Does Argentina’s dollarization boost or affect the US currency?

Argentina Dollarization
Key facts:
  • The more countries dollarize, the stronger the currency will become, says Miguel Velarde.
  • Politics will be the main obstacle to dollarizing Argentina.

Under the premise of possible dollarization in Argentina, proposed by president-elect Javier Milei, a crucial question arises: Will this measure stimulate or negatively impact the strength of the US dollar? 

It is worth clarifying that Milei’s proposal is, to be strict, a regime of free currency competition. Although, it is expected that the currency chosen by the majority to carry out transactions is the US dollar. 

The proposal to include the dollar as a central axis in Milei’s economic plan has generated a debate not only about its consequences on the Argentine economy, but also about its impact on the North American currency. 

To understand how it could affect or benefit the dollar, CriptoNoticias consulted Venezuelan economist and political consultant Miguel Velarde, advisor to Venezuelan opposition leader María Corina Machado. 

Velarde told Money Investors that dollarization in Argentina “would not have a global impact on the dollar.” Although Argentina requires a large amount of dollars to implement the Milei plan (which some estimate at close to 40 billion), this would not significantly influence the currency

Velarde indicated that countries that dollarize or intensively use the dollar tend to strengthen it. This is one of the United States’ most important tools, contributing to its position as a world power. For this reason, nations such as China and the BRICS countries (Brazil, Russia, India, China and South Africa) try to do business or loans in their own currencies to counteract the global influence of the dollar. 

The economist, who has lived in Buenos Aires for years, pointed out that some non-Western countries are seeking to weaken the US dollar, although so far without success. 

“The dollar is the most important currency in the world, and if more countries opt for dollarization, it would be relevant, but it is not essential to confirm its global preeminence.” Miguel Velarde, economist 

Velarde highlighted that the US currency already has strength in the region. “Although it is not official in Argentina, in many other countries in the region the dollar is used for the purchase and sale of goods and services,” he said.  

Obstacles to dollarization

When asked about the possibilities of implementing dollarization, Velarde expressed that the libertarian president has several obstacles. The first is to obtain the funds to make the measure effective.  

“If trust is built and there is a serious plan, [Milei] can get the necessary dollars, it is a challenge, but it can be achieved.” Miguel Velarde, economist.

For the economist, the biggest challenge will be political: “Dollarization requires approval by the Argentine Congress and possibly changes to the Constitution, which complicates its implementation.” 

The president-elect is going to need much greater parliamentary support than he has. In the last elections he only got 38 deputies and 7 senators, so he will have to reach agreements with other political forces to approve laws.  

Despite this, Velarde does not doubt that in a country like Argentina with high inflation and a local currency that is increasingly worth less, dollarization is necessary, because people will be able to preserve the value of their salaries and save more.  

Analyst Daniel Raisbeck of the Cato Institute agrees with Velarde and assures that dollarization is the “best means available to reduce inflation to single digits quickly and permanently.” Allowing the dollar to be legal tender also “protects the purchasing power of citizens.”  

Currently, Argentina has an annual inflation rate of more than 140%, a national currency that is practically worthless and 40% of the population lives below the poverty line, according to data from the National Institute of Statistics and Censuses of Argentina.   

Year-on-year inflation in Argentina with monthly candles. Source: INDEC.

Argentine economist Natalia Motyl, consulted by CriptoNoticias, said that a consequence of dollarization will be an increase in private sector investments, the creation of new jobs, unemployment will be reduced, poverty will decrease and real wages will improve. 

The American economist Steve H. Hanke also spoke with this medium about the impact that dollarization would have on Argentines. He noted that “all implications will be positive.” 

“Currency crises will no longer exist. The probability of a banking crisis would be drastically reduced. Economic growth will be greater than it would be if the peso were maintained. “Poverty and the probability of sovereign debt default will decrease.” Steve Hanke, economist 

Bimonetarism is an option

If dollarization is not achieved, Velarde believes that the country has few alternatives. One of them is bimonetarism. This means that there would be two currencies actively participating in an economy officially. This was proposed by the former presidential candidate for the PRO, Patricia Bullrich, who, after coming in third place in the first round of the recent election, supported Milei and will be Minister of Security during her government. 

In this way, through bimonetarism, we can try to unify the different types of exchange that exist, into one that is sincere, said Velarde.  

“It is an alternative halfway between what exists today, which is a trap, and the other extreme, which is total dollarization. “I wouldn’t be surprised if in the short or medium term that is the place where the Argentine economy finds a balance before dollarizing.” Miguel Velarde, economist. 

Bitcoin in Argentina as in El Salvador?

For several years now, Milei has spoken publicly about bitcoin (BTC) and has spoken out in favor of the decentralized digital asset, which for him is nothing more than the natural reaction to the actions of the world’s central banks.   

Velarde—who has also worked as a strategy advisor for the Argentine Chamber of Deputies—was consulted about the possibility of bitcoin being adopted by the Milei government, as happened in El Salvador. The economist indicated that “it is difficult to imagine that happening” because the characteristics of the countries are very different, changes would have to be made in the laws and he sees it as “complicated to achieve.” 

However, the specialist and co-director of the consulting firm Speaker’s Corner highlights that, in the current context that Argentina faces, the country has become one of the countries that has most adopted and been interested in bitcoin and cryptocurrencies. This is due to inflation, which makes it an interesting market to move forward and explore in all things digital assets

What he does see as possible is for bitcoin to be integrated into the public debate, both in politics and in society in general. 

“With a liberal president, who not only considers the viability and desirability of cryptocurrencies, but also does so for his own ideology, Bitcoin could generate a lot of discussion in the coming years.” Miguel Velarde, economist 

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