Recently, it has been reflecting the discussion on whether or not it should dominate the economy. Many argue that officially adopting the dollar as our currency is the only way to finally anchor inflation expectations, and ensure a minimum of monetary stability. Others believe that such a policy would bring more harm than good, that losing Argentine weight is ultimately a way to lose our sovereignty, and even if doaring is unconstitutional.
In addition to the discussion, which at this time has numerous arguments on both sides, there are two things that are safe:
- In the last 70 years of poor monetary praxis and the subordination of the Central Bank to the discrectionality of fiscal policy led to a distrust and a repudiation by weight, which converted the dollar into the Argentinean reference currency. We prefer to save, invest, and think about dollars. It is our unit of account at the end of the day, and from this base, price stability, capital flows, and economic activity, this intrinsically related to currency stability.
- Dolarizing does not mean touching the macro with a magic stick. It does not work alone, and not by taking the circulation weight the Argentine economy will straighten the way and reach the first world. It may conclude or not agree, but it is important to understand that certain conditions are necessary for such a project to have the opportunity to be viable in the long run.
About that will turn a little what I come to say, to donate we need dollars. It seems a triviality, but I also think it is worth stopping over this point and ahondaring a little. First, giving essentially means withdrawing the entire monetary base and turning it into dollars. This includes not only the notes and coins that the public keeps in his pocket, but of course all the deposits in sight, bank incomes and liabilities of the central bank. If we are really going to change all these weights for dollars of our reserves (for that we would do in a unilateral doll that does not include a EDF assistance package), the first we will have to establish is the exchange rate we will use for that conversion. Today, with the reserves we have available, we would be talking about over 4,000 pesos per dollar. If, in return, we have good currency support, this type of exchange may not be so high, with which the value in dollars of the Argentinean heritage would not be so affected.
In turn, and going beyond the first stage of conversion of assets and contracts into weights, one should consider that dolarizing implies totally renouncing our ability to make monetary policy, and consequently using it to smooth the economic cycle. At this point, it can be argued that in our recent history, the capacity of our Central Bank to exercise some degree of control over the amount of money in circulation did not serve much to stabilize the cycle; in the last 15 years, 7 have been filled and recession. However, the point is no longer valid; when a shock reaches our economy, and it depresses our yields, this liquidity injection feature to the markets functions as an oxygen nozzle that helps the gears of the economy not hold completely. The scourge of pandemic, and the subsequent assistance of the central banks of the world, was a categorical example of this. With what, if we're going to stick hands with a policy like dolarization, which eliminates the possibility of issuing, we're going to need a good $ mattress for when the seasons of flaky cows arrive. In other words, in order to donate it is viable in the long run, we need to save currency when possible, and form a cyclic reserve fund.
In the same line, an economy that spreads naturally loses the possibility of devaluing its currency. This means that you renounce a tool that allows you to reduce domestic costs in dollars and discourage imports when we need to correct a trade deficit with the rest of the world.
It seems to me that it is worth stopping the ball over this point, and opening a parentheses. Let us consider a minute if, in the particular case of Argentina, devaluation is the best adjustment mechanism we can have in the face of the need to recover competitiveness abroad. For us to devaluate, it is essentially reflected in the reduction of imports, the reduction of economic activity, and in the hope that the inflation that will fire this devaluation does not end up completely compensating. And if we can reduce ourselves in dollars, In the midst of a devaluation process, people escape from the assets in weights, dolarizes their portfolios, and the dollars they earn on the one hand go out the other, in what we call the famous "fuge of capital". Moving the price of the dollar abruptly in an economy that uses it as a unit of account generates this type of effects that do not have the same presence in “sana” monetary economies. With what it would be good that, in general, we would assimilate the following idea; devaluation is not the only way to correct competitiveness. If the objective is to reduce unit labour costs in dollars, we lower the retentions and the tax burden, encourage investments that improve productivity, and reform the working system to flexibilize wages by weight below. That last one seems unpopular, of course. But can we really say that reducing wages in weights impoverishes us more than inflation that triggers abrupt devaluations?
In any case, the former only summarizes mechanisms of adjustment alternative to devaluation, which may resort to a dolarized economy. This adjustment is necessary only insofar as there is no room for financing a current account deficit with reserves, while we hope that international conditions will improve. A cyclical fund may eventually give you that margin.
Another argument that is often heard when the cons are pointed out to have a dolarized economy, is the vulnerability that our financial system would have to banking. Dolarizing ultimately implies that the Central Bank cannot act as a last resort lender and redeem a bank that faces liquidity problems. Unless, of course, you have to save him. I mean, of course, and for the last time, to the deep bending against cyclicals. Now yes, I hope it was clear; to donate, we need dollars.
Lastly, and not least, to donate is also to renounce the possibility that the Central Bank is issuing the tax imbalances of the treasure. With what, consistently, spends more than the revenue has two options; or adjust, either as (of course, not worth the inflationary tax), or take debt in dollars, at a rate adjusted by risk of default. Considering the Argentine credit story, the second option is not very convincing.
In short, and always in my opinion, a dolarization that is successful in time is necessarily accompanied by; a solid fund against cyclists of reserves, a labor and fiscal reform that promotes productivity and the flexibilization of labor costs to low, and fiscal discipline. That is, it will be feasible only in an Argentina that starts doing things right. Therefore, it is worth asking; if we can make public expenditure more efficient, if we reduce the tax burden, and if we strengthen the reserves... Shall we continue to repudiate our currency? Shall we continue to argue that we need to dolarize?
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