SPEAKER_01: This is Planet Money from NPR. We are recording, yes. Last week we called up video producer Lucas Babic to help us with a recording in Buenos Aires on Florida Street.
SPEAKER_03: Do you ever buy anything on that street?
SPEAKER_05: No. No, no, no, no. People who live here don't even come to this street. Oh, really? This is a touristic place and of course they have touristic prices.
SPEAKER_08: This touristy Florida street is lined with chain stores and fast food places. Also, people who exchange dollars and pesos.
It was potentially a big day here.
SPEAKER_04: Javier Millet had just become president of Argentina and he'd been calling for huge changes.
SPEAKER_04: He's kind of an economic wrecking ball.
SPEAKER_03: And what he says and does sometimes impacts the value of the peso. So we asked Lucas to try to interview one of the people who exchange money here.
SPEAKER_08: People, people. Nobody wants to talk. The previous administration actively controlled the buying and selling of dollars and made exchanging money at places like these illegal. But still, money exchangers have lined the street and continue to line the street.
SPEAKER_05:
They call out, cambio, cambio, which basically means exchange, exchange.
I see. OK, so he basically was like... Oh, let me check this out.
SPEAKER_03: Lucas finds a money exchanger who is willing to talk. And our big question? Now that Millet is president, what will that mean for the peso? No. No. The guy was saying the value of the peso was going to tank.
SPEAKER_05: He was predicting that in just a week's time it was going to fall by 200%.
SPEAKER_08: He says that's what everybody is saying around here.
For them, here is a fact. 3,000 pesos.
SPEAKER_05: Now, this prediction was made a little over a week ago.
As of today, when this episode of the show is over,
SPEAKER_08: December 20th, the rate of exchange is actually closer to 1,000 pesos per dollar.
So, not quite as dramatic as the money exchanger predicted. But even so, the peso is dropping in value,
SPEAKER_05: which means prices in stores and restaurants are going up,
SPEAKER_00: salaries are worth less, it's harder to save any money.
SPEAKER_03: We ask the money exchanger, what is he going to do as the peso drops? What will he do with the peso? He says he's worried about the people. Because things like buying a kilo of meat, that is about to get way more expensive.
SPEAKER_08: It's going to be a pity because people will not have money, basically. New president Millet has a fix for all of these issues with the local currency. Really, for the whole economy,
he's worried about the people. He says he's worried about the people.
SPEAKER_05: He says he's worried about the people.
SPEAKER_03: He wants to bring out of the shadows what is happening here on this street.
SPEAKER_03: But instead of people exchanging a few pesos for dollars here and there at these little exchange shops, instead, all of Argentina would show up and exchange all of the country's pesos.
SPEAKER_08: Walk away with stacks and stacks of dollars. Millet says he wants to dollarize Argentina. That's a good thing. He wants to dollarize Argentina. That's at least in part how Millet won the presidency. Which leads us to one more question for the money exchanger. The guy who basically every day turns pesos into dollars. Does he have any questions about how dollarizing will work?
SPEAKER_03: Money exchanger says, I don't know, I don't know. He's like, no, no, man, that's like for economists. I have no idea. So yeah, dollarizing.
SPEAKER_05: Easier said than done.
Hello and welcome to Planet Money.
SPEAKER_03: I'm Amanda Aronchick. And I'm Erika Barris.
SPEAKER_05: Argentina has been on a decades-long search for economic stability.
SPEAKER_08: And it always seems to be out of reach.
So in a country where the local currency is in free fall,
promising to replace that currency with the U.S. dollar can seem like a magical solution. Argentina's new president won in part by promising to do just that. To dollarize. To scrap the peso and replace it with the relatively stable, predictable, almost delightfully boring U.S. dollar.
Today on the show, what does dollarizing even mean?
SPEAKER_03:
Why dollarize? How to do it? And will it work?
SPEAKER_02: Now smarter and more flexible. That's the powerful backing of American Express. Terms apply. Learn more at AmericanExpress.com slash business gold card. Argentina's new president, Javier Bile, is a political outsider. You might have seen pictures of him and his bright blue eyes and these surprisingly bushy sideburns. He's an economist, far right. And when he was on the campaign trail, one of his promises was to dollarize Argentina.
In this video from September, Millet is saying the decision to dollarize is set. And it's not going to change, not going to move. The big idea behind dollarizing is not all that complicated. Your country has a currency, the rupee or the euro or the peso, whatever.
And one day, government really does say, come exchange your old currency for U.S. dollars.
SPEAKER_08: Your old money is no longer good. Starting now, only U.S. dollars work.
SPEAKER_04: There are a lot of reasons to dollarize. Currently, there are more than 30 countries in the world that use the currency of another country.
SPEAKER_08: For Argentina, it's an idea for fixing an economy that's been broken for decades.
SPEAKER_03:
So people kind of have lost faith in their own currency.
SPEAKER_03: Yes, Argentines don't remember the last time they had faith in their currency. This is Ivan Werning. He's an expert in dollarizing and an Argentinian.
SPEAKER_08: He's got kind of longish hair, plays the guitar. I'd say he seems a little bit hippie, a whole lot macroeconomist. We spoke to him at his office at MIT and scattered across Ivan's desk are dollars and pesos. And the pack of Kleenex made to look like hundred dollar bills.
SPEAKER_03: So you can, you know, act like you're rich and blowing your nose on a hundred dollar bill. I guess this is what makes a macroeconomist laugh. Anyway, Ivan comes by his passion for currencies honestly.
SPEAKER_08: I lived through two changes of currency where the currency changed name, changed pictures on them.
SPEAKER_09: They took some zeros off.
SPEAKER_08: Imagine one day the hundred dollar bill in your wallet. The government now decides it's worth one dollar or instead of dollars you get some purple and orange money. It's got pictures of like, I don't know, Janet Yellen or Beyonce or Spiderman on it.
SPEAKER_03: Ivan says most Argentinians have lived through two or three or four different currencies. Yes, they become kind of a collectible thing.
SPEAKER_09: So some people have desks with a glass on top and underneath the glass they have, you know,
SPEAKER_08: maybe four generations of different currencies.
Wow. So the idea for like an average Argentinian, like the idea of changing currency is not a strange thing to do.
SPEAKER_09:
It isn't. We're all kind of armchair macroeconomists that have lived through those unusual things and they're not unusual for us anymore.
SPEAKER_08:
But fully dollarizing? That would be new. And one of the reasons Miele wants to dollarize is because inflation is a raging out of control dumpster fire. At the moment, it's over 160 percent a year. It's so high because the government has been basically printing pesos to cover its expenses. Dollarizing would rein that in.
SPEAKER_09: The idea behind dollarization is if you can take away that temptation, the money printing press, it's like tying yourself to the mast so as to not go towards the siren's call.
SPEAKER_08:
And the siren's call is print more pesos, print more pesos.
SPEAKER_09: Yes, exactly. That's the best argument for dollarizing. That somehow dollarizing is a way to control yourself so you don't overspend.
SPEAKER_08:
We call it a commitment device. A commitment device because when a country takes on a new currency, they can't print more money. Only the U.S. government can print dollars.
SPEAKER_03: So how exactly would Argentina dollarize? Let us, along with Yvonne, walk through the steps that a country would need to pull this off.
SPEAKER_09: Okay, let's say President Millet calls you up and says, okay Yvonne, tell me a few things that I have to have in place to be able to dollarize Argentina. What do you say to him?
SPEAKER_07: Is it fair to say first, don't do it? You can start with don't do it. I would say probably don't do it. Try and talk him out of it.
SPEAKER_09: But let's say you can't dissuade President Millet. He is a really insistent guy. He is sure dollarizing will rescue his country's failing economy.
SPEAKER_03: So how do you do it? Yvonne says there are basically three steps. Step one. Yeah, the first thing is if you are going to dollarize and you don't have the dollars, it's obviously a problem. So you need to get the dollars.
SPEAKER_08: First step, government needs to get the dollars. Great. Most likely, the country would need to borrow money to get dollars. But Argentina does not have a super great track record for paying back their loans.
SPEAKER_09: Let's say they do find some lenders and then they're going to use those dollars to replace all of those pesos.
SPEAKER_03:
Now there are some disagreements on what is the exact right number of dollars, but a few economists have floated an amount of around $40 billion. $40 billion would basically cover the pesos in circulation and pesos in savings accounts as well as some of the other debts of Argentina's central bank.
SPEAKER_09: Then Yvonne says the government picks a day when it's all going to go down. This is step two. The day it starts, let's call it dollarization day.
SPEAKER_08: I assume when you say you go to convert, that's like people go to the bank, they hold their pesos, and then there's like a moment where they hand in the pesos and are handed some dollars. Is that right? Exactly. Exactly. That's exactly how it would happen. And if that $40 billion turns out to be the right amount and all goes well, here's what it could look like for Argentinians.
SPEAKER_03: Their salaries should stay about the same, but they'd be paid in dollars. And that kilo of meat would still be affordable, just now priced in dollars.
SPEAKER_08: The timing here is really key. Plans to dollarize might make people worry that they need to dump their pesos and fast.
SPEAKER_03: That could cause the value of the peso to drop in anticipation of dollarizing. So one way to go about it is to do it as a surprise. Don't tell people when dollarization day is going to happen.
SPEAKER_08: If you surprised everyone with dollars and converted the next day, that would be something you can do. And that's a little more how dollarization worked in Ecuador.
SPEAKER_03: Ecuador officially dollarized in January of 2000. At the time, the country was in terrible economic condition. High inflation, huge deficits, devaluing currency, and the big international lenders didn't support the idea of dollarizing.
SPEAKER_08: So the president of Ecuador kind of sprung an announcement on everyone. Surprise! The conversion rate between our currency and the dollar is set. We've dollarized.
At first, this was considered such a bad idea. Within two weeks, the president got kicked out. But the next president agreed to see the whole plan through. By the end of the year, the transition was essentially complete.
SPEAKER_09:
So, recap. Step one, get dollars. Step two, set a date and a rate. The next step, step three, the country needs to stop spending more than it brings in. It can no longer run a deficit if it wants to maintain this whole dollarizing endeavor.
SPEAKER_03: An important step then is you're going to have to get the financial fiscal deficit situation in order. Otherwise, eventually, you're going to need to get exit dollarization and go back to printing pesos.
SPEAKER_08: Those are the basic steps to dollarize. Now, the thing is, Argentinians have and use a lot of dollars already. That's because the government has mismanaged the economy for so long. People don't trust the government and they don't trust the peso.
SPEAKER_03:
That's why people who can save in dollars do. And they have for years. We are so used to this. This is Mariana Luzzi. She is a professor of sociology at the National University of San Martin in Buenos Aires. She says people are so used to dealing in dollars.
SPEAKER_09: It's something that we learned from our parents that we have been doing for a very long time that it's not extraordinary for us anymore.
We called Mariana because she co-wrote a book called The Dollar, how the U.S. dollar became a popular currency in Argentina. She spent years trying to understand the cultural relationship Argentinians have with the dollar.
SPEAKER_08:
When you look at ads, you will see all apartments, houses and everything that prices are set in dollars are published in U.S. dollars and transactions are made in U.S. dollars, mostly in cash.
SPEAKER_03: When we visited earlier this year, you could really see what Mariana is describing here. Dollar, dollar bills, y'all. You know, the small things, coffee, lunch, buying a souvenir mug. You pay for those with pesos. But for some big things, an apartment or luxury car, you pay for that in dollars.
SPEAKER_03: It's the idea that if you have dollars instead of having pesos, you protect yourself from the insertitude, at least part of the insertitude that comes with government decisions. It's something that helps you to avoid the problems that come with state decisions and mostly crisis.
SPEAKER_06: President Millet wants to disrupt decades and decades of poor economic decisions. And as a political outsider, he argues his administration will be the one that can finally, officially, fully dollarize the country.
SPEAKER_08:
And so I think that for some of the people, this idea of dollarization has this power, the power of the golden ticket. Like we have this golden ticket that can solve all of our problems.
SPEAKER_06:
Coming up after the break, we read the fine print on that golden ticket and there might be some problems.
Hey, it's Erika Barris. Before we get back to the show, a bit of year end reflection. In 2023, Planet Money followed the wild arc of inflation of interest rates.
SPEAKER_03: We brought you a series about AI and an episode produced by AI, and we served up another extremely infotaining season of Planet Money Summer School.
SPEAKER_06:
Of course, we have big plans for lots more cool stuff like that in 2024, but that stuff will not be possible without your help.
SPEAKER_08: This is where we want to say a big thank you to our Planet Money Plus supporters and anyone listening who already donates to public media.
SPEAKER_01: And to anyone out there who isn't a supporter yet, right now is the time to get behind the NPR network, especially with a big election year coming up. So please join NPR Plus at plus.npr.org or make a tax deductible donation now at donate.npr.org slash money. And thanks.
SPEAKER_00:
Now to recap. For Argentina to dollarize, our economist Yvonne Bening says the government will need dollars, a date and a rate for making the exchange and to get the country's finances in order.
SPEAKER_01:
Let's say President Millet does all the stuff. Hypothetically, he dollarizes Argentina. Then what?
Unfortunately for him, the aftermath of dollarizing is very complicated. There are all sorts of problems that can pop up. Here are three big ones.
Number one, when Argentina adopts the dollar, you know, ties itself to the mast, the country would no longer print its own currency.
SPEAKER_03: That means it would lose what's known as seniorage. That's money it earns when it prints money. So there's a benefit for the government of printing money. It's very cheap physically to print money relative to its value. And that's the benefit the government gets. And if Argentina were to dollarize, they lose the ability to have seniorage because they're not like physically making their currency anymore. Exactly. They'd give up a cheap way of financing part of the government budget, which every you know, most every country has.
Here's how seniorage works. Let's say printing a one dollar bill costs 10 cents. Seniorage is the difference, the 90 cents the country puts into the economy when it prints that dollar.
Now, of course, this can all get out of control. They can print too much. It will fuel inflation. But it is one of the benefits of being able to print your own money. And you lose that when you dollarize.
Complication number two. Let's say Argentina can't actually raise that roughly 40 billion dollars we mentioned earlier. But Malay still goes ahead and dollarizes with just 10 billion dollars sitting in the central bank. That could lead to a recession.
SPEAKER_08: Maybe Argentinians lose their jobs, can't afford to pay their bills. And so they need to dip into these stashed away dollars. Argentines have always been saving and have a bunch of dollars stashed under the mattress. The richest Argentines have dollars in the financial sector, in Uruguay, across the river or in the United States or elsewhere.
SPEAKER_03: Not ideal to have to pull the savings out from under the mattress. But if you're well off, this is an option for you.
The problem is nearly half of all Argentinians live below the poverty line. They don't have that bunch of dollars stashed away.
In this scenario, dollarizing would likely lead directly to even more inequality. Next, the third complication. So, say Argentina ties itself to the mast and after a few years gets a little careless, starts spending, you know, more than they have, starts running a deficit.
SPEAKER_08: And at this point, it would be useful if there was some way for them to like heat up their economy, get people to spend more money.
Usually, that would mean that the banks would make it cheaper to borrow. They would do that by lowering interest rates.
SPEAKER_09: So, one of the big problems of dollarizing is you basically lose the capacity to influence the economy.
SPEAKER_08: So, we all hear about the Fed in the U.S. lowering rates or raising rates to try and control, to minimize recessions.
When you dollarize, you give that capacity up. You can't change your interest rates if you dollarize?
It's very difficult to do it in the same way. Why is that? Well, because basically the interest rate will be roughly pinned down by what the U.S. interest rate is.
SPEAKER_03: If Argentina is running a deficit and they can't really set their interest rates higher or lower, they can't print money, they're kind of stuck. It's possible that something truly weird could happen. And Ivan knows this because it happened before.
It was the early 1990s. Argentina was dealing with high inflation, at times hyperinflation.
SPEAKER_09:
So, the government introduced what they called the convertibility plan. The government pegged the peso to the dollar at one to one. One peso shall equal one dollar. Ivan says that meant that the country was practically dollarized.
SPEAKER_08:
And Argentina's government was still running a deficit, so it started to run out of money. And some of the provinces were going broke. So, the provincial governments started doing something kind of wild.
It's funny. They issue something that they call a bond, but it has the exact shape of a bill, of a currency, of a peso.
And because legally speaking, you're not supposed to issue currency if you're a province. That's the federal government's job.
SPEAKER_03: So, they call them debt cancellation bonds. It's called a debt cancellation bond, but actually in practical sense, it's a new currency.
SPEAKER_08: Absolutely. It's kind of like an IOU dollars. Exactly. Exactly. And they try and spend it at the store. And initially, you would think, well, maybe the store won't take these.
SPEAKER_09: But you know what? If the store doesn't take them, they'll have no customers. So, because the provinces are running out of money, they start essentially printing their own currencies. And they're paying government employees with these IOU dollars.
SPEAKER_08: Government employees go to the store and they spend their IOU dollars there.
SPEAKER_08: More and more people then take it. So, that's how I think it gets circulating.
SPEAKER_09: And soon enough, you're getting paid and you're accepting payment in this other thing.
SPEAKER_03: And eventually, you can crowd out the dollar. And is this a risk of dollarizing? Like, let's say one of the provinces was like, actually, we're running out of dollars. We don't have anything. We can't borrow from the government. You don't have anything. We're just going to make our own money. Oh, I absolutely think it is. I absolutely think it is.
SPEAKER_08: Basically, the last complication is this. If a country continues to run a deficit, but can't print money, can't set interest rates, other currencies might just sneak back in.
So, those are some big complications.
SPEAKER_08: Dollarizing without enough dollars could create more inequality.
SPEAKER_03:
And Argentina could lose some of the benefits of printing its own currency, from seniorage to the ability to control its monetary policy. On December 10, 2023, Javier Millet became the president of Argentina. He did start his presidency addressing some of his campaign promises.
SPEAKER_09: But there was one thing he didn't mention. Dollarizing. So that's right. He did not immediately dollarize the country. Perhaps it's because his party has so few seats in Congress, nowhere near a majority, and getting support for dollarizing could be pretty hard.
SPEAKER_08: Perhaps he heard economists like Yvonne Werning and realized just how many complications there would be. Or maybe in a few years he can fix Argentina's economy enough, try again.
SPEAKER_09: Or maybe, just maybe, everyone will go to bed one night, wake up the next morning, and surprise, Argentina, you've been dollarized.
SPEAKER_08: We've covered Argentina's economic crisis pre-election through the lens of a tango competition. And we've made shows about how people turned to the dollar after a currency crisis in Venezuela a few years ago.
SPEAKER_09: And that time that Ecuador dollarized. The links to those episodes are in our show notes.
This episode was produced by Sam Yellowhorse Kessler with help from Dave Blanchard and Willa Rubin.
SPEAKER_07: It was engineered by Nisha Heinas, fact checked by Sierra Juarez, and edited by Jess Jang. Alex Goldmark is our executive producer. Special thanks again to Nicolas Saldías and Edward Gilliland.
SPEAKER_08: I'm Erika Barris.
And I'm Amanda Aronchick. This is NPR. Thanks for listening.
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