Javier Milei 2022, image by Ilan Berkenwald via flickr.com. License: Creative Commons

Argentina has voted and the Bitcoin scene is overflowing with congratulations and messages to the new President Javier Milei. Why? And what are his monetary policy plans?

Sometimes the crypto scene can also agree. For example with the newly elected Argentine President Javier Milei. Everyone with a name cheers, congratulates, reports, and the Bitcoin price rises by three percent.

Milei doesn’t know exactly what to call him. The German media likes to call him a right-wing populist, he describes himself as an “anarcho-capitalist,” which is probably the reason for the Bitcoin community’s exuberant sympathy.

But one thing is clear: Milei worked as an economics professor for 21 years and held high positions in banks. He is liberal to the point of libertarian, names his dogs after scholars of the Austrian school, and declared in his election campaign that he would abolish the central bank and replace the peso with the dollar.

Specifically, Argentinians should initially be able to voluntarily decide between the two currencies. As soon as two-thirds of the monetary base is converted, the economy will be completely dollarized, which will probably be accompanied by the dissolution of the central bank.

He’s breaking open doors for the Argentinians. The peso has lost a good 90 percent of its dollar value since 2019, and even 99 percent since 2009. Milei’s election is therefore primarily a monetary policy signal: against the peso and for the dollar.

Or, to put it another way: for the withdrawal of monetary sovereignty.

“Central banks are frauds”

Many of Milei’s statements took place against the backdrop of the election campaign. A currency like the Argentine peso, along with the central bank, makes a grateful target for public malice.

Once Milei said that a central bank is “a scam, nothing but a mechanism through which a caste of politicians cheats the people through inflation taxes.” Another time he listed that there are four types of central banks – the bad ones like the US Fed , the very bad ones, like those in South America, the terrible ones, and finally the Central Bank of Argentina, which forms a category of its own.

It will not be easy for the new president to implement his promise, if only because he does not have a real majority in parliament. Many of the country’s economists warn that the central bank is needed to bring liquidity to the market and that the country does not receive enough foreign currency from abroad to be able to afford a dollar standard. Because the abolition of the peso limits the state’s financial freedom of action, Milei will also have to face tough resistance from the public sector.

Whether he will make it remains to be seen. But Milei is without a doubt serious. In his first interview after the runoff election, he declared that he would alleviate inflation by exchanging the peso for the dollar.

His choice of personnel also shows how serious he is: he is advised by two economists who already advised Carlos Menem when he pegged the peso to the dollar in the 1990s. This stabilized the country’s currency for several years, but at the price of an autocratic government.

Maybe that’s why some people fear the “right-wing extremists” in Milei. His economic goals are so ambitious that he may not be able to achieve them through purely democratic means.

Argentina has long been the second largest dollar economy

The most important figure in Milei’s dollarization plans, however, is Emilio Ocampo, professor of financial and economic history at the private CEMA University in Buenos Aires. He is directly responsible for the project.

On his blog, Ocampo answers Argentine economists’ criticism of dollarization with academic expertise and tiresome detail. In an article in the Independent he sharpens his arguments against it. The Argentine economists who oppose dollarization simply do not understand “that the citizens of Argentina have already chosen the dollar.”

Nobody in Argentina, writes Ocampo, still wants to hold pesos. Unofficially, the country has long been the second largest dollar economy after the USA. Argentinians hold $200 billion in banknotes, while the peso’s money supply is only $50 billion. Milei’s dollarization merely makes official a decision that has long been made informally.

The path to a dollar zone

In addition, history professor Ocampo knows the past is behind him. Citing a recent paper, he explains that there are 96 cases in which temporary or permanent dollarization helped stabilize an economy.

The libertarian US think tank Cato Institute agrees: Panama, Ecuador and El Salvador have shown that private entrepreneurs in the dollarized countries of Latin America receive loans on better terms. A dollar standard also imposes a hard budget limit on governments, which forces them to exercise greater budgetary discipline.

The Cato Institute is already hoping that Milei’s victory will pave the way for a dollar zone. While Panama, Ecuador and El Salvador are relatively small economies, Argentina is large and influential. Its entry would enormously expand the Latin American dollar zone and could bring with it other countries in the region until both Americas eventually trade under the sign of the dollar.

The fruits of self-incapacitation

Dollarization is a monetary policy self-incapacitation. A country that chooses not to have its own currency is choosing not to let politicians influence money.

If one says that Bitcoin is the separation of the state and money, then what Milei is planning in Argentina is not far from Bitcoin. Milei wants to separate the money from the state – but only from Argentina. Fully aware that the Federal Reserve is only the least bad of central banks, he puts his trust in the dollar. It is better to be well controlled by others than to be poorly self-managed.

It would have been more logical not just to send the political problem abroad, but to resolve it completely. Milei would have had the opportunity to do this with Bitcoin or other cryptocurrencies. But this is probably not yet capable of winning a majority, while the dollar in Argentina has long since had the support of the population.

There is an interesting trend emerging globally. While the Brics states have always been planning “de-dollarization,” the dollar is not getting weaker, but stronger. The dollar has never been more of a world currency and a measure of everything than it is today, to which stablecoins such as Tether (USDT) have also made a contribution.

Countries that dollarize like Argentina are still making themselves dependent on the US government. But cryptocurrencies could change this. There are already independent issuers of digital dollars, Tether, and Maker DAO, a decentralized organization that issues one dollar without holding real dollars. With such instruments, especially DAOs, the issuance of dollars could be decentralized away from the US, which in the long term might be the logical and only sensible evolution of the dollar.

In the short term, stablecoins such as the Mountain Dollar, which pass on the income from government bonds to their owners, are likely to be interesting. The USDM is banned in the US because it is considered a security there – but it is allowed in Argentina. If such a model takes hold, Argentinians could soon be using money that pays handsome interest – while helping to finance the US government.

Source: https://bitcoinblog.de/2023/11/20/argentinien-stimmt-fuer-den-dollar/

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