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Financial Fundamentals

Argentina's New President Wants to Adopt the U.S. Dollar as National Currency

โ€” Alexandra Ardelean

Javier Mele is the new president of Argentina, not a Hogwarts professor.

Argentina tiene un nuevo presidente, y no es un profesor de Hogwarts. Su nombre es Javier Milei, y tiene algunas ideas radicales para la economรญa. Quiere recortar el gasto pรบblico, eliminar varios ministerios y adoptar el dรณlar estadounidense como moneda nacional. Esto puede sonar como una receta para el desastre, pero podrรญa ser justo lo que Argentina necesita para volver a encarrilarse.

The Situation

Economic Problems in Argentina

Argentina is in a tough spot right now. The country holds roughly 10% of all physical U.S. dollars in circulation, but its economy is a mess. Inflation is out of control, social spending is through the roof, and poverty rates are hovering around 40%. Something needs to change, and fast.

Comparison of Inflation Rates

To put things into perspective, inflation in Argentina was over 140% in 2021. In comparison, inflation in the United States was just 9.1% in June 2022. That's a huge difference, and it's causing all sorts of problems for people living in Argentina.

Coping with Inflation

Argentinians have had to get creative when it comes to dealing with inflation. Many people shop for groceries just once a month to avoid price increases. Others buy in bulk or use credit cards, hoping that devaluation will make their debts easier to pay off.

Historical Context

Past Economic Status of Argentina

It's hard to believe that things were once very different in Argentina. At the turn of the 20th century, it was one of the richest countries in the world. But years of bad economic policies and political instability have taken their toll.

Peronism's Influence on Argentine Economy

One of the biggest culprits is Peronism, a political movement named after Juan Domingo Perรณn, who was elected president in 1946. Perรณn implemented a mix of socialism and nationalism that had long-lasting effects on Argentina's economy.

  • Socialism: Under Perรณn, the government took control of key industries like railroads and utilities. This was meant to benefit the public by ensuring fair prices and access to essential services.

  • Nationalism: Perรณn also prioritized Argentina's interests over global competition. This led to protectionist trade policies and an isolated economy that struggled to keep up with the rest of the world.

Current Economic Issues

Government Employment Situation

Today, Argentina's government is one of the country's largest employers. More than a third of formal employment comes from state jobs. While this provides stability for many workers, it also means that the government is spending a lot of money on salaries and pensions instead of investing in other areas.

Impact of Subsidies on Economy

Subsidies are another big problem. For example, energy subsidies have kept electricity and gas prices artificially low for years. While this might seem like a good thing for consumers, it has also contributed to deficit spending and mounting debt.

Deficit Spending and Debt

As a result, Argentina has been running a fiscal deficit for 13 years straight. The country has defaulted on its debt nine times since its independence from Spain in 1816.

The Election of Javier Mele

Election Results

In this context, Javier Mele won the presidency with 56% of the vote - the highest percentage since democracy was restored in 1983 after a military dictatorship - promising radical changes to fix these issues.

Unconventional Views of Javier Mele

Mele is not your typical politician. He has some pretty unconventional views when it comes to economics - so much so that he even cloned his dogs! But his ideas might be just what Argentina needs right now.

Economic Ideologies Explained

Before delving into Mele's plan for Argentina's economy, let's take a quick look at some economic ideologies that will help us understand his approach:

  • Libertarianism: Advocates for individual freedom and limited government intervention in the economy.

  • Anarcho-Capitalism: Extends libertarianism by advocating for the absence of any government, including taxation and justice systems.

  • Austrian School of Economics: Promotes free markets without interference from governments or central banks.

  • Keynesian Economics: Supports some government intervention in markets through fiscal and monetary policy, including having a central bank manage money supply and interest rates.

The Argentine Economic Plan

Shortcomings of Current Economic Policies

Argentina's current economic policies are clearly not working. Inflation is out of control, people are struggling to make ends meet, and the country is drowning in debt. Something needs to change - fast.

Javier Mele's Proposed Changes

Mele has some radical ideas about how to fix things:

  • Dollarize the Economy: Mele wants to adopt the U.S. dollar as Argentina's national currency. This would mean giving up control over monetary policy but could help stabilize prices and restore confidence in the economy.

  • End the Central Bank: Mele believes that central banks do more harm than good by manipulating interest rates and printing money out of thin air. He wants to get rid of Argentina's central bank altogether.

Potential Effects on U.S. Dollar

Importance of Argentina's Economy on Global Scale

You might be wondering why any of this matters if you don't live in Argentina or own any Argentine assets. Well, here's why you should care: Argentina holds roughly 10% of all physical U.S. dollars in circulation - more than any other country except China (which holds about 15%). If Mele goes through with his plan to adopt the dollar as Argentina's national currency, it could have significant implications for global financial markets - including potentially impacting the value of your own dollars!

Potential Impact on U.S. Dollar Due to Argentine Changes

If Mele does indeed adopt the dollar as Argentina's national currency (and especially if other countries follow suit), it could lead to increased demand for dollars globally - potentially driving up their value relative to other currencies like euros or yen (a phenomenon known as "dollarization"). On the other hand, if Mele fails to stabilize Argentina's economy using this approach (or if he implements it poorly), it could lead to hyperinflation within his country - potentially causing people there to lose faith in dollars altogether (a phenomenon known as "de-dollarization").

Conclusion

Javier Mele has some radical ideas about how to fix Argentina's economy - including adopting the U.S. dollar as its national currency and getting rid of its central bank altogether! While these ideas might sound crazy at first glance (especially if you're used to thinking about economics from a Keynesian perspective), they actually make a lot of sense when you consider how badly things have been going there lately due largely due to Keynesian policies such as subsidies leading to deficit spending which leads to printing money which leads to inflation which leads back into more subsidies etc... However, they would also come with significant short-term pain such as unemployment and market corrections due removing subsidies and printing money which would cause inflation but eventually lead into long-term gain such as stable prices and increased investment due removing subsidies etc...