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Caribbean Progress

Why and How to Dollarize Argentina

🎙️Podcast with Emilio Ocampo

Rasheed Griffith

Oct 20, 2023

[Full Transcript of the Podcast is below]

Argentina is gearing up to make one of the most pivotal decisions in its economic recovery: dollarisation - adopting the US dollar as the primary currency and eliminating the Argentine Peso. The country heads to the polls this weekend, and a win for presidential hopeful Javier Milei means a vote for the shift to an officially dollarized financial system. Emilio Ocampo is the man tasked by the potential new president to coordinate and execute the transition to the dollar. In this episode, he discusses the implications of this controversial move and the conditions that have brought one of Latin America's most culturally and economically significant players to this historical crossroads.

Is sovereignty lost when you dollarise? Ocampo argues that the answer is an unequivocal “no.” If sovereignty is associated with having your own currency, then Argentina's is markedly weak. The peso has lost 90% of its value in just the short span of four years. Trust in the banking system is at an all-time low and continues to sink lower daily. Argentinians have already voted for the dollar across the informal economy.

We're not treading new ground. Panama, another Latin American state, has been dollarized since 1904. "I wouldn't mind having Panama's GDP," says Ocampo, commenting on the Central American republic's own as the highest in Latin America. Panama is an example of successful dollarisation, and despite the historical and development differences, Argentina could learn from the isthmus. Even its less prominent neighbors, El Salvador and Ecuador, have maintained their dollarization through political regimes that were less than welcoming to the concept. This is a testament to the transition as a viable and beneficial monetary policy backed by economic precedent and by the voters themselves.

The Central Bank of Argentina is insolvent. Its continual "printing" of money has forced the country into runaway hyperinflation that becomes more dire by the month. The only path to correction is drastic monetary and fiscal reform, neither feasible at this stage, as the most effective means of doing so have been exhausted. Dollarization will not be a silver bullet, but it is a viable start for a platform of responsible governance. Join Rasheed and Emilio Ocampo in this insightful discussion on the future of Latin America's second-largest economy.

Show Notes and Resources

Dolarización: Una Solución para la Argentina
Emilio Ocampo and Nicolás Cachanosky
Dolarización en Argentina (Substack)
Emilio Campo et al
Dollarization as an Effective Commitment Device: The Case of Argentina
Emilio Campo
Dollarization Dynamics: A Comment
Emilio Campo
Lessons from Dollarization in Latin America in the 21st Century
Emilio Campo, Nicolás Cachanosky, Alexander William Salter
Dollarization and Free Choice in Currency
Lawrence H. White
The Time Has Come to Permanently Retire All Our Caribbean Currencies
DeLisle Worrell
Así dolarizamos al Ecuador
Jamil Mahuad
The Blue Dollar Economy
Lucía Cholakian Herrera

Full Transcript

Rasheed Griffith: [00:00:00] What is your take on the common objection that dollarization will make you lose monetary sovereignty in Argentina?

Emilio Ocampo: This whole thing about loss of sovereignty is just nonsense. It's absolute nonsense. I would say it's one of the silliest arguments. that you can make because that sovereignty was lost many years ago.

Rasheed Griffith: Hi everyone, and welcome back to Caribbean Progress with me, Rashid Griffith. In this episode, I am delighted to be joined by Emilio Ocampo. Professor Ocampo was recently chosen by Argentina's presidential front-runner, Javier Milei, to lead the closure of the Central Bank of Argentina and dollarize the entire country when Milei wins the election.

Dollarization is the cornerstone of the Milei campaign, which makes the election this weekend, October 22, 2023, an implicit referendum on dollarization. Ocampo and I took a deep dive into why this seemingly unorthodox policy [00:01:00] perhaps is the best solution for Argentina.

Dollarization is, right now, a very hot topic in Argentina and even outside. And this has been primarily because of Javier Milei’s election campaign. He put dollarization as a central component of the campaign once he wins. He was able to win the primary election and coming into the general election he is by far the front-runner. And of course dollarization has been on essentially every news channel , almost every night in Argentina last year. I want you to explain what is it about Argentina's state of monetary problems that enabled dollarization to be such a forefront policy in Milaei’s campaign and why is it so resonant with the people in Argentina?

Emilio Ocampo: Anybody who looks back at Argentina's history can get an easy answer. We're a very unusual case. There's no country in the world with the level of income per capita, education, institutional development that Argentina has, that has had such a long, high, persistent, and volatile inflation rate. Our neighbors, Uruguay, Chile, Paraguay, Bolivia, even Brazil, which in the nineties, had its own hyperinflation.

Bolivia had hyperinflation in the eighties, or Peru also had hyperinflation and all those countries managed to bring inflation down. But Argentina hasn't, and inflation in Argentina is essentially a tax that is paid mostly by. People on a fixed salary and pensioners, and those are the people who are suffering the most and that's why dollarization is popular because in a way what's happened in Argentina is that when you think about dollarization, everybody thinks about a decision made by the government.

In truth, it's first a decision that people make. When the political system is unable to provide a stable currency, then people actually go and look for ways to defend themselves and protect their savings from the inflation tax. And in Argentina, you could say we are de facto dollarized. What does it mean?

It means that Argentines over the past two decades have decided to keep most of their liquidity in dollars. Argentina has, probably outside the U. S. on a per capita basis, the country that has more dollar bills, hundred dollar bills in the world. That means there's been a spontaneous dollarization. And when we talk about money, usually we talk about the three functions of money: store of value, medium of exchange, unit of account.

And in Argentina, the reality is that the peso is no store of value, as a unit of account it’s not very good and as a medium of exchange it’s actually not so great. Because the largest bill that circulates in Argentina right now, the peso, the largest peso bill is roughly 3 dollars at the free market exchange rate. So if you have to pay 2, 000 dollars in pesos, the equivalent of 2, 000 dollars in pesos, you have to carry bags of pesos.

So it's very inconvenient. Now against that, you have another fact that is common to Argentina and many other countries, which is most of the money or most of what we call money is actually not physical money. It's mostly bank money and most transactions in the economy, at least most transactions in the formal economy are done through the banking system.

Everything in the informal economy is obviously in cash and that informal economy has dollarized itself because if you have to do, as I said, large amounts of money, you would need a Brinks truck to bring the pesos that you need. So I want to highlight this point. It's that people can choose the currency they want.

There's a lot more dollar bills here in Argentina than the equivalent peso bills. And so official dollarization, which is what we've been advocating, is a recognition of a fact and a recognition of a fact that would take a large sunk cost from the economy. Because when people are saving dollars, what they do is they go to the black market with their pesos, they buy dollars, they save those dollars.

And then when they need to spend money, they sell the dollars again. Now, the biggest spread in the blue or informal exchange market is about one and a half percent. So that means that the round trip is about three percent. So if you think that we have, let's assume for the sake of the argument that over a period of a year, about 50 billion U.S. are sold and bought by Argentines, which is very conservative, you're talking about 1. 5 billion in money that is lost, that is going right now to speculators and foreign exchange traders that don't add to anything in terms of productivity to the economy or whatever. That is a very important consideration as well.

Those I would say are two very powerful arguments. There are many others, but I think that would address your question.

Rasheed Griffith: So I have here your very excellent book with Nicolás Cachanosky and a big advocate of the book. It actually brought me all the way to Spain from Panama. And I want to get to some of the objections.

So one of the main objections often by both lay people and economists is this idea of the loss of monetary sovereignty that comes when you dollarize your economy. What is your best response to that particular argument?

I have here with me your very excellent book, that you co-authored with. Nicolás Cachanosky and in it you have many arguments and refutations of common objections to the entire idea of dollarization as it pertains to Argentina in this case. And I want to hone in on one of the main objections that economists often make. Even some lay people I think make this argument often as well. And that has to do with the idea of “dollarization would make Argentina or any country lose their monetary sovereignty”. What then would you say to people who use this argument that monetary sovereignty is very important and you should not dollarize because you would lose it.

Emilio Ocampo: It's absolute nonsense because you lost monetary sovereignty the minute people started ditching your currency and when the demand for your own currency converges to zero, which is what's happening now in Argentina.

We have an economy that is roughly anywhere between five and six hundred billion dollars. An economy of this size should have a ratio of M3 to GDP of 50 to 60%. So that means the overall M3 should be around 300 billion at least. That's for example, the level of monetization that you see in Ecuador.

But if you look at the actual monetization in pesos, it's closer to 12, 13% of GDP we lost. That's sovereignty. And we lost the seigniorage. Sometimes people say, Oh, we're going to lose seigniorage, but you lost it already. Because when you convert all the pesos that have been printed by the Argentine government or by the central bank, plus the bank reserves in pesos, we're talking about 9 billion dollars at the informal exchange rate, we're talking about an economy of close to 600 billion and the total monetary base is basically 9 billion. Sovereignty, what are you talking about? You cannot do monetary policy when you cannot control monetary aggregates. And in Argentina, the central bank has very little control because people don't trust the central bank and they have decided to dollarize. And the central bank cannot control the dollar holdings because the level of mistrust is so high that just to give you an idea, it is estimated that they're about between 100 and 200 billion.

And we don't know. with precision, the number. The president of the central bank of Argentina said it was a hundred billion and some other people that work at the central bank say it was 200 billion. I have tried to get a more precise estimate, but roughly what you are talking about is that all this liquidity is in safe deposit boxes. It's not in bank accounts, so it's not intermediated. The reason it's not intermediated is that the people who have half a million dollars or a million dollars in their safe deposit box, they don't want to deposit that money in a bank because they fear that the government somehow will confiscate those dollars at some point because it's running out of reserves or whatever.

This whole thing about loss of sovereignty is just nonsense. It's absolute nonsense. I would say it's one of the silliest arguments that you can make because that sovereignty was lost many years ago. How can you associate sovereignty to the value of the peso that has lost 90 percent of its value in the last four years, only in the last four years, the peso lost 90 percent of its value.

So if that's sovereignty, then you lost it. You lost 90 percent of it. You cannot have sovereignty with a weak currency. You can have sovereignty with a strong economy. So people should focus on the strong economy and we're going to have a strong economy because we have all this natural wealth. And the only thing we need is to get politicians out of this business of trying to confiscate wealth and redistribute wealth for political purposes.

If we give the private sector clear rules, we take the government out of their lives and we give them the freedom to use a stable currency, Argentina would have a strong economy and then we can talk about sovereignty.

Rasheed Griffith: There was a recent paper published by three MIT economists who also happened to all be Argentine I believe, arguing that you cannot have a proper, smooth dollarization process in Argentina because of a severe dollar shortage. That's their term that they use in the paper. And I know that you and your co-author wrote a fairly substantial reply to that paper consequently. So then could you explain why? Why was that paper so wrong? Why did they have such a faulty characterization of the monetary system and the actual dollarization process?

Emilio Ocampo: I think you should ask them. I think they don't understand. The authors of this paper don't seem to understand. They take a fact, which is they look at the monetary base or GDP, and they say, Argentina has very low money balances and that is a problem. But what they don't realize is that Argentina doesn't have low money balances.

It has low money balances in pesos. But Argentina. has money balances in dollars that obviously the central bank doesn't compute as a monetary aggregate. There's a very well known economist here in Argentina called Ricardo Reis. And he's always emphasizing that when you look at Argentina, the relevant monetary aggregate is not M3 denominated in pesos, but M4 and in his definition, M4 includes M3 in pesos plus all the dollars that are circulated in the economy.

So. Just to give you a sense, M3 in pesos today at the blue exchange rate is roughly 50 billion. And the total dollars in the economy are estimated anywhere at 200 to 250 billion. We have 16 billion in dollar deposits in the banking system. So the ratio of dollar money balances to peso money balances is huge.

And I think these economists at MIT are too much in the ivory tower and they fail to see reality. It's very easy to play and build a model with all these sorts of interesting assumptions and whatever and project things, but at the end of the day, not only are the assumptions unrealistic, but the predictions don't make any sense.

I think it's the wrong approach. And by the way, for those readers. interested in a more detailed response, we wrote a paper in which we criticize specifically each and every point that these MIT economists have raised. I personally think that the argument is very weak and it doesn't provide any useful guidance to policymakers.

I think it's essentially flawed. But there is some hysteria going on in Argentina, with respect to dollarization and this, a dramatization of dollarization as being such a sort of radical, crazy thing to do when Argentines have decided or decided a long time ago that they want to have the dollar.

They chose the dollar between five or six times more dollars in their pockets than pesos. And let's not dramatize. Let's give people the option to use their dollars and let's give them the freedom to choose the currency they want. We don't want to impose a shitty currency, sorry for my French, on the average person.

[00:14:00] We want to allow people to save, to borrow, to have a unit of account that is stable over time. And I totally disagree with the paper you mentioned. I think it's completely misguided. And as I said, it offers very poor guidance for policy makers to evaluate whether dollarization is the right thing to do.

Rasheed Griffith: Definitely one of the main faults of the dollarization dynamics paper from these three MIT economists is the total disregard for real world comparative examples of dollarization even in Latin America. There are three countries in Latin America that are dollarized and there are no mentions of those things. So I know you've written. Paper is comparing the dollarization episodes in these three countries already. So then I'm going to ask what are the biggest lessons that Argentina should learn from the dollarization processes in El Salvador or Ecuador or even perhaps Panama.

Emilio Ocampo: There are many lessons. The problem is that everybody says, “Oh you can't compare Argentina to those countries. You want us to be like Panama and Ecuador.”

I said, “listen, I wouldn't mind having Panama's GDP per capita.” It's the highest in Latin America. It has the strongest macroeconomic track record in the last 30 years in Latin America, in terms of inflation and GDP growth. And there's nothing in economic theory that says there's a different law that applies if your GDP is 10 billion or whether it's 550 billion. At the end of the day, smallness in economic theory has to do with your ability to influence prices. And in that regard, Argentina is a small country. We are a price-taker. And so whether we are small or very small from the perspective of economic theory and the working of economic laws, there shouldn't be any difference.

The most important lesson I think to derive from cases of El Salvador and Ecuador are that [00:16:00] dollarization resisted, almost in both cases, 10 years of leftist governments that were openly against dollarization and openly against the dollar. And they survived. In fact, if you look at the experience of El Salvador during the period when the Farabundo Martí front was in power they had a pretty strong fiscal discipline and they weren't able to revert dollarization.

And in Argentina, some people have gone out and said Argentina tried dollarization in the 90s and it didn't work and it was a disaster and whatever. That's a total misreading of history. Argentina never tried official dollarization. We attempted to do it, in the late 90s, in January or February 99, then President Carlos Menem announced that he thought dollarization was the right way to go.

Unfortunately, we were in an electoral year and the two candidates, the two contenders for the presidency, were very much against dollarization. So it's a tragedy we didn't do it then, it would have been so much easier than doing it today and it would have spared us the pain of all the damage inflicted by the Kirchneristas.

So the biggest lesson is that convertibility, which in a country that has strong institutions, can be a very good system to fix the exchange rate. In Argentina it was very vulnerable. In just a week, we had a new president that came in and basically destroyed contracts, basically confiscated private savings and did incredible damage.

And it took a week. And in El Salvador and in Ecuador, they had 10 years of recalcitrant leftists who opposed dollarization and they weren't able to revert it. For example, in the case of Ecuador, Rafael Correa was the most popular politician in the country's history. He managed to change the constitution to allow for his own re-election.

He railed against dollarization as an economist. Then he criticized dollarization when he was minister of economy in 2006. Then he became president and he said dollarization. It was a money, the equivalent of a monetary suicide. He actually was the pioneer of CBDCs. He tried to introduce a digital currency through the Ecuadorian central bank.

And people didn't want to know about this currency. They said, “listen, we have dollars. You're not going to give us another shitty currency. We don't want that. We don't want junk currency.” And so who are the protectors of dollarization? If you have a democracy that works and you don't have persistent fraud and whatever, the biggest insurance against reversal of dollarization is the voter.

Because 80 percent of the people in the economy that get a fixed salary, they prefer to get dollars than to get any other piece of paper printed by the government, pretending to be worth something that is not worth. I think that is the strongest, most important lesson that you can extrapolate from those experiences in my mind.

Rasheed Griffith: One of the things I've enjoyed most about following the Milei campaign is his active engagement on social media, which is I guess not surprising to most people, but it's very active. He's on TikTok. He's on Instagram, all over YouTube, . And when he [00:19:00] talks about dollarization, he talks in very simple language that everyone understands. And of course I follow some Argentinian influencers on TikTok and Instagram and so on. And they do these street interviews where they ask people, “Hey, what do you think about dollarization? What's your view on it?” And everyone has very straightforward, simple terms of why dollarization is important and can impact their life in a very good way. When you contrast that you have many economists using very obscure language and obscure models to explain why,, dollarization perhaps isn't that good. So there’s truly a disconnect

Emilio Ocampo: Yeah, for the average person, for the average voter, the bad things about dollarization are arcane.

These are the typical things that economists would argue. For example, the argument that you lose the lender of last resort, or you lose seigniorage revenues, or that you lose a tool with which you can soften the impact of external shocks. Those things are arcane for the average voter. The average voter knows they have a salary, and they know that their income is eroded every day by high inflation.

And you can make any argument against dollarization, but the argument that you get to earn dollars is a very powerful argument and everybody understands. And I think that's the reason why dollarization is becoming more and more popular. People are realizing that attaching national pride to currency doesn't make any sense.

You may want to have national pride when Messi plays with the national soccer team, because they win. But if Argentina had a terrible soccer team, they wouldn't be so attached to it probably. So the question is, as I said, national pride, maybe let's redirect it to something else, which is having a strong economy.

And the only way we're going to have a strong economy is if we have a stable currency. And people understand that it's very simple. When economists go out and say, “What if there’s an external shock? We're not going to be able to devalue the peso.” And people know what the devaluation means. A devaluation essentially means a drop in real wages.

They're not stupid. The funny thing is, I was on TV the other day. I said, look, why do you think in the early 20th century in Argentina, the leading socialist politicians were the strongest advocates of having a hard currency. Very simple, because the worker basically gets his income from salary, and if somehow the purchasing power of that salary is eroded by the inflation tax, that worker is a victim of the system.

Rasheed Griffith: Another common objection that economists levy against dollarization is this idea of the lender of last resort. In it, you need to have a central bank in Argentina to provide backstop lending in case of some kind of economic crisis and to in some ways, support the Argentine economy. So what is the best counter argument to this idea that you need to have a lender of last resort in Argentina?

Emilio Ocampo: There are many economists who have written about it, and I always quote Guillermo Calvo, who is probably the best known Argentine economist alive. And he always says, “look, if you have a financially constrained central bank and a government that cannot access the capital markets, the international capital markets, the lender of last resort doesn't exist.”

It's just a route to hyperinflation. That's a theoretical argument. On a practical level, what I would tell you is the following. Today, the Argentine central bank is essentially insolvent. The ratio of liabilities to the monetary base is over 600%. That means that the central bank not only is insolvent, but it's incapable of being a lender of last resort.

And the reason is very simple. The biggest debtor of the Argentine banking system is the central bank. If you look at the consolidated balance sheet of all banks in Argentina, roughly sixty percent of their assets are bills issued by the central bank, i. e. bonds issued by the central, short term bonds with a maturity of 28 days.

What's the problem with that? Very simple. The central bank doesn't have real assets. The only real asset the central bank, you could say the central bank has, is a machine that prints pesos. Now, if you use that machine to pay your debts, that's going to take you straight into hyperinflation. That's where we're going now.

Inflation rate now this month probably is going to be above 10 percent during the month, not during the year. This is a monthly inflation rate. And so the debt that the central bank rolls over every 28 days gets an increasing interest rate. And there's no way to stop that unless you do a very drastic monetary reform and a very drastic fiscal reform. And the problem in Argentina is that we run out of possible monetary reforms because we've tried everything. And the fiscal reform is not going to be lasting unless we do the dollarization. Going back to the lender of last resort, we don't have it. You cannot lose what you don't have. I would say the same thing about seigniorage.

One of the arguments, “oh we're going to lose seigniorage”. Sorry, guys, you lost it. That's why the monetary base today is 9 billion. Six, seven years ago, it was over 50 billion. That difference is dollarization. People have dollarized themselves. So let's stick to reality. Let's not compare dollarization to some ideal DSGE Hank model with whatever flexible price, whatever you want to add to it and with an independent central bank that follows optimal rules and you devise this fabulous reaction function and all this crap that ivory tower economists love to do. That is nonsense. That's not reality. We have a real problem here.

We're heading towards hyperinflation at full gallop and it's going to be very hard to get out of it unless we have a regime change that is lasting. Because also an important point that I always make is that we don't need binding rules for a good government because we assume that a good government will behave properly and follow the rules. We need binding rules for when we have a bad government and the probability of having a bad government is almost 100 percent even if we dollarize. Look, Ecuador dollarized in 2000 and in 2007 they got Rafael Correa. The question is what kind of populism was costlier?

Correa's populism with dollarization? Or Argentina's populism with Kirchner's with the peso? And their response is very obvious. It was so much more costly for Argentina to have populism with the peso than for Ecuador to have populism with the dollar.

Rasheed Griffith: From your standpoint. I'm curious if you think there has been a lot of positive appreciation for dollarization amongst the [00:26:00] economic academy in Argentina.

Emilio Ocampo: I think generally economists, first of all, we're not trained to think in terms of a country without its own currency. Everything we learn as economists is predicated on the assumption that there's something called the numéraire and it's established by the government and there's an exchange rate and whatever.

So the framework with which we analyze the economy is very much influenced by a particular way of thinking in which that currency exists. If that currency doesn't exist, things are very different. And the problem is that it's very hard for economists to move from one world to the other, because the whole framework of analysis must change. The way you look at a central bank, the way you look at reserves, everything changes.

And so you have quite a large number of academic economists who point out that there are certain costs to dollarization and that they estimate those costs to be high. But they're also very serious economists who say, “listen, wait a minute, if you have a situation or a country like Argentina, where you have proven over and over again that your political system is unable to behave responsibly and to live within budgetary restrictions like we all have to do, then you have to resort to some kind of mechanism that serves as a commitment device and that Essentially eliminates or moderates time inconsistency.” And time inconsistency for non-technical people is simply a situation where policymakers are always giving more priority to the immediate short term, and they don't care about the medium or the long term.

And that's what happens in Argentina. That's why Finn Kydland, who was a Nobel prize winner, coined this expression. He said Argentina suffers from “time inconsistency disease”, which means that its policymakers are constantly focusing just on the short term. And that basically its politicians and the electorate have a very high discount rate in a sense.

And that in theory, they just prioritize what's going to happen tomorrow. And they don't care about the impact three years from now or four or ten or whatever. But then you look , I always say I'm in good company - Robert Mandel, who is one of the giants of international economics, is in favor of dollarization.

Milton Friedman was in favor of dollarization. He was one of the earliest advocates. And in fact, I quoted him when he gave testimony to Congress in June, 1973. And he actually recommended that Argentina and nothing has changed in Argentina. We had high inflation back then. We still have it.

Robert Barrow, Alberto Alesina, Guillermo Calvo, Carmen Reinhardt. And in Argentina, we have several economists who have, like Reis and many others who have favored dollarization reform. donarizatioDollarization is also an institutional reform and a fiscal reform because the inflation tax at the end of the day is a source of revenue for the government and you're eliminating that source of revenue.

So there's a fiscal element, there's an institutional element, there's a monetary element to dollarization, and you have to factor in all these things. So I'm not terribly worried about these MIT professors. As I said, I feel that I'm in very good company. George Selgin, Larry White, for example, more contemporary economists who have been in favor of dollarization.

And it's very important to emphasize at this point that the point of view here is, look, the important thing is there's monetary freedom. That people can actually choose the currency they want. We say only the Argentine government must use the dollar as the only currency because the Argentine government today has 190 billion in debt, denominated in dollars.

More than 55 percent of total public debt is denominated in dollars. Obviously, when we dollarize, all that debt will be in dollars. But unless the government actually reduces its level of debt, because the reality today before dollarization is that 55 percent of total debt is in dollars. And then we have the debt with the IMF which is in DEGs ("Derechos Especiales de Giro" - this is the Spanish term for SDRs "Special Drawing Rights" at the IMF).

And we have some small portion of debt in euros. But the reality of the matter is that as long as we have these levels of debt, then the government should use the dollar. And the truth is there's no capital market like the US dollar market. It wouldn't make sense for Argentina to raise debt in other currencies, whether you dollarize or not.

Without being dollarized, the only way we can access long term funding is through the dollar market. So that's a fact of life. That's a reality. And so as long as that's the reality, the government will have to use the dollar. As for the private sector, they should be able to use whatever currency they want.

But let's remember that we don't live in a world where currency is physical anymore except in the black market economy where you do cash or maybe now you do cryptos, I don't know. Most money is essentially bank money. And it's a very interesting thing in Sweden, for example. In Sweden, there's no cash.

It's a cashless society, which has implications for the central bank because when you go cashless, you lose seigniorage revenues because all the money is created by the banking system to some extent. Or ninety percent of the money is created by the banking system.

Rasheed Griffith: What is your view on the use of Bitcoin, Ethereum, and other cryptocurrencies, similar to the experimentation in El Salvador with Bukele, and his policies towards crypto? Do you think that would be useful in Argentina?

Emilio Ocampo: First of all, the Bukele experiment hasn't worked, okay? So, we have a very strong precedent there, and the reason it hasn't worked is because Bitcoin is not a currency that people want today.

Maybe speculators want Bitcoin, but the average worker doesn't want to pay in Bitcoin because maybe tomorrow he has 20 percent more, and the day after he has 25 percent less and it just doesn't make any sense. You need a stable currency and Bitcoin now can’t provide it. Maybe 10 years from now it's going to be a different story.

So Argentina doesn't have the luxury of tampering with or trying to be… Because in theory you could say, well what Argentina needs is a stable coin based in the cloud outside of Argentina or whatever, something like that. But look, we have to come back to reality. This is a country that is going through a very serious social crisis.

We're at the verge of hyperinflation. To start tinkering and proposing things that nobody has ever tried. The execution risk is huge. And by the way, I emphasize the point I made earlier. Under our proposal, the guiding principle is monetary freedom. It's the idea that you can choose which currency you want to use, not the government, you pay your taxes in dollars, anything else you want to sign your lease in euros or in Bitcoin or in yen, that's your choice.

The idea here is to get the government out of that position. It’s to provide people with complete freedom to decide what currency they want to use. So we don't need to do fancy schemes like what has been tried in El Salvador, which by the way, as I said, it's not working and it hasn't worked. We need to stick to the basics and to the basic idea, which is freedom.

At the end of the day, the basic idea here is freedom of choice.

Rasheed Griffith: My final question.

How long would it take to actually dollarize Argentina? And what would the process truly look like?

Emilio Ocampo: Look, the reality is I cannot give you any precision or details or a road map because the political situation here is very dynamic. The economic situation is very dynamic. It's going to be different if December arrives with an inflation rate of 20, 25 percent a month than if we are still at the levels we have today, which are a little bit over 10 percent a month.

Also, we need to assess. the level of political support. If Javier Milet wins by a broad margin in October, then that in itself is a big referendum in favor of dollarization. It means people want dollarization. Essentially, dollarization for Argentina has never been cheaper because I mentioned earlier, the monetary base is 9 billion.

And then we have the debt owed by the central bank to the banking system, which would be anywhere between 25, and 27 billion for an economy of close to 550 billion or 600 billion. That's not a problem. And by the way, since I mentioned this number of 550 or 600 billion, people are going to say, that's at the official rate.

And what I say is look, no, the value of the basket of goods and services that Argentina provides cannot be altered by foreign exchange policy on a long-term basis. If you devalue what's going to happen, if you devalue by a hundred percent or you let the effects float and it increases by a hundred percent well what that means is that internal prices will adjust. That's called pass-through. So maybe on time zero, you divide the GDP in pesos by a higher exchange rate, but over time you're going to have inflation in dollars. That's inevitable. We saw it in Ecuador. As I said, for an economy the size of Argentina, the total amount of financial resources that you need to dollarize and that you don't need to disperse from one day to the next, we're talking about maybe 35 billion at most. That's the total number. That's nothing. It's slightly over 10 percent of GDP. And again, that's a debt that exists.

The central bank of Argentina already has a debt of 27 billion to the banking system and the banks owe that money to private sector depositors. So. It's not like that debt is created by dollarization. Debt exists and it has to be paid. And if it's not paid, we're going to have hyperinflation.

Period. End of story. So the actual cost of dollarization is the monetary base. And the monetary base in the last 30 years has been at this level on two occasions. Right before convertibility in 91. And Right after the demise of convertibility in early 2002. So I say it's never been cheaper for Argentina to consider dollarization than it is today.

Rasheed Griffith: Thank you so much, Emilio. This has been a really great conversation.

Emilio Ocampo: Thank you for inviting me and have a good day.

Afterword

I am very much looking forward to the outcome of the elections in Argentina this weekend. We are going to have many more conversations about dollarization in the Caribbean and Latin America on this podcast over the next few weeks and months. If you have any comments, questions, objections, or critiques of dollarization from our conversation today. You can email the podcast at progress@cpsi.org. I also invite you to subscribe to our Substack. You can find that at cpsi.media on Substack. That’s CPSI - Caribbean Progress Studies Institute. I hope you join us again for another episode next week.