The Peter Zeihan Podcast Series - Dollarizing Argentina: Run-Off Elections Between Massa and Milei || Peter Zeihan

Episode Date: October 27, 2023

Today, we're turning our attention to Argentina's upcoming run-off presidential election between current economic minister Sergio Massa and libertarian candidate Javier Milei. I'll be focusing on Milei's proposed dollarization program. Full Newsletter: https://mailchi.mp/zeihan/dollarizing-argentina

Everybody, Peter Zion here coming to you from Boston Haba. The news over the weekend was that in Argentina we had our first round presidential contest, and the two finalists who will compete in the first weekend of November are a guy from the ruling party, the pronists. He's the economy minister. And a guy from the libertarian field, which is Javier Malay. And apologies if I got that name right. If you win, I'll learn to pronounce your name. just ask Bernie Mohamed off of Patrick Menistan.

Okay, let's see what to say. Malay's big thing is that he wants to do away with the Argentinian peso and institute a dollarization program. Three big things from this. Number one, this is more than just some financial chicanery. This has very real implications for the Argentinians, as well as everybody else in the neighborhood. Because the financial strategies of the pronus

are a little whackadoo. Peronism is a very non-standard political and economic ideology, and it combines the worst aspects of Venezuelan socialism with corporate Nazism. So basically, under a cult of personality on top of that. So if you can imagine AOC of the squad in the American Congress, you know, one of those really, really, really left-ring weirdos, having a love child with Donald Trump.

I mean, it would be an ugly, ugly, ugly, hideous child. But that's basically what peronism is. And among other things, it's heavily unionized, but the government represents the unions. And it believes that the government should be able to print currency in any volume to pay for everything so long as you're a political ally. Needless to say, this has gotten Argentina into a lot of financial trouble over the last century. They've defaulted on their debt, I think, nine times. And it should be a very successful country based on their demographics and the geography, but policy-keeping. getting in the way. So if you're an American who thinks that you can do no wrong, bear in mind

that if you wake up every day for decades, just trying to wreck everything, you can't eventually become Argentina. So there is a limit to what we can get away with. Now, with that kind of in your back pocket, let's talk about the impacts here. If dollarization worked, it would destroy the ability of the proneness or really any government in Argentina to use their central bank and their currency in order to manipulate events. And that is honestly the idea here that Malay has, is if we can wreck their ability to do what they've been doing these last 90 years,

then that entire political ideology will die on the vibe because they'll actually have to then balance the books and do things like have fiduciary responsibility. And in that sort of environment, people who can do math are going to do better than people who cannot do math. So there's more at stake here than simply having a balanced budget. It's about eliminating what has been the dominant ideology of the country and has been very, very damaging for generations.

But two, number two, it's not easy. The first step to dollarizing the economy is to remove all the pesos from circulation. And that means that the Argentine government under Malay would have to go out and get a lot of U.S. dollars to buy back all the currency. And the government is completely broke. One of the reasons why the prognus are printing currency like Matt. So the first thing they would have to do is come up with billions and billions and billions of dollars in order to buy up all the old currency. Now, doing that is beyond the government's capacity right now unless they do a mass devaluation. And if they devalue the peso by at least, say, three quarters, so make it worth at most 20 to 25% what it's worth now, then the number of dollars that you need would be significantly less.

So in order to stop the budget largesse and the hyperinflation that comes from that, the first step would be to trigger hyperinflation. Needless to say, that would have not just economic but political outcomes. So not something that could be done easily, lightly, or without consequences. Which brings us to the third thing, whether or not it would even work. The whole idea of dollarization and the handful of countries that have done it is they believe that their institutions are not sufficiently responsible to be granted independent monetary policy and control over printing press.

So by doing away with that completely, basically ending the central bank, you then have a system where everyone is beholden to a much more responsible monetary regimen out of the United States. You know, you can cue the laughter for those of you who are gold bugs out there. The issue with this is that there's more things that the central bank does than just regulate the currency. They're also the lender of last resort. They're also the regulator for the banking sector. And if you have a central bank that does not have the capacity to step in and help the banks, in a system that is as fiscally wobbly as Argentina, you're also going to have a bank rent, a bank collapse, and nothing behind it to stabilize it. So for this plan to work, not only do a lot

of things have to go right that are beyond Argentina's control, but Argentina would have to enter through a series of banking and fiscal reforms in a matter of days that most countries take a generation to do. There's a reason why dollarization as a rule is not something that states do and it's certainly not a quick fix. It requires years of reforms and it's not clear that the political and economic system in Argentina has that sort of durability or attention to detail. So honestly, dollarization as a rule reminds me a lot of Boston's participation in the Revolutionary War of modern sports. They hit hard right out of the gate.

They pick a lot of fights, and then they largely sit out for the rest of the season.