2024-08-30 14:40:30
Argentina’s Economy Minister Luis Caputo announced this weekend that the government headed by Javier Milei is launching its plan to reactivate the country’s economy starting this Monday.
And the key piece of the program is make the peso a scarce, rare currency in such high demand that people are willing to pay more dollars to get hold of it. A plan to turn the peso into a scarce currency, like bitcoin, and turn the last 80 years of dollar supremacy in Argentina upside down.
Since the beginning of the year, Milei’s economic measures have caused the peso to appreciate: its exchange rate against the dollar has fallen much less than the accumulated inflation has risen. The result is that Argentina is a much more expensive country today for people who pay in dollars than it was when the current president took office last December. And Caputo’s goal is to advance even further in this revaluation.
In an interview on Saturday, the Minister of Economy announced that the Central Bank would stop issuing pesos starting this Monday. Specifically, he announced that he would cancel two ways in which banknotes were still being printed: when the Central Bank exchanges dollars for pesos and when banks sell public debt to the institution. From now on, new pesos will no longer be issued in both cases and the bank’s own reserves will be used when necessary. On the other hand, Caputo explained that The Treasury will withdraw from circulation about one billion pesos per monththanks to the fiscal surplus recorded in the country’s accounts.
All these steps are in a different direction from the dollarization that Milei promised during his election campaign. At that time, he promised to destroy the peso, a currency that he described as “excrement,” and to establish the US currency as the country’s main currency. Now he is betting on a “monetary competition” in which a “strong” peso and the dollar coexistas well as any other currency (euros, reais, pounds, etc.) that citizens choose to use.
The ‘pesocoin’
With these measures, The Government wants to put a ceiling on the amount of pesos in circulation: “We are going to make the peso very scarce. From now on the monetary base will not grow any more,” he said. An idea that sounds a lot like bitcoin, of which there can only be 21 million units in circulation. The theory of its creator of the digital currency is that if there is a limited amount of coins, the increase in demand and economic growth will make each of those coins more and more valuable. From a monetary point of view, there will not be inflation, but deflation. And that is saying a lot in economic terms. In the digital currency environment, it assumes that Prices will go down because each bitcoin will have greater purchasing powerFor an economy, it is the greatest curse of all. Any finance minister would fear deflation because it creates a vicious circle, leading to reduced spending and investment, which leads to lower economic growth and higher unemployment, which leads to even lower spending and investment.
Caputo’s plan is somewhat similar. The minister insists that taxes will continue to have to be paid in pesos, so there will continue to be demand for the Argentine currency. But there will be fewer and fewer pesos in circulation, so the currency will appreciate over time. But this is where the dollar comes into play: Milei’s goal is that the millions of Argentines who keep their savings under the mattress in US bills are forced to sell them to get pesos.And, since pesos will be scarcer and more valuable, they will have to pay more dollars in exchange. In other words: revalue the peso and reduce the exchange rate.
The libertarian president’s dream is that the price of the black market dollar, the one used as a reference, will fall to the level of the official exchange rate, which is set ‘by hand’ by the Government, in the face of an avalanche of dollars coming out of citizens’ mattresses. From that moment on, Caputo could lift restrictions on currency exchange and allow Argentines to choose to operate with a scarce and revalued peso or a dollar that could already be used for any operation, without restrictions.
The risks of this plan, however, are high. Argentines who save in the ‘new’ revalued peso will be more exposed, because the Central Bank will see its reserves reduced and will have to be very careful to avoid organized currency attacks that sink the value of the peso. And the restrictive fiscal policy only encourages the recessionary cycle that the country is experiencing: The plan is not to give more money to citizens so that they consume more and reactivate the economy, but to force them to spend savings in dollars that will be worth less and less just to maintain their current level of consumption.already reduced. And if the country enters deflation, the economic slowdown could be even worse. The middle class that until now saved in dollars to maintain their standard of living could see that cushion disappear before the economy recovers.
Milei came to power promising innovative recipes to deal with a monetary policy that had failed for decades. The question that remains is whether the solution will be better or worse than the disease, or whether it will simply be a different disease. What can be said is that Milei has wanted to go all out to implement his theories, in a monetary experiment with few precedents in the modern world.