Argentine President’s Efforts to Tame Inflation
Argentine President Javier Milei has successfully brought down inflation in his country from a monthly 25% in December 2023 to less than 3%, according to official data published by the country’s Indec statistics authority. However, the cost of living is still increasing, forcing the libertarian leader to make a further controversial proposal to the public.
The Proposal
Milei has asked his fellow citizens to bring out their cash dollars, which have long been held as protection against decades of economic turbulence, from mattresses and foreign bank accounts. Last week, Milei’s government sent a draft law called "fiscal innocence" to Congress, which ensures that Argentines who did not declare their dollars will no longer be pursued.
Austerity Measures and Dollarization
Milei’s comprehensive austerity measures have stemmed inflation, but many Argentines who have confronted economic difficulties are still skeptical. During his presidential election campaign in 2023, Milei’s followers marched through the streets of Buenos Aires with oversized dollar bills featuring their candidate’s face. Milei himself called the Argentine peso "worthless" and initially promised to replace it with the US dollar as a legal tender as soon as he was elected.
The "Mattress Dollars"
The Indec agency has estimated that Argentines have hidden around $271 billion, colloquially described as "mattress dollars." People started saving these dollars during Argentina’s prolonged period of hyperinflation, which the country finally overcame by the end of 2023. Having access to US dollars in cash allowed people to avoid price increases through favorable exchange rates.
Economic Relaxation through Cash Dollars
Now, President Milei wants to encourage the behavior of saving in dollars by convincing Argentines to bring their hidden dollars back into the money system for the wider economy. The government argues that, with inflation at least temporarily tamed, it is the right moment to release the hoarded money.
Trust in the Currency
However, trust in a currency can be destroyed quickly, while it takes much longer to rebuild. It is still unclear whether Argentines are willing to monetize their "mattress dollars" in considerable amounts. In his efforts, Milei counts on deregulation and the removal of tax burdens to encourage them.
The "Fiscal Innocence" Bill
Technically, Argentines are required to report all foreign currency stocks, but the law was never completely enforced. Milei’s law draft, which guarantees tax innocence, is seen as a clever step by Economist Eugenio Mari. By lifting the reporting obligations to the tax authority, transactions are facilitated, and the risk that citizens will be pursued by the state is reduced.
Economic Growth and Dollarization
According to the latest forecasts by the World Bank, Argentina’s economy is expected to grow by 5.5% this year, with another 4.5% projected for next year. However, prices for food and essential goods have increased, primarily due to the rollback of state subsidies and the strengthening of the Argentine peso. Thousands of Argentines cross the borders to buy cheaper goods in Chile, Paraguay, or Brazil, taking advantage of the stronger peso, which gives them a more favorable exchange rate.
Dollarization through the Back Door
Hernan Letcher, director of the Centro de Economia Politica Argentina (Cepa) in Buenos Aires, believes that Milei’s target is to "insert more dollars into the government’s currency exchange system" with his dollar monetization plan. Financial expert NAU Bernues thinks that the government wants to make the dollar a "more transactional currency" that enables people to buy everyday goods, not just big-ticket items like apartments or cars.
