Observations of an Expat: The Almighty Dollar

The Almighty Dollar is a bit too mighty for a growing number of countries. They want to curb it.

That was one of the driving forces behind this week’s 5-nation BRICS meeting in Johannesburg and the reason why another 40 want to join the latest political/economic organisation. Six of the applicants were admitted to the club this week.

BRICS is the acronym for Brazil, Russia, India, China and South Africa—the current membership of the 14-year-old organisation. It controls 26 percent of the world’s GDP as opposed to the G7’s 30.7 percent, although the G7 is dropping and will drop further faster with BRICS expansion.

For BRICS you could easily substitute China which dominates the BRICS economies. And for G7 just say America. Which means the two economic groupings have become political/economic weapons in the Sino-American clash.

BRICS has thus become a diplomatic vehicle for the Chinese attempt to constrain the dollar as the world’s reserve currency or replace it altogether.

It has its work cut out for it. The dollar is indeed almighty. Eighty-seven percent of the world’s trade is conducted in dollars. The currencies of 65 countries are pegged to the value of the dollar and the American greenback is the official currency of five US territories and 11 foreign countries.

Being the world’s reserve currency bestows advantages on the US economy and the government that controls it. Chief among them is lower borrowing costs on the international market, which allows America to carry a bigger public spending debt then other countries.

It also means that the Federal Reserve Bank sets the benchmark for world interest rates. And the primary concern of America’s central bank is America, not the billions of people in other countries whose economies depend on the monthly meetings of the Federal Reserve. On top of all the above, America controls the two biggest lending institutions: the World Bank and the International Monetary Fund.

But what particularly angers China, and its “partner without limits” Russia, is the power the dollar gives Washington to unilaterally impose sanctions and ensure their compliance by third countries. The desire to bust US sanctions is also one of the aims of one of the newly-admitted BRICS members—Iran.

Their answer to their sanctions problem is a new reserve currency. They are, however, a bit vague about the structure it should take but the solution they appear to favour is a floating reserve based on a basket of currencies from the world’s leading economies. The idea is not new. The Russians proposed it in 2009 when they were members of what was then the G8. The UN Conference on Trade and Development (UNCTAD) and the IMF have also suggested it.

But there are problems with any BRICS/Chinese/Russian-led initiative to replace the dollar. Basically it is the radically different political structures of BRICS members. The dominant member of BRICS is a one-party autocratic state. Three of its other members are democracies—flawed, but still basically democracies. Two of them, Brazil and India, are hesitant about damaging their relationship with Washington.

If five countries cannot agree on a policy to confront the almighty dollar how can they expect 11 countries to concur, let alone the 45 that some BRICS supporters advocate?

On the opposing side is a grouping of 40 developed world countries who, by and large, share common democratic values, a belief in the capitalist system and are either members of the EU or tied to the United States through defense and economic agreements.

But even among this largely cohesive group there are mumblings of discontent about Washington’s tendency to weaponise the dollar with unilateral sanctions. The French and Germans are particularly concerned about the checks it imposes on their foreign policy.

America to their mind has abused the power of the dollar by imposing sanctions against non-American companies that refuse to comply with sanctions against America’s perceived enemies. One of the problems of power is that if you abuse it, you run the risk of losing it.

* Tom Arms is foreign editor of Liberal Democrat Voice. He is also the author of “America Made in Britain” and co-host of the weekly world affairs podcast “Trans-Atlantic Riff” which can be heard by clicking here.

* Tom Arms is foreign editor of Liberal Democrat Voice and author of “The Encyclopaedia of the Cold War” and “America Made in Britain". To subscribe to his email alerts on world affairs click here.

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30 Comments

  • Kyle Harrison 27th Aug '23 - 4:00pm

    Imperialism in one form or another is inevitable, the US has imperial like powers and has done since 1945. If the US privilege in regards to the US Dollar is overthrown then China would end up practicing its own imperial advantages over the countries it deals with. You even have defenders of the EU that often talk about it as a rival superpower against the US and China, the French/ De Gaulle/ Macron fantasy is the idea of Europe as a military and economic power all of its own without relying on the US. However, as Ukraine has proved, Europe is too economically and militarily weak to do such a thing. Europe can’t save Ukraine without American help. I don’t think America is perfect, and in recent times they have major issues, but the brutal reality is countries like the UK need to hug the US close and keep them from retrenching too much. Japan and South Korea understand the same. The EU, whatever you think of its benefits, just doesn’t have the strength to replace the US. The Germans get this more than the French, have done for decades.

  • If you want a strong currency, you need to
    a) fight against populist demands for lower interest rates; and
    b) fight against populist demands to fund public spending by borrowing
    c) fight inflation by rasing interest rates and/or tax rates.

  • Steve Trevethan 28th Aug '23 - 8:21am

    Might it be that the U S A manipulated the post World War 2 Breton Woods conference to gain financial dominance despite the efforts of Keynes to have a politically neutral world currency, the bancor?

    As the U S A is a remarkably unequal society are we discussing the will of a whole, fully democratic nation or of a relatively few very rich, and therefore, very powerful people?

  • Nonconformistradical 28th Aug '23 - 9:13am

    “are we discussing the will of a whole, fully democratic nation or of a relatively few very rich, and therefore, very powerful people?”
    Yes

  • Peter Martin 28th Aug '23 - 10:05am

    @ Tom

    ” Eighty-seven percent of the world’s trade is conducted in dollars.”

    You really need to explain what this means. For example, a buyer of North Sea oil in Germany might agree a price in US dollars with a seller in the UK or Norway but it’s unlikely any real dollars will change hands. The currencies of use will be euros, pounds or Krone. The $ is just a numeraire. It could just as well be any other currency.

    “Their answer to their sanctions problem is a new reserve currency. They are, however, a bit vague about the structure…. ”

    They are a bit vague because of the inherent contradictions involved. There’s really no such thing as *the* world reserve currency. The currency of any country can be a reserve if a capital inflow, or a surplus in the capital account, is allowed by its government. This also means there has to be a deficit in its current account. A trade deficit in other words. The trade deficit run by the USA is the way savers get the dollars to be able to save in the first place.

    So unless China, and the rest of the BRICs countries, are prepared to be far more relaxed about imports than they are, their plan is arithmetically impossible. The same argument applies to the euro. This will never become a reserve currency until the German government changes its view on the desirability of running a large export surplus.

  • @Peter – “ There’s really no such thing as *the* world reserve currency.”
    I would tend to agree as some years back talk was of the basket of “reserve” currencies that included the USD, GBP, EUR, Yen and the Yuan because a trading nation would use all of them.

  • While the US dollar is the dominant reserve currency it is not the only one. A reserve currency is one that is liquid and usable around the world, has limited volatility, and is one which would retain its value even when its supply increases because of the resulting current account deficit. That is something which is not true in many countries in which an expansionary fiscal policy might well trigger a capital outflow.
    The G7 countries—with the exception of Italy— generally have not seen an increase in risk premiums on borrowing costs on government debt as indebtedness increased during the 2008 financial crisis and Covid pandemics. Fiscal space for borrowing tends to correlate positively with a countries’ reserve currency status. Among the G7, it is the US that issues the key reserve currency and so can give a strongest fiscal response to adverse exogenous shocks because it has larger fiscal space and so more fiscal autonomy compared with the other G7 countries.
    The US can use fiscal policy to prop up demand without triggering short-term outflows in a way which is more difficult than for other countries. In the UK however, in September 2022, the proposal for unfunded tax cuts triggered a furious market reaction that required the intervention of the Bank of England to defuse a financial crisis. The decline of sterling as a reserve currency has rendered the UK’s space for fiscal expansion more limited than was previously the case.

  • A more egalitarian global financial system only makes sense if it truly dilutes the power amongst say the top 50 countries in the world rather than push them to decide between China and the USA. Any reinforcement of this dual hegemony should be resisted. The global south especially should be allowed to play its part in deciding how the world economy is organised.

  • After World War II, the General Agreement on Tariffs and Trade prohibited the extension of preferential tariffs. Inflation, combined with the general liberalisation of trade around the world, ended the British Empire’s system of imperial preference.
    The US was adamant that International monetary arrangements could not support the continuation of British Imperialism and were suspicious of Keynes proposals.
    The UK instead brought in the sterling area – an international monetary system that operated for almost 30 years after the end of the Second World War. Born from wartime exchange controls, it was initially a short-term response to global imbalances in the wake of the war and the failure of the new Bretton Woods institutions to support multilateral trade and payments. From 1945 to 1972, members of the sterling area agreed to maintain fixed exchange rates with sterling, to hold the bulk of their foreign exchange reserves in sterling, and to impose exchange control in common with Britain to protect against possible flight from sterling to other currencies. In return, members enjoyed freer trade with Britain and freer access to British capital than other countries. In the early years, it was defined by Britain’s war debts, but through the 1950s these were retired and replaced by fresh accumulations of sterling by other members. But by the 1960s, a weaker pound and waning enthusiasm for monetary cooperation among its members undermined the system, and it became part of the crumbling of the wider Bretton Woods system in 1972.
    In 2009, the Governor of the People’s Bank of China argued that a national currency was unsuitable as a global reserve currency. He called Keynes’s bancor approach “farsighted”.

  • Kyle Harrison 27th Aug ’23 – 4:00pm:
    You even have defenders of the EU that often talk about it as a rival superpower against the US and China, the French/ De Gaulle/ Macron fantasy is the idea of Europe as a military and economic power all of its own without relying on the US.

    There are many in the EU who are similarly deluded, as Gérard Araud, the former French ambassador to the US, explained in his recent article…

    ‘Deluded Europe can’t see that it’s finished’ [25th. August 2023]:
    https://www.telegraph.co.uk/business/2023/08/25/deluded-europe-cant-see-that-its-finished/

    Are we Europeans able to prove that we still matter, that we are not some peripheral tourist destination?

    I doubt it, and for a very particular reason. As a Frenchman who has seen his country, the China of Europe in 1815, progressively lose its power in parallel with its demographic decline, I firmly believe that demography is destiny. […]

    ….emigration from Europe is especially unwelcome. We are losing young, highly educated individuals who go mainly to the US, where they will have better opportunities, be it in the research, academic or the private sectors.

    When travelling in America, everywhere I went I met European researchers, surgeons, teachers and entrepreneurs. It was difficult not to feel sadness that these young people, who our countries had educated at a high cost, were instead enriching the US.

    But their explanation was always the same: better financing, more opportunities, less regulation. Unfortunately, ageing countries have less money and tend to love regulations.

  • Jeff,

    Monsieur Araud speaks in terms of great power status. The whole concept of the EU and the post-war world order presents an alternative to might is right. It is that of economic inter-dependence that began with the European Coal and Steel community after the war and has developed into an economic union that has become the world’s biggest single market.
    Nato was formed in the aftermath of the 1949 Berlin blockade to provide for the defence of Western Europe against a massive build-up of Soviet and Warsaw pact troops in Eastern Europe and the soviet acquisition of the atom bomb. It is the Nato alliance, rather than the EU that wields military power on the European continent.
    The EU, US, UK and other democracies have applied economic sanctions against Russia as an alternative to sending military forces to Ukraine, while Nato has assisted in coordinating the supply of weapons and ammunition.
    One impact of the sanctions is that Russian oil and gas is now sold principally to China and India. While the Russian central bank can use Yuan to buy Chinese goods they have very limited use for Rupees piling up in their accounts in Indian banks. As this author writes “The Indian government has tried to persuade them to invest their rupees locally without much success. This means rupees are locked up; not usable by and for Indians, either.The Eurodollar Standard Isn’t Going Anywhere Anytime Soon
    Russia cutting itself off from the EU has shot itself in the foot economically and politically. A Brics currency won’t save it.

  • Peter Martin 29th Aug '23 - 9:14pm

    @ Tom,

    “Being the world’s reserve currency bestows advantages on the US economy and the government that controls it. Chief among them is lower borrowing costs on the international market, which allows America to carry a bigger public spending debt then other countries”. ???

    As previously said there is no such thing as *the* world’s currency. The US is the largest economy in GDP terms and it is this which bestows the advantages.

    It doesn’t actually have lower borrowing costs than countries like Germany and Sweden. They’ve had negative interest rates in recent years. The level of interest rates are decided by the US government/US Fed. They chose what interest rates should be according to what they believe to be appropriate for the US economy.

    The National Debt for the US is around 125% which might be slightly higher than *most* “other countries” but not *all* “other countries”.

    You and I cannot do this. We are constrained in our borrowing by the level of interest rates which are available to us. This is because, unlike the US govt, we aren’t currency issuers!

  • What Tom has written is that “Eighty-seven percent of the world’s trade is conducted in dollars”. The reason for this very high % of financing of world trade is the Euro-dollar market What is the Eurodollar System?
    Non-US banks outside the US can create offshore US dollar denominated loans and derivatives that create US dollar liabilities/deposits for their clients. This wholesale market is controlled by the large International banks, not the US government or federal reserve i.e. it is unregulated. There are no central bank reserves for this system as it is a cashless system not retail banking. It operates on the basis of a distributed ledger of bank debits and credits i.e. banks lending to and borrowing from each other in US dollar denominated transactions including the US banks that can provide dollar liquidity as required in normal circumstances against collateral such as US treasuries.
    The US dollar is the anchor currency for the Eurodollar system due to its historic ability to maintain its value in the form of limited inflation and depreciation. Because of the trust it is widely accepted around the world and there is always a high demand for US dollars. The US financial markets are deep, liquid and open making dollar based securities easily tradeable. That makes the US Dollar both the dominant reserve currency around the world and the dominant unit of account for International trade.

  • Peter Martin 30th Aug '23 - 7:36am

    The term eurodollar doesn’t any longer imply any connection to european banks. It can apply to a dollar which is *created* by any bank anywhere in the world which is outside the US regulatory system. Again these are just ‘numeraires’. Units for other financial transactions. Much as we might use meters and centimeters, pounds and ounces etc. They bank doesn’t need to have what might be termed ‘real dollars’ but they do have to be able to guarantee their creations against the real thing.

    So it isn’t at all fair to criticise the US government for imposing the dollar on the rest of the world. We don’t have to use dollars if we don’t want to. Just like we don’t have to lend them money if we don’t want to.

  • “We don’t have to use dollars if we don’t want to”

    As the article linked above notes “it isn’t so easy to do international trade on international money that isn’t actually all that international.”
    “The dollar remains the primary transaction tool for both [China and Brazil] and will almost certainly be in direct exchange between the two. After all, does Brazil really want to end up with yuan it won’t be able to use the same way Russia is stuck with rupees? The Brazilians might be able to sell resources to China, but how much will Brazil be able to buy back in Chinese goods with any CNY?”

    “It is the same roadblock everywhere and in each capacity. The eurodollar continues to be the undisputed global standard… There is no real alternative to it”

    “…what China is doing with Brazil (with Beijing’s careful eye on the Russian predicament) is attempting nothing more than to lessen the dollar demands on each. If either can get away with some bilateral trade in local currencies, bypassing the eurodollar to a small extent, that’s fewer expensive and increasingly hard-to-source (as denoted by the rising exchange value) eurodollars.”

    “What these “mechanisms” are really about is acknowledging Russia’s rupee problem. Understanding how easy an imbalance can come up, the real danger is being left with money you can’t actually use.”

    “Money you can’t use is beyond counterproductive. It is, in fact, much worse than having a difficult time finding “dollars” you always can.”
    The US Federal Reserve facilitates the use of the dollar for International finance by making available swap lines in times of liquidity crises The International Role of the U.S. Dollar

  • Peter Martin 30th Aug '23 - 10:41pm

    @ Joe,

    Just to restate the point: The euro dollar isn’t anything to do with the Americans. It’s just an artificial construct which uses the dollar as a reference. At one time a metre was defined as the distance between two marks on a metal rod stored in Paris. It didn’t mean that the metre was inherently French.

    I don’t quite follow your argument about currency that cannot be spent. On the forex market 1 ruppee is worth $0.012 or £0.0095 or €0.011. So why wouldn’t anyone just change their ruppees to whatever other currency they’d like to hold or spend?

  • Peter Martin,
    banks creating eurodollar liabilities do have to be able to guarantee their debt creation. To do that they have to maintain accounts with a US correspondent bank and be able to borrow dollars on demand whenever necessary from the US banking system (usually by providing US treasury bonds or similar AAA securities as collateral) Money Creation in the Euro-Dollar Market The US Federal reserve has made swap lines available to International institutions to support the eurodollar market at times of liquidity stress.
    The Indian rupee is not a fully convertible currency. India has put restrictions on trading the rupee. Anyone wanting to purchase goods or assets outside of the country above a certain amount, or anyone planning to invest in India more than a pre-defined amount of money, needs permission from the state in order to do that. The status also means that the currency is not subject to the market-driven exchange rate, and its value is subject to regulatory interventions, preventing it from becoming unstable.
    The Argentine Peso is a freely convertible currency, but almost no one will accept it as payment for International goods and services at the official government rate and then try to get anywhere near the same rate on forex markets. They will require the Argentines themselves to convert the pesos first and then make payment in US dollars.
    The domestic Chinese Yuan is not fully convertible. However, there is an off-shore Yuan that is not regulated and is de facto fully convertible. That is, for transactions outside of mainland China, such as in Hong Kong and Singapore. If the transaction involves a party inside China, the regulations and currency controls set by the Chinese central bank and SAFE, the Chinese Safe Administration of Foreign Exchange, apply.

  • Peter Martin 31st Aug '23 - 8:20am

    Joe,

    I’d already said that any bank creating eurodollars needs to be able to guarantee them against the ‘real thing’. It’s no different in principle from how banks have to guarantee any IOUs they generate which are denominated in their domestic currency. They are often said to create their own money but I would say just what this means is often misunderstood.

    The purpose of trade and the workings of the international finance system should be to swap goods and services produced in one country with goods and services in another. It shouldn’t be to allow the rich from other countries to buy up expensive apartments in London just to keep them empty for example. This is not the kind of foreign ‘investment’ which is at all desirable. India has had a fully convertible currency (the rupee and which I’ve managed to spell correctly this time!) for several years now but only in its current account and not in its capital account which is a policy we might want to adopt also.

    The does mean that there is no need to use US dollars when trading normally with India, although there’s no reason not to if it helps stabilise term price lists etc. The dollar is just a measurement standard. Even so it won’t get around any restrictions on undesirable foreign ‘investment’ in the country.

  • The theme of Tom’s article is dedollarisation and the prospects for a new reserve currency – as an alternative medium of exchange for International trade and investment. The Brics countries have already established two financial institution as an alterative to the IMF and World bank. The former is the Contingent Asset Reserve – a series of swap lines for central banks to get hard currency if they have balance of payment problems. The mini-world bank is the New Development bank for development finance.
    There are significant economic difference among the five original Brics countries. The per capita GDP of India is roughly a fifth of that of China and Russia. The latter pair run current-account surpluses, the other deficits. Russia and Brazil are net oil exporters; the other three depend on imports. A common Brics currency would collapse on first contact with reality; no member would give up the power held by its central bank.
    More likely is an expansion of dollarisation in countries like Argentina experiencing continuous bouts of hyper-inflation,. A candidate in the coming elections is proposing to abolish the power of the Argentine central bank to monetise government deficits and make the US dollar legal tender in the country. The Argentine government would no longer be able to sell its bonds to the central bank and would be forced to finance state spending via taxation and the issue of bonds to third party domestic and foreign lenders only.

  • Peter Martin 31st Aug '23 - 1:02pm

    @ Joe,

    You’re probably right that the BRICS idea is a non starter. Technically, Keynes concept of the Bancor is the best way to channel savings into a reserve currency, but politically this is also not going to be generally acceptable.

    Countries with high rates of inflation should look to put their own house in order rather than thinking that using someone else’s currency or even having a new reserve currency is going to solve their problems. I haven’t studied how the Argentinian tax collection system operates but I’d bet a dollar to one of their pesos that it will be a complete shambles!

    A pre-requisite for a stable fiat currency is to have an effective and efficient tax collection system. Not because the country’s government needs the money to fund its spending but because the collection of taxes gives a value to the currency. So whereas the government doesn’t necessarly have to balance its books it does have to balance its economy and the Argentinian government clearly is not doing that.

  • Argentina collects around 30% of GDP in taxes. Inflation has been the preferred tool to tax citizens without creating additional taxes. The problem is that the inflation tax affects the poor most, as they cannot access protection instruments such as foreign hard currency.
    Argentina has experienced consistently high inflation and hyper-inflations since the creation of the Argentine Central Bank in May 1935. The exception being from 1991 to 2001 when the Argentine peso was pegged to the dollar.
    The peg from 1991 to 2001 was a form of currency board, albeit with a number of loopholes or escape clauses that ultimately proved its undoing Argentina’s Currency Board: from Monetary Panacea to Fiscal Straitjacket
    The government is unable to solve the inflation issues by increasing taxes as they are already taxing companies on the basis of monetarily inflated profits eroding the real capital base of Argentinian firms. Neither are interest rates hikes currently (118%) likely to be effective with so much of the commerce of the country being conducted in dollars.
    A similar situation occurred in Montenegro during the Yugoslav wars where the local population had effectively rejected the use of the Yugoslav Dinar and unilaterally adopted the Euro from 2001. This means that even though the euro is not a legal tender there, it is treated as such by the government and the population.
    Dollarisation or currency boards are not of themselves a panacea for all economic ills, but as a means of halting inflation and returning stability to the currency they are effective and stability is a necessary platform to making any economic progress.

  • Peter Martin 1st Sep '23 - 8:45am

    The dollar is the currency of the largest economy in the world so it is hardly surprising that it has the status it does. This isn’t likely to change any time soon. The krona of Iceland (pop 300k) has to be one of the smallest and the Icelandic people do perfectly well. They wouldn’t benefit by using someone else’s currency like the euro. Just like the “PIGS” countries haven’t done well out of the euro.

    Ecuador doesn’t have the self confidence to use its own currency. Instead it uses the US$ but its GDP per person is around half of Argentina’s. So, also no evidence there for any beneficial effects. The US$ works fine for the USA because it issues the currency. Ecuador doesn’t.

    “Argentina collects 30% of GDP in taxes”

    I’d question this. The problem will be the use of cash and the black economy in Argentina. The GDP will be understated in official figures. The motivation will be to earn in cash and spend it quickly before prices rise. Except on taxes of course! If these must be paid then it is obviously better to delay the payments as long as possible so that the money is then worth less as inflation whittles away its value. So it is the speed of collection which is equally important the number of transactions each peso makes before it is collected.

    You may be interested in Warren Mosler’s take on what needs to be done there.

    https://gimms.org.uk/2022/05/16/journey-to-the-heart-of-argentina/

  • In support of floating exchange rates, Mosler gives as an example the debt crises of Mexico in 1994 and Russia in 1998.
    In 1994, the Mexican central bank devalued the peso by around 14%.. The peso was then allowed to float freely depreciating nearly half of its value in the following months.
    The USA provided billions in financial assistance for swap facilities and securities guarantees, and additional assistance provided by the IMF. Mexico was required to implement certain fiscal and monetary policies controls. and suffered through a severe recession and bouts of hyperinflation in the years following the crisis, as the country maintained excessive levels of poverty for the remainder of the nineties.
    A chronic fiscal deficit led to the 1998 Russian debt crisis. It was resolved by simply defaulting on state debts. The Russian government devalued the ruble, defaulted on domestic debt held by Russian citizens as savings, and declared a moratorium on repayment of foreign debt.The financial collapse resulted in a political crisis for Yeltsin. However, as world oil prices increased rapidly during 1999–2000, Russia ran a large trade surplus in 1999 and 2000 repairing much of the damage done as Putin was taking office.
    Mosler’s proposals involve a devaluation of over 50% for Argentina and restructuring of IMF debt based on dollar earnings from exports that will be more than halved in value by devaluation. The volume of export trade would need to more than double to get back to the current dollar levels and require large cutbacks in domestic consumption or implausible increases in productivity.
    Your income is what you produce. If you consume more than what you produce you must borrow from or sell assets to those counties that produce more than they consume. If you can find lenders willing to accept the risk of holding IOUs in your own currency or sell financial assets you have options. If you have insufficient takers, then you have no alternative but to borrow in dollars or other International currencies, and your options are limited.

  • Peter Martin 2nd Sep '23 - 9:37am

    @ Joe,

    “Your income is what you produce. If you consume more than what you produce…”

    There’s no disagreement form MMT on this point. There’s no reason why Argentina, a country with significant natural and human resources, shouldn’t be able to produce enough for everyone to have reasonable living standard. So how to do that? Mosler is saying that it is only possible to have full employment if the exchange rate is allowed to truly float rather than have the present system of a pseudo float. This means there should be no difference between an “official” exchange rate and the real exchange rate which is what the currency will fetch on the open market.

    I’m surprised you would disagree with this.

    The advantages of a full employment policy are obvious. Not only does this create jobs, the employment also converts real resources into the production of goods and services which is how we measure economic success.

    The problem with putting the American dollar at the centre of any economy, except the US economy, is that it’s not your own currency. Any loans in your currency can always be repaid but they can’t if they are denominated in someone else’s currency. This is a lesson that Argentina should have learned the hard way in previous crises.

  • In the early 1990s, the Argentine government reined in inflation by making the peso equal in value to the U.S. dollar and privatized numerous state-run companies using part of the proceeds to reduce the national debt. However, a sustained recession at the turn of the 21st century culminated in a default, and the government again devalued the peso. By 2005 the economy had recovered,but the country again defaulted in 2014 and 2020.
    Argentina needs to solve its inflation problem first, before it can make and progress toward economic recovery. A currency board along the lines of what they had from 1991 to 2001 is an effective way of stopping inflation, although it will come with an initial recession as it imposes a hard fiscal restraint. That’s the downside of the debt cycle. Professor Hanke of John Hopkins makes the argument here Dollarization is the only way for Argentina to stop its ‘death spiral’. A visiting LSE professor makes the counter-argument Argentina should beware the dollarisation fairy arguing that dollarisation, either soft (Managed peg) or hard, cannot by itself solve the fiscal problem. That is supported by another economist who argues Argentina should just accept they cannot avoid recession Argentina needs a recession, not dollarization, to tackle the peso crash
    “The Peso is in free fall because Argentina lives beyond its means. Imports are near their historical peak. Argentina needs fiscal spending cuts and a recession to fix this. How to do this in a fair way is what this election should be about. Not dollarization.” Argentina does need job guarantees and full employment, but it can’t get there until it gets a government prepared to deal with the instability caused by its inflation problem.

  • Peter Martin 3rd Sep '23 - 10:57am

    “privatized numerous state-run companies using part of the proceeds to reduce the national debt.”

    Selling off assets doesn’t reduce debts, either for ourselves or government. If the price is fair its simply a balance sheet swap of a real asset like a company share, an area of land, a lump of gold, or whatever, for a monetary asset. But if it isn’t fair…..

    “Argentina needs to solve its inflation problem first, before it can make and progress toward economic recovery….”

    The progress has to be simultaneous. Your favoured approach of trying to fix the value of a currency to an external reference, like the US$, has been tried previously and has failed previously. Not just in Argentina but elsewhere.Time for some new thinking in Argentina maybe? Most countries have accepted the advantage of a freely floating currency even though there is still far much emphasis on monetary policy in macroeconomic management. Trying to prop up a currency’s value by artificial means is simply putting money into the hands of speculators as happened in the UK during the Black Wednesday crash of 1992.

    The well known saying of “trying the same thing and expecting different results being insanity” may well be a misattribution to Einstein, but it still has some validity!

  • Simon Kuznets, a Nobel laureate, is supposed to have remarked: “There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina.” Other countries have since managed to copy Japan’s rapid industrialisation; Argentina remains in a class of its own https://www.economist.com/briefing/2014/02/17/a-century-of-decline.
    Argentina should be comparable with Canada or Australia today with balanced trade or export surplus, but has been plagued by a century of economic chaos.
    Much of Argentina’s problems seem to stem from political and institutional instability and an absence of a firm foundation of property rights, swinging backwards and forwards between nationalisation and privatisation.
    Argentina is already a dual-currency country as are other countries experiencing hyper-inflation like Zimbabwe and Venezuela.
    A currency board is probably the only way out of the current debt trap. Currency boards have been successful in curbing inflation and stabilising the economies of many countries Are Currency Boards a Cure for All Monetary Problems?
    When Argentina is running an external deficit on its overall “balance of payments” with other countries, private domestic saving requires government deficits to support growth. It can only reduce those deficits and hence its continuing need for dollars to meet external debt payments by running a trade surplus. The Argentine Peso is not a currency that foreign investors (other than short-term speculators) or domestic savers will hold. Consequently, it will always be beholden to overseas creditors and/or the IMF under the current arrangements.

  • Peter Martin 3rd Sep '23 - 10:42pm

    @ Joe,

    No one is likely to want to save in pesos if the inflation rate is high. You wouldn’t. I wouldn’t. However, you seem to want to reverse that by saying that no one wants to save in pesos therefore the inflation rate is going to be high unless they “dollarise” their economy . This doesn’t make any sense.

    There’s no reason why the currency of Argentina should be any different from those of Australia or Canada. Both the Canadian and Australian dollars freely float, at least most of the time. It has been a long time since either have been referenced against the US dollar.

    There is simply no need for it in Argentina also. Even if they don’t go all the way with the suggestions made by Warren Mosler the Argentinians can get most of the way there by letting the currency freely float, stamping down on the black economy, tackling systematic corruption, and ensuring the taxation system is effective in doing what it is meant to do.

  • With inflation over 100% the rational thing to do for households is spend or exchange all your wages as soon as possible and borrow in pesos to spend further if you can, as the real value of your debt will be rapidly eroded by inflation. That is an inflationary spiral.
    The difference between Australia and Argentina’s economic history is explained here Argentina and Australia once had eerily similar economies. How did one end up with 100 per cent inflation?
    The scope for additional taxation is very limited Argentina is trying to tax its way out of another financial crisis – why that’s so risky
    “Compared to other developing countries around the world, Argentina already has high levels of taxation. It’s a country with a large informal sector and a semi-industrialised economy built around the export of commodities. This means that the sources from which the government can extract additional fiscal revenue are limited to the richer middle and upper classes, and to the agrarian export sector.”
    When a sovereign borrower cannot refinance maturing debt due to a sudden stop of market financing, a policy choice must be made. Either monetize the maturing debt and send the country into hyperinflation as Bulgaria did in late 1996, or default and restructure as Russia did in 1998. Russia seems to have chosen the latter because a significant element of their Ruble debt was held by foreigners, including foreign hedge funds. Letting the currency freely float doesn’t change that reality.

  • Peter Martin 5th Sep '23 - 12:29pm

    @ Joe,

    From your link;

    “Australia was flush with cash …..But it (a fiscal squeeze) did the job and inflation ground to a halt.”

    A few points:

    If there were an influx of dollars the value of the Aussie currencyshould have been allowed to rise. This would have any inflationary tendencies. It was probably have been fixed at the time.
    If Mr Fadden had been miseducated in the monetarist way he would have created a recession by raising interest rates. It’s the economic equivalent of bloodletting which the medical profession started to give up on some 200 years ago.
    To stop its rampant inflation Argentina also needs to match supply with demand using the tax system. Creating a recession might well cut demand but it cuts supply. Employment guarantees are necessary – at least during the transition.
    The immediate implementation of 0% interest rates is questionable. That would create a credit boom. I would say that as inflation is reduced by fiscal means then interest rates can follow.

    The price of petrol in Argentina is about £0.75 per litre. So this is one commodity which could be taxed more without too much difficulty. Other taxes could be collected on property and land which aren’t easily dodged.

    However, the main problem is the “informal economy” or “black economy”. The Argentinian government has to do what it takes to reduce this ( ~27% of GDP) significantly. The Indian government cancelled all high value notes quite abruptly. Maybe a similar approach needs to be taken.

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