💰 Can the Dollar Beat Argentina's 160% Inflation?
Argentina has an age-old battle with Inflation. Finally, it has a million dollar idea (quite literally) to defeat it! Read on.
160% inflation.
4 out of 10 people in poverty.
Sounds like a nightmare?
Well, this is the reality of Argentina.
What is the government doing about it?
Devaluing the currency (Peso) by 50%!
Huh? What does that mean? And how will it help?
Read on.
Argentina: The Land of Inflation
Argentina can rightly be called the land of inflation.
This is not the first time Argentina is in an economic crisis.
The country has been struggling with rising prices for the last 50 years.
In fact, in the 1980s, inflation was at a record-high 3,000%!
Wondering how the country got trapped in this inescapable maze?
The answer lies in the way the Central Bank manages its economic policy.
The country has a history of spending more than its means.
Though this is usually done with good intent (a lot of government money goes into subsidising healthcare, education and other public welfare schemes), it leaves the country with a huge fiscal deficit (gap between its earnings and expenditure).
What does it do to bridge this gap?
Simple: print more money.
That's where the trouble lies.
You see, any time a country prints more money, the supply of the currency in the market increases.
Now, this extra currency is chasing the same amount of goods.
Result?
Inflation. In the case of Argentina, hyperinflation.
This increased the prices of goods daily.
So much so that shops have stopped using price tags altogether!
So much so that people started stockpiling food and household goods. After all, every time they went to the store, prices would go up drastically!
Ultimately, people gave up saving Pesos. They would go out and spend it.
After all, the pesos in their pockets were losing value faster than a melting ice cream in the sun!
This in turn, would mean more demand and increase the prices of goods.
Yep, a vicious cycle.
Such is the case that Argentina’s central bank had to raise the benchmark interest rate to 133% to curb hyperinflation!
Did it help?
Nuh-uh.
November 2023’s monthly inflation hit 2023’s record-high of 12.8%!
Solution: Dollarisation of the economy?
Now, as things look out of control, Argentina's newly elected President, Javier Milei, has taken a bold step.
He has announced the devaluation of Peso by over 50%!
This means that the exchange rate would slide to 800 pesos to the dollar, from 365 pesos to the dollar.
According to reports, this is a step towards making the US Dollar official currency in the country.
How can this save Argentina?
You see, dollarisation would require Argentina to exchange all pesos held by residents and businesses for dollars and assign a dollar value for all assets and contracts.
This would mean a shift of power.
A shift of power from the Central Bank of Argentina to the US Federal Reserve.
And this may be the anchor to the sinking ship of Argentina.
With very little to no control, Argentina's Central Bank would no longer be able to print more money (the major driver of inflation).
Inflation: check.
And well, the people of Argentina have already started using the US Dollar for major transactions.
Why, you ask?
With inflation reaching sky-high limits, people started losing faith in their currency.
And they started buying and hoarding US Dollars.
This way, their money had value for longer. They could save it, or spend it later.
According to some estimates, Argentina has around 10% of the total dollars in circulation in the world!
Turns out, the Dollar has come to the rescue for many other economies in the past.
Yes, many countries in the world use the US Dollar as their official currency.
Ecuador, El Salvador, Panama, Zimbabwe - all these countries have adopted the US Dollar in times of crises.
You see, humans find peace in stability.
They trust the US Dollar to hold value over time.
Goodbye, unchecked money printing; hello, stability?
Dollarisation: Not So Easy!
While the government is optimistic about rising from the ashes, the reality is harsh.
You see, Argentina would need enough Dollar reserves to replace the existing pesos in circulation.
Only problem?
It doesn't have enough foreign reserves.
Now, it could turn to the International Monetary Fund (IMF) to borrow dollars.
Only problem?
It owes the IMF $44 Billion!
So, how will Argentina end it with Peso and tie a knot with the trustworthy US Dollar?
Will the IMF come to rescue?
We don't know.
This move has been the topic of debate for many economists and politicians around the world.
Some have supported the move, while others mocked it.
It only remains to say where Argentina is headed.
Until next time.
Read on.
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