On November 19th, 2023, the world was filled with the sound of Libertarians cracking open beers. They had a reason to be happy – Javier Milei, a self-described anarcho-capitalist, had been elected the president of Argentina. That’s not something you hear every day. Nor is it something to be completely optimistic about. At heart, I’m glad Argentina now has a leader with such an interest in neoliberal economic reforms who’s willing to reverse decades of failed Peronism; and if their situation were normal, I’d be in favour of Milei implementing such reforms as quickly as possible. But sadly, they may provide a slight exception to that, much in part due to what Milei is proposing. I’ll elaborate more later.

I have no doubt that Milei’s injection of free-market principles will alleviate Argentina’s current predicament. But that doesn’t mean he always hits the right notes in terms of policy – some of his ideas are downright ridiculous:

Namely, his proposal to abolish the Central Bank

The political incentive to do this may be great, as Argentina’s inflation rate hovers at 40%. But abolishing the central bank is still a fully idiotic thing to do. 

It’s not hard to see why doing this will medicate Argentina’s exorbitant inflation rate, since the country’s experienced uncontrollable monetary growth over the past few years. But the cure might be so powerful that it creates a new disease – deflation, the self-perpetuating, investment-destroying, debt-increasing monster which characterises economic stagnation. If Milei actually goes through with this, he could turn Argentina into Japan. 

Or worse than that, Great Depression America, when times get rough. The whole point of a central bank is to act as an economic stabiliser when a recession hits, doing so by providing liquidity to member banks through quantitative easing. This mitigates the likelihood of bank runs, giving an economy’s financial structure the power to weather the storm. The consequences of not doing this are to be learnt from the US Great Depression. The fact that the problem of illiquidity drove the majority of bank suspensions implies that the crisis could have been prevented very easily by banks having greater access to liquidity, facilitated by the central bank. The collapse of thousands of banks brought a 36% reduction in the quantity of money in circulation. Before you knew it, a quarter of the workforce was jobless. 

Dollarization needs to be done very, very, very carefully (Beware the Quicksand Effect)

One of Milei’s more laudable solutions to inflation has been to do away with the Peso and install the Dollar. He aims to do this by both deregulating the consumption of Dollars within Argentina and using IMF funds to buy up Dollars from abroad. A popular criticism of Dollarization (from the Left in particular) has been that it’ll concede Argentina’s monetary sovereignty to the United States, signalling a return of good ol’ American economic imperialism. There have been academic attempts to downplay this. The Cato Institute, for example, says:

Nor does dollarization imply, as the sovereigntists claim, a country’s surrender of its monetary policy to the United States. As economist Juan Luis Moreno‐​Villalaz argued in the Cato Journal in 1999, Panama’s banks, which have been integrated to the global financial system after a series of liberalization measures in the 1970s, allocate their resources inside or outside the country without major restrictions, adjusting their liquidity according to the local demand for credit or money. Hence, changes in the money supply—which arise from the interplay between local factors and the specific conditions of global credit markets—and not the Federal Reserve, determine Panama’s monetary policy. Fed policy affects Panama only to the same extent that it does the rest of the world. 

Right. But this doesn’t discredit the basic fear that sovereigntists have: Argentina’s adoption of the Dollar will mean that the Argentinian central bank no longer has sovereignty over the nation’s currency, and hence the money supply will be almost entirely at the whim of the markets. As I’ve stated before in reference to the Euro, this makes the assumption of vast quantities of public debt way riskier, as the central bank can no longer produce the currency in which that debt is denominated. Hence, Dollarization will undoubtedly put fiscal pressure on Argentina, given how high its debt level is. But hey – there are no solutions, only trade-offs. Dollarization is a fundamentally good aim. The Peso is so devalued, that getting rid of it would be the most humane and efficient way at tackling inflation, as opposed to jacking up interest rates beyond their already exorbitant levels. 

But that does not mean that Dollarization shouldn’t be adopted without caution. Due to regulatory constraints, there are relatively few Dollars circulating in the Argentinian economy. It will take time before the country has fully Dollarized. In the meantime, inflation will get dramatically worse if Milei proceeds too quickly, thanks to a “currency quicksand effect” which is bound to occur. The more Dollars Argentina imports, the more the demand for the Peso will fall, worsening the inflation of the Peso. You might say that this will just accelerate the acquisition of Dollars. But not so fast – Dollars need to be purchased from abroad, and this will become exponentially difficult with an exponentially devaluing Peso. Sure, the IMF may provide significant funds for the Dollarization process to be completed swiftly. But it would be reckless to place a country’s entire monetary health on the goodwill of an anonymous international institution. Argentina could find itself mired in an even more suffocating inflationary treacle with nowhere to go.  

To reduce pressure on the Peso during the adoption of the Dollar, Milei must be willing to compromise on some of his free-market principles by (temporarily) retaining governmental controls on currency and capital. Capital controls should be kept in place or even tightened to avoid a financial exodus from Argentina which would be the worst thing for inflation. India followed similar measures in 2013, and successfully fended off a speculative attack on the Rupee. Studies also suggest that capital controls make foreign exchange reserves far more efficient at promoting economic growth by limiting the chaotic slipping and sliding of exchange rates.

But in the meantime, Milei needs to do his best to strengthen Argentina with neoliberal reforms. He should reduce the regulatory burden as much as possible; privatise where he can; put Argentina on the road out of the Peronist nightmare it’s been stuck in for far too long now.