May 25, in the province of Córdoba, for the signing of a new social contract called the May Pact: a social contract that establishes the 10 principles of the new Argentine economic order.” These include private-property rights, fiscal restraint, choice in pension savings, labor deregulation, reform of revenue sharing with the provinces and open trade. Mr. Milei asked the nation for “patience and trust” and proposed a negotiated fiscal agreement with the provincial governors ahead of the May Pact.
It’s great to have someone at the Argentine helm who touts the morality of the market as well as the utilitarian case for freedom. Either by executive decree or by enforcing existing law, Mr. Milei is signaling change for the average José: Protesters no longer have the right to block roads; victims of crime are entitled to justice; teachers unions have an obligation to students; rent control is repealed.
Yet triple-digit annual inflation remains intractable. Mr. Milei’s campaign promises to dollarize and close the central bank are now medium-term goals. A fiscal balance achieved in January isn’t sustainable, the economy is in recession, and inflation expectations by market participants at over 200% for the year are nothing to brag about. A $9 billion increase in international reserves isn’t a surge in confidence. It’s the result of printing pesos to buy the dollars and then issuing debt at high interest rates to sop up those pesos.
Inflation is always and everywhere a hidden tax on savers, workers, consumers and pensioners. In Argentina, as prices in pesos have shot up, the purchasing power of the nation has dwindled, making people poorer. But as the peso loses value against the dollar, so does the peso debt on the government’s balance sheet. Devaluing the currency is a surreptitious way to extract resources from the population, over and above explicit taxes. Government payments to suppliers and utilities also lose value in real terms.
Inflation then is a good deal for a heavily indebted state and a raw deal for the rest. Could it be that Mr. Milei’s economy minister, Luis Caputo—and other retreads from former failed administrations who are in the Milei cabinet—fears being part of a government that is without a peso-printing press? It seems possible.
Mr. Milei has a mandate for change, but it won’t last forever. The longer it takes to solve inflation, the more time there is for something else to go wrong. To recover prosperity Argentina needs dollars to flow into the banking system. That will happen when Mr. Milei lifts exchange, capital and trade controls and lets the nation save, invest, earn and spend in the currency it chooses. Argentina will dollarize itself.
