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Argentine economy is de facto dollarized, it must be done de jure

May 16, 2019 1:12 pm A+ / A-

INFOBAE- The instability of the exchange policy has been a trademark since the beginning of the government of Cambiemos

Since we left the fixed exchange rate, Cambiemos has had the following exchange rate policies:

1) they started with a free exchange rate, although in reality it was not so free because the BCRA indirectly influenced the exchange rate with LEBACs (government bond) until it could not contain it anymore,

2) with the April 2018 exchange rate run, an agreement was reached with the IMF for which a broad rate band was established within which the exchange rate floated freely, with a floor and a ceiling that would increase, initially, 3% monthly. Then they lowered it to 2% monthly and then to 1.75% monthly,

3) later decided to freeze the ceiling of the exchange band until the end of the year and remove the floor until June and

4) finally opted to intervene at any time in the market of changes.

All these changes of economic policy in less than 4 years of administration show the absence of a consistent economic plan. The exchange policy has to be adopted to some monetary rule that is stable over time, something that does not exist today. But the vertiginous changes in exchange policy are more worrisome. Since the middle of last year until now, there has been the greatest amount of changes in the exchange rule, which reflects a certain confusion when it comes to gaining confidence in the peso. Argentine economic crisis

That distrust in the peso is also evident in the crazy rate of interest that the BCRA pays for the LELIQs (Government Bond). Recall that the LELIQs began with an annual rate of 67%, rose to 73.5% and then began to fall until the exchange market jumped and had to raise it again. Today it is already at historical maximum levels of 74%. The question is: does this increase in interest rates generate more distrust among economic agents, indicating that there is no longer a rate that is high enough for the investor to remain in pesos?

From the above it follows, in my opinion, that once again it is demonstrated that Argentina is not in a position to have currency for the simple reason that today it does not emit money that it wants, but that it can. Indeed, since 1971, when Nixon declared the inconvertibility of the dollar to gold, the entire international monetary system was transformed into a fiduciary currency. People believe or do not believe in those roles that are circulating around the world that supposedly serve as means of exchange and reserve of value. Put another way, Argentina has no currency in the strict sense of the term since the peso does not serve as a store of value.

What is the support currency circulating around the world has? The confidence that people have in the quality of their political leadership and their institutions. The seriousness of them is what generates confidence that a printed piece of paper that governments call currency is accepted as such by economic agents.

If the support of the currency is the quality and seriousness of the political leadership and the institutions of a country, it is not necessary to go into too many details to realize that Argentina can not have currency. You can issue some papers that you call currency, but people do not accept them as such.

Given that without a currency economic transactions are difficult and the economic calculation becomes impossible, we Argentinians long ago chose the dollar as currency. But that election is de facto and not de jure, with which, it falls to maturity that the dollarization of the economy should be accepted at some point by the political leadership. Strictly speaking, more than dollarization, my point of view is that it would be necessary to establish free competition of currencies so that people can make contracts in the currency that they please, although it is most likely that they end up choosing the dollar as an instrument of exchange and reserve of value over the rest of the coins. Maybe people would operate with dollars or euros, but it is certain that, without a forced course, the peso would cease to exist because it is a merchandise that nobody wants to have because of its poor quality.

It is true that the dollarization of the economy does not solve all the problems of the economy. Even if it were dollarized, it would have to change the labor legislation, lower public spending, reform the tax system, have fiscal balance and integrate economically into the world. And here the debate arises. If the aforementioned structural reforms are going to be carried out, the institutional conditions necessary to support the peso and have its own currency would appear, therefore, if all these reforms are going to be made, dollarization is not necessary.

Let’s say that in the debate on dollarization there are those who oppose it because they say that it is not necessary to carry it out if structural reforms are made, and those who say that it is necessary to dollarize despite structural reforms, and if they do not the reforms, at least we have a currency so as not to go back to the era of barter. Strictly speaking, I am saying dollarize the economy, but the basic concept is to have currency competition. Under this scheme of currency competition, and always keeping in mind that it is to establish only a monetary order that does not resolve structural problems by itself, does the Central Bank have to be left?

In principle, considering that the currency is a merchandise and not a patriotic symbol, the BCRA would be a state company that produces a merchandise called currency with the name peso and would be in competition with the rest of the currencies. If it produces a bad quality currency and that currency does not have a forced course, the BCRA would be producing a merchandise that no one would want to use. The counter argument is that if the market needs a certain merchandise, in this case currency, the state does not have to provide it. In the same way that if the state has to pave the streets, it does not have to put a pavement factory, that the economy needs a currency does not mean that the state should produce it. It is enough to read history of the currency, in particular Jack Weatherford’s book, “The History of Money”, to realize that currency is not an invention of governments but a discovery of the market. People discovered that using certain goods could make indirect exchange instead of complex barter.

Since the BCRA was created in 1935 and until 2018 the average annual inflation was 62.08% per annum, raised to the 83 that are the years of life of the BCRA gives an accumulated CPI inflation of 25,671,070,716,075,600,000%, I understand that it reads 25.7 trillion percent. With this background it is unthinkable to believe that the Central Bank can produce a good quality currency.

One could think of a gold conversion box as it existed between 1891 and 1914, when the Conversion Fund was closed due to the flight of capital due to the Great War and then it was reopened in 1927 and closed in 1929 due to the crisis of 30. In both cases, the closure of the conversion box responded to external and not internal events and, by the way, the great Argentine economic takeoff of the late nineteenth and early twentieth century occurred with convertibility to gold. But it is clear that the quality of the Argentine political leadership was another and populism had not yet invaded us.

In short, with such a history of inflation, we know that the Argentine state not only can not provide a decent telephonic service (remember ENTEL a state owned Telephone Company), it can not provide a currency with this institutional quality and this political leadership.

The advisable thing is to go to a system of currency competition that, I suspect, would lead to a dollarization in fact, but not by the decision of the rulers, but the Argentinean has long since given up the peso and opted for the dollar as his true coin. Only de jure need to recognize what people have already established de facto: the death of the peso and the BCRA.

Written by Roberto Cachanosky


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