What is the rationale behind switching to the US dollar? I sort of get why US libertarians are opposed to fiat currency (they don’t want the Fed to have the power to interfere in markets), but Milei just wants to switch to a fiat currency that someone else controls? What makes him think that would end well for Argentina?
Argentina’s runaway inflation is caused by the central bank printing money (to finance the government’s out of control spending). The rationale for dollarization is to remove the ability for the government to do this. It’s not an inherently crazy idea, since (i) there are smaller Latin American countries that use the dollar, and (ii) the dollar is already used de facto for many purposes in Argentina because of how debased the peso has been. But there are lots of practical problems; notably, Argentina simply does not own enough dollars in the entire country to keep the economy running normally if they switch (whatever “normally” means for an economy like theirs).
Argentina’s runaway inflation is caused by the central bank printing money (to finance the government’s out of control spending)
Macroeconomists don’t really agree that that issuing money in and of itself causes inflation, but it certainly can lead to it in some cases. Instead, if you issue money you need to spend it on something that increases the productivity of your economy, otherwise it can lead to waste and inflation down the line. You can actually use money issuing to fight inflation if you spend the money you issued on addressing the problem at hand - for example, the supply side problems we faced following the pandemic that caused the inflation we’re at the tail end of right now.
By adopting the US dollar, Argentina would effectively give up monetary autonomy to the US central bank (so, just another central bank outside of their control). In fact, the US central bank could decide to issue money in a positive way as mentioned above, without any of that having a similarly positive impact on the countries that depend on the US dollar.
Money & Macro (PhD Joeri Schasfoort) has made multiple videos on the topic, but here are two (the first one short, the second one a deep dive) if you want to hear this side of the story told in greater depth:
You might be confusing debt issuance with money issuance.
Governments often issue debt to fund various kinds of spending. And despite concerns about debt levels, they can have a pretty fuzzy relationship with inflation; Japan has public debt of over 200% of GDP, and an underinflation problem.
But issuing money for the purposes of government spending – the monetization of fiscal policy – is almost always a bad idea, outside of wartime. The practice is behind every single episode of hyperinflation in economic history. And governments know this. Fiscal monetization is only resorted to by countries that have exhausted their ability to borrow; if cutting spending isn’t politically feasible, the remaining resort is monetization. That’s basically how you get to Argentina’s situation.
As for giving up monetary autonomy, it is indeed a serious drawback to dollarization. But this is a second order problem compared to the kinds of problems facing Argentina, like findng a guy bleeding out after a road accident, and worrying about his obesity.
You might be confusing debt issuance with money issuance.
Nope. Let me quote Joeri from his second video (19 minutes in):
Let’s tackle the one that the internet loves the most first: money printing. To view money printing as the source of all
price inflation actually has a very long tradition in economics. The most prominent economist
to support this idea was Nobel prize winner Milton Friedman (11:49) who said that. […]
Crucially, Friedman inspired economists often assume that velocity and production are roughly constant. Remember that clip from Peter Schiff arguing that stimulus checks for people at home would be inflationary? Crucially, he made the implicit assumption there that this didn’t prevent a further collapse of production.
“Everything is getting more expensive. And if people think that is transitory, it is because they don’t understand the problem. In fact, they don’t even understand inflation or where it comes from because inflation is about money. You are inflating the money supply. That’s what’s being expanded and none of this is transitory because these deficits aren’t transitory. The money printing isn’t transitory. It’s here to stay. — and that means prices are going to continue to go up because we continue to destroy the value of the dollar as we expand the supply”
Sounds pretty convincing right? However, the monetary theory of inflation has almost completely disappeared from universities. Why? Well, because the data doesn’t support this simple explanation in most economies. For example, check out this graph of the CPI for Europe and compare it to the graph of central bank printed M1 money supply… You can clearly see that the money supply has accelerated while price growth has slowed. To a less extend this disconnect also exists for the USA. But, if you really want to see this simple theory fail, you only need to look at Japan. Even if we take into account the more expansive M3 money supply measure, which include money
created by private banks, and compare it to the CPI. You can clearly see that while M3
kept going up, the CPI had its ups and downs. What can explain this disconnect?
Pointing to Japanese money supply versus inflation is irrelevant because Japan doesn’t fund its fiscal deficit via monetization. It issues debt, just like every other non-basket case economy on Earth.
The distinction is important. Debt is tied to a promise to repay later. Monetization has no such promise, so it’s functionally equivalent to issuing debt and then immediately defaulting. So long as lenders believe debt will be repaid, the effects are different from monetization.
What is the rationale behind switching to the US dollar? I sort of get why US libertarians are opposed to fiat currency (they don’t want the Fed to have the power to interfere in markets), but Milei just wants to switch to a fiat currency that someone else controls? What makes him think that would end well for Argentina?
Argentina’s runaway inflation is caused by the central bank printing money (to finance the government’s out of control spending). The rationale for dollarization is to remove the ability for the government to do this. It’s not an inherently crazy idea, since (i) there are smaller Latin American countries that use the dollar, and (ii) the dollar is already used de facto for many purposes in Argentina because of how debased the peso has been. But there are lots of practical problems; notably, Argentina simply does not own enough dollars in the entire country to keep the economy running normally if they switch (whatever “normally” means for an economy like theirs).
Macroeconomists don’t really agree that that issuing money in and of itself causes inflation, but it certainly can lead to it in some cases. Instead, if you issue money you need to spend it on something that increases the productivity of your economy, otherwise it can lead to waste and inflation down the line. You can actually use money issuing to fight inflation if you spend the money you issued on addressing the problem at hand - for example, the supply side problems we faced following the pandemic that caused the inflation we’re at the tail end of right now.
By adopting the US dollar, Argentina would effectively give up monetary autonomy to the US central bank (so, just another central bank outside of their control). In fact, the US central bank could decide to issue money in a positive way as mentioned above, without any of that having a similarly positive impact on the countries that depend on the US dollar.
Money & Macro (PhD Joeri Schasfoort) has made multiple videos on the topic, but here are two (the first one short, the second one a deep dive) if you want to hear this side of the story told in greater depth:
You might be confusing debt issuance with money issuance.
Governments often issue debt to fund various kinds of spending. And despite concerns about debt levels, they can have a pretty fuzzy relationship with inflation; Japan has public debt of over 200% of GDP, and an underinflation problem.
But issuing money for the purposes of government spending – the monetization of fiscal policy – is almost always a bad idea, outside of wartime. The practice is behind every single episode of hyperinflation in economic history. And governments know this. Fiscal monetization is only resorted to by countries that have exhausted their ability to borrow; if cutting spending isn’t politically feasible, the remaining resort is monetization. That’s basically how you get to Argentina’s situation.
As for giving up monetary autonomy, it is indeed a serious drawback to dollarization. But this is a second order problem compared to the kinds of problems facing Argentina, like findng a guy bleeding out after a road accident, and worrying about his obesity.
Nope. Let me quote Joeri from his second video (19 minutes in):
Pointing to Japanese money supply versus inflation is irrelevant because Japan doesn’t fund its fiscal deficit via monetization. It issues debt, just like every other non-basket case economy on Earth.
The distinction is important. Debt is tied to a promise to repay later. Monetization has no such promise, so it’s functionally equivalent to issuing debt and then immediately defaulting. So long as lenders believe debt will be repaid, the effects are different from monetization.