Argentine Elvis and the Dollar Dream: Can Dollarization Solve Argentina’s Inflation Nightmare?

  During this time, a foreign middle-aged man who looked like Elvis Presley suddenly began to dominate the screen. He doesn’t look like Elvis, but his hairstyle is very similar. They both have thick and long sideburns. It is relatively rare for a man to have such a hairstyle, and it is usually reserved for entertainers. He was jumping up and down in the video, waving here and there to the public, speaking rapidly in a language I didn’t understand at all.
  This person is the newly elected Argentine President Milai. Argentina is a former Spanish colony and he speaks Spanish. Millais is indeed a strange person. When he gives speeches and interviews, he likes to throw bombs everywhere, and his political views are extremely right-wing. His most eye-catching idea is to abolish Argentina’s sovereign currency and use the US dollar.
  Strangely, many currency speculators will distort his views and say that he wants to use Bitcoin as a national currency. Obviously, as a former economics professor, he must have a deep understanding of currency issues. To attract the votes of those who hold Bitcoin, he might as well say this. But the possibility of Argentina, the second largest country in South America, using Bitcoin as its national currency is even lower than the possibility of using the U.S. dollar as its currency.
  Few people know that Argentina planned to “use the U.S. dollar” more than 30 years ago. Millay’s views were not just a whim. In 1991, Argentina implemented a currency board system to maintain a fixed exchange rate of its national currency, the peso, against the U.S. dollar. The ratio at that time was 1:1. The first reason behind maintaining a fixed exchange rate with the US dollar is to allow foreign investors to maintain confidence in the domestic currency, allowing them to avoid exchange rate risks and invest with peace of mind in Argentina.
  In the 1980s, Argentina experienced a serious debt crisis and foreign capital withdrew in large numbers. At the same time, the peso depreciated wildly against the dollar. The devaluation has formed a vicious cycle – when foreign investors are worried about the further depreciation of the peso, they will withdraw their capital even more frantically, and then the peso will depreciate again, endlessly. Declaring a fixed exchange rate with the power of the state is tantamount to giving reassurance to foreign investment and its own citizens.
  However, Argentina’s foreign exchange reserves are pitifully small and the ability of the industrial sector to earn foreign exchange from exports is not satisfactory, so it is impossible to maintain such an exchange rate level. In the black market, because there was no control and the exchange rate more reflected the real market supply relationship, the peso quickly fell to a level close to 40:1 against the US dollar. Plans for a fixed exchange rate system and a currency board were aborted.
  This plan was doomed to fail from the start. The 1:1 ratio of the peso to the U.S. dollar is entirely an illusion of national pride. Argentina’s economic fundamentals simply cannot support such a highly valued currency.
  At the turn of the 1980s and 1990s, due to the turmoil in the international financial market, there were too many cases of overvaluing the national currency to reflect national pride or national honor. For example, the exchange rate of the East German mark against the Federal German mark and the ruble against the U.S. dollar were once set very high, but in the end they all fell miserably. In 1990, the ruble was set at 0.6:1 against the U.S. dollar, making the ruble more valuable than the U.S. dollar. But by 1994, 1 U.S. dollar could be exchanged for more than 3,000 yuan in rubles.
  The market economy is indeed a very magical thing, and many currencies cannot stand the test. Among late-developing economies, there are very few sovereign currencies that have withstood various tests and maintained stable currency values. The RMB is undoubtedly the most dazzling one.
  Back to the Argentinian story. Because of a failed experiment with the currency board system, Argentines developed a complex with the U.S. dollar. What’s more, Argentina is suffering from severe inflation. Using November 2023 as the base period and looking back 12 months, Argentina’s inflation has reached 140%. In one year, prices have more than doubled. With such a high inflation rate, Argentina’s wage earners are suffering too much, and it is a visceral pain.
  In the context of high inflation, using monetary revolution as a campaign slogan, the more extreme it is, the more popular it is. For citizens who suffer from shrinking wealth every day, words like “abolish the local currency” or even “blow up the central bank” do sound too exciting and very exciting.
  For politicians, expressing deep concern for people’s wallets and their core interests is always the best harvester of people’s hearts. Even if “President Elvis” is just talking, it does not affect this truth.

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