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Taming Inflation: Argentina’s Bold Pivot to a ‘Hard Dollar Regime’

In the face of hyperinflation and a free-falling peso, Argentina is contemplating a radical monetary solution: ditching the peso and fully embracing the US dollar as its local currency. This approach, recently proposed by leading economists and the Cato Institute, is aimed at reigning in spiraling inflation.

The adoption of the US dollar, according to these economic think tanks, would effectively serve as a financial ‘straitjacket,’ limiting the central bank’s capacity to enable extravagant spending by Argentina’s lawmakers.

“Official dollarization, whereby a country awards legal tender status to a foreign currency, serves as a sort of financial hangman’s noose—it takes the central bank out of action and eliminates the local currency. This hard dollar regime is precisely what Argentina needs in its current situation,” assert Cato researchers in a recently published paper.

As Argentina battles hyperinflation, a plummeting peso, and reliance on emergency loans from the International Monetary Fund, the idea of adopting the greenback is garnering increasing attention. One presidential candidate has suggested this switch as a potential remedy for taming inflation rates that have soared beyond a staggering 100%. Johns Hopkins University economist Steve Hanke has also supported this move.

Interestingly, Argentina already exhibits signs of de facto dollarization, with locals frequently using the US dollar in daily transactions. Several other nations—including a few Latin American countries—use the dollar as their primary or parallel currency. If Argentina follows this trend, it will become the largest economy to do so.

Naysayers point to Argentina’s unsuccessful attempt in the 1990s to peg the peso to the dollar as a cautionary tale. The Cato Institute, however, argues that this failure was due to inherent flaws in the approach, including the central bank’s continuing role as the lender of last resort.

Concerns regarding currency imperialism, loss of monetary sovereignty, and the need for macroeconomic policy flexibility have been raised. But Cato argues these arguments miss the crucial point behind dollarization. The focus of this strategy, they explain, is “to protect the purchasing power of ordinary people from the excessive spending habits of chronically wasteful politicians and frequently submissive or incompetent central bankers.”

While dollarization does not necessarily promise economic growth or sound fiscal policies, it’s noteworthy that Latin American countries using the dollar didn’t face double-digit inflation in the wake of the COVID pandemic. This was true even as US inflation skyrocketed to its highest level in four decades.

In conclusion, the researchers stated, “When you hinder the local elite’s ability to indiscriminately print money, positive outcomes start to appear.” Whether Argentina’s decision-makers will adopt this dramatic pivot remains to be seen.