Argentina's Dollarization Dilemma

11/25/20232 min read

In Argentina, where many people struggle with poverty, the inflation rate is a whopping 140%, and the local currency, the Argentine Peso, has dropped by 90% against the US dollar in the last five years, there's a big economic mess. The new President, Javier Milei, has a wild idea to fix things – he wants to ditch the Argentine Peso and close down the central bank.

It might sound crazy, but Milei thinks it's necessary because Argentina has been stuck in an economic crisis for a long time. Inflation, or the increase in prices, has been very high for about 50 years. Milei, who gave up being a footballer due to rampant inflation in the 1980s, believes the root of the problem is the central bank. The government, wanting money for things like healthcare and education, used the central bank to print more Pesos. But too much currency in circulation leads to inflation, and that's what happened in Argentina.

Milei suggests a drastic solution – using the US dollar as the official currency instead of the Argentine Peso. This move, called dollarization, worked for Zimbabwe in 2009 when they were facing a crisis. By adopting the US dollar, Zimbabwe stabilized its economy, and inflation dropped from over 200,000,000% to a steady 3%.

How does this work? People trust the US dollar more than their own currency, so they are more willing to save money. When people save, they spend less, which helps lower inflation. Also, without their own currency to print, the government becomes more careful with spending.

However, for Argentina, there's a big challenge. To switch to the US dollar, they need a lot of dollars in reserve, around $40 billion. Looking at Argentina's current situation, they don't have that money saved up. Borrowing from institutions like the International Monetary Fund (IMF) is an option, but Argentina already owes them $44 billion, so it's not that simple.

The decision to move to the US dollar is not just an economic move; it's also a political one. It means depending on the US for everything, and it limits certain economic strategies. Whether Argentina will take this bold step is uncertain, as politicians are known for making big promises. If Milei goes through with this plan, it could be the most significant dollarization experiment ever. Until then, we'll have to wait and see how it unfolds.