The Argentine peso could shortly become extinct. If Javier Milei, the front-runner in the race for president, wins the election later this year, the country’s currency may be supplanted with the US dollar. It is remarkable that no one has suggested it before. Argentines are believed to possess the most U.S. dollars outside of the United States, and stockpiling dollars is a way of life for many. The action is part of the right-wing libertarian’s strategy to transform Argentina’s economic prospects through shock therapy.
Polls indicate that sixty percent of Argentines oppose the proposal because it would grant the Federal Reserve too much authority. However, whether they like it or not, the dollar already plays such a significant role in their economy that some view this as a foregone conclusion. Argentines have historically placed little value on their own currency, preferring to convert any extra pesos into dollars as quickly as possible. They also have little faith in financial institutions, so they resort to what is locally known as the “colchón bank” – hiding their money under the mattress.
There are numerous anecdotes about people hiding money in the garden, in the walls, or even in their heating systems, sometimes with disastrous results if an unexpected cold wave occurs and the money is not retrieved in time. It is an indication of the country’s structural economic problems. As with all chronic diseases, its onset was gradual. The Argentine population’s fixation on the US dollar can be traced back to the 1970s and 1980s, when hyperinflation ravaged the nation’s economy.
It is estimated that the purchasing power of middle-class Argentines decreased by 30% during the 1980s alone. During that period, unchecked price increases eroded the purchasing power of wages and made a farce of savings, to the point where people lost faith in their own currency.
Read Also: Nestle Recalls Toll House ‘Break and Bake’ Bars Due to Wood Chip Contamination
Rapid Peso Devaluation Led to Value-Preserving Strategies
The pesos in their pouches lost value so rapidly that no one kept them for long. There were essentially two methods to keep up: purchasing products in quantity or purchasing U.S. currency, both of which would retain their value better than the initial pay packet. With an annual inflation rate of 115%, Argentina has a cost-of-living issue once again. This has resulted in a remarkable increase in the number of people living in poverty, from roughly a quarter of the population in 2017 to more than forty percent now.
You might believe that no self-respecting government would want this situation to continue indefinitely. You would be correct. There have been numerous efforts to restore Argentine confidence in its currency, either by bolstering its value or by squeezing the dollar supply. But ultimately, they have all failed. The most ambitious initiative was the 1991 introduction of the so-called Convertibility Plan. This established a parity between the peso and the dollar.
Previous governments fueled inflation through the issuance of currency. This time, however, it was decreed that each peso issued would be guaranteed by one dollar in the coffers of the central bank. It was believed that if people knew they could exchange their pesos for dollars at any time, they would determine they did not need to. And for a time, it served its purpose. But it had other secondary effects that eventually contributed to the 2001-2002 economic collapse.
Argentina had effectively delegated its economic policy to the United States by adopting an inflexible currency regime. Without getting too specific, Argentina had also allowed its public debt to spiral out of control. In addition, the currency’s bond to the dollar made it susceptible to the ups and downs of the US economy. In the two decades since that crisis, Argentina has been governed primarily by left-wing protectionists.
Their solution to the peso’s credibility problem has been to make purchasing dollars more difficult. There are now up to a dozen distinct exchange rates, depending on who desires access to the US currency and why. A dollar costs 287 pesos at the official exchange rate, but you can only buy $200 per month and you must pay punitive taxes on the transaction. The situation then becomes increasingly surreal. The Coldplay dollar rate (374 pesos per dollar) was established specifically for foreign rock bands touring the country.
In addition, there is the Malbec rate (340 to the dollar), which is intended to increase exports of wine and other agricultural products. Still, the public’s desire for dollars persists, as taxi drivers and restaurateurs alike gladly take greenbacks as payment for products and services. All of this makes dollarization appear desirable, if not inevitable. But it could have been different. Brazil, the dominant neighbor and rival of Argentina, confronted many of the same challenges but chose a different path.
Brazil followed Argentina’s lead in 1993 when it introduced the Real Plan and pegged its currency to the dollar. However, demonstrating the Brazilian propensity to modify the rules, they allowed themselves some wiggle room by permitting the real’s value against the dollar to fluctuate within certain parameters. Brazil was aided by additional economic and cultural factors, so it never developed the same distrust of banks and desire for the dollar as the United States.
No merchant or refreshment bar owner in Brazil will accept dollars as payment, regardless of how much you beg. (I should know; I once attempted it as a last-ditch effort to pay for a supper in So Paulo when the restaurant’s credit card machine failed. The stern proprietor forced me to call a friend to come to my rescue.) In the present day, neither country’s exchange rate is anywhere near the parity it had in the 1990s. In modern-day Brazil, however, it takes just under five reais to purchase a dollar, whereas in Argentina, take your choice.
Argentine dollarisation? It would not be the first South American nation to do so, as Ecuador did so in 2000 and subsequently lowered inflation. A common currency for the two countries, potentially to be called the “sur” or even the “gaucho,” was recently proposed by the presidents of Argentina and Brazil. It may be simpler to realize this goal than the “sur” or “gaucho” moniker.
Read Also: Mother Set to Plead Guilty After 6-Year-Old Shoots Teacher with Her Gun in Virginia
Source: BBC News
