How Argentina Could Still Convert to the Dollar

Javier Milei was elected president of Argentina on the strength of a radical promise: that he would replace the highly inflationary Argentine peso with the stable US dollar. Yet the latest reports suggest that such dollarization is now a “medium-term” goal, rather than an immediate priority, and dollarization is not on the official agenda of Milei’s meetings this week with the International Monetary Fund and members of Joe Biden’s administration.

US dollars are already ubiquitous in Argentina, as any visitor can attest. So why should dollarization be so difficult? Because — as even those of us who favor the policy have to admit — no matter how it happens, if it does, it will be messy.

The simplest way for Argentina to dollarize would be to inflate the peso even more. For purposes of argument, imagine a peso inflation rate of one billion percent a year. Pesos would be worthless, and transactions would be consummated with US dollars (or in some cases in crypto, which also is popular in Argentina). The problem is that current peso holders would be left with nothing. That would be unfair, and it also might torpedo support for other parts of Milei’s agenda.

To put it in more general terms: The question is not how to adopt a new currency, it is how to adopt a new currency and retain a reasonable value for the old one. Argentina, according to some estimates, would need about $30 billion to back the retired pesos.

So could the government dollarize by seizing the dollar holdings of wealthy Argentines, and using those assets to back pesos? Peso holders would convert into the more stable dollars, enthroning the dollar and deposing the peso.

But again, the politics would be difficult. Furthermore, a lot of those dollars are in the US, under mattresses, or in otherwise difficult-to-reach places. The plan also seems unfair and would turn the elites against Milei.1