The serious economic crisis that Argentina is going through can serve as a kind of shock doctrine for Javier Milei and create the conditions for a radical libertarian experiment of privatizations, drastic reductions in the social protection of the State and, in a central place, the dollarization of the economy.
It is assumed that the crisis will deepen in the coming months and force another bailout from the International Monetary Fund. In the worst scenario, Argentina would enter a phase of hyperinflation, defined by inflation greater than 500% annually compared to the current 140%. This would create an uncontrolled spiral of price increases, with disastrous effects at a time when four out of ten Argentines live in poverty and the streets of Buenos Aires are filled with homelessness and prostitution.
But for Milei it may be the ideal condition to dollarize and thus, in a shock, control inflation definitively, even if it is at a gigantic cost for economic activity, salaries and employment.
Although the draconian prescriptions recommended by Milei – harsh fiscal adjustment and dollarization – seem like a classic anti-inflationary prescription, many economists fear that it will worsen the situation if not managed carefully. Provoking a massive conversion of pesos into dollars “would already trigger disinflation,” said an economist at a public bank in Buenos Aires. Milei said that precisely the circumstances of hyperinflation would be necessary to dollarize. “Milei may want chaos and then dollarize,” said Matías Vernego, an Argentine economist in the US.
It is not clear at this time whether the rapprochement between Milei and former president Mauricio Macri – in theory, more moderate in his anti-inflationary recipes – may have stopped the wishes of Milei's team, led by the dollarization guru, the economist Emilio Ocampo. Former director of the American bank Chase Manhattan and member of the team that collaborated in the privatization of YPF under the presidency of Carlos Menem, Ocampo is the number one guru of dollarization.
Another key Milei figure, Carlos Rodríguez, Menem's former advisor, already tried to peg the peso to the dollar, an experiment that ended in a humanitarian crisis and social outbreaks. Rodríguez said yesterday that Milei should let the peso float on the first day of his presidency. Free floating would almost certainly lead to a collapse of the peso and possibly hyperinflation.
“I think they will continue with dollarization, but it is not known when. “I don’t think that is moderated by Macri’s influence,” Vernego said. “There is no consensus among the Buenos Aires elite about dollarization, but they are not against it either.” Other measures that Milei wants to implement, such as the right to own weapons or the abolition of abortion, require support from Congress, where Milei has weak support. “Dollarization can be done without support from Congress,” Vernego added. As always happens, high inflation is the result of the depreciation of the peso. To avoid uncontrolled depreciation, the Central Bank must buy pesos with foreign currencies. But these currencies are close to being exhausted.
Milei criticizes the Central Bank for issuing money to buy foreign currency, thus generating inflation, which is why he wants to eliminate the Central Bank. The banks remained closed yesterday as it was a holiday. But when they open “there may be a run (uncontrolled withdrawal of savings) precisely because of dollarization,” Vernego said. “If people see that there is going to be a devaluation, they will go ahead by selling pesos, and the dollar will skyrocket.”
“Dollarization would be a disaster for ordinary people, but not for the elite, an adventure with very harsh consequences, but we have had adventurers in the past in Argentina so anything is possible,” Vernego said.
