“The dollar enjoys too much confidence”: Argentina’s new president on the wrong track Zelenskyy announces upcoming peace talks in Switzerland

Argentine President Javier Milei has promised his voters the US dollar as the new national currency. For the first time, a major country wants to participate in this experiment. How do you estimate the chance of success?
Willem White: I have never thought about whether the chances of success would change if a large or small country gave up its own currency and made the dollar its national currency. There are the well-known examples of small or smaller countries such as Panama or Ecuador that have done this. But their motive for the currency change was the same as Javier Milei’s: they wanted to bring the notoriously high inflation under control.

The US Federal Reserve is given a lot of extra responsibility, almost without the question being asked whether it should also conduct monetary policy for other, especially very large, countries. Would it be conceivable that the Fed would oppose this?
I do not believe that. The Federal Reserve is tasked with pursuing monetary policy that suits the United States of America. What happens in other countries is secondary or even irrelevant. Argentina had already gone through this experience thirty years ago. In 1991, Carlos Menem pegged the peso’s exchange rate very closely to the dollar to deal with Argentina’s hyperinflation at the time. The experiment initially seemed to work, but then the Fed raised rates quickly and sharply in 1994

The tequila crisis happened in Mexico, the currency crisis in Southeast Asia followed in 1997 and foreign debt in Argentina rose sharply – but this time in dollars and no longer in pesos. The foreign investors who had previously brought a lot of capital to Argentina believed that the dollar peg could not be maintained. They withdrew the money and their expectations came true. In 2001, Argentina plunged into a deep economic crisis that the country has still not overcome to this day.

So can countries not sustain a currency change in the long term?
Yes, they could. But in principle, a country can only be happy with the US dollar if the government can maintain budget discipline. But if a government applies this budget discipline, it does not need the dollar

The United States of America is not necessarily a role model for other countries when it comes to fiscal discipline.
No, US fiscal policy is certainly not exemplary. Nevertheless, the dollar still enjoys a lot of confidence in the world. I would therefore say that the dollar is overconfident

Explain your argument a little further!
With the dollar, the US has by far the most important reserve currency in the world. A country with such a currency enjoys great advantages. It can import valuable goods and pay for them with a piece of paper, the value of which in any case is much less clear than that of the imported goods. But the deal still works because the whole world is willing to hold dollars and pay with dollars

The Belgian economist Robert Triffin identified the problem as early as 1959 on the basis of a flawed design of the then global monetary system of Bretton Woods. With the gold-backed dollar, the US had a strong currency and a strong incentive to import more than it exported. In principle, the growing US balance of payments deficit should have weakened confidence in the dollar, but that was not the case.

And that is still not the case today. Can it be said that this incorrect construction of the Bretton Woods system continues to this day in a different form?
That’s how it is. There are of course systems that are fundamentally unstable, but that can function for much longer than you would expect

What could tip the system?
Maybe US fiscal policy. The annual budget deficit currently stands at 8 percent of gross domestic product – and that’s at the height of the current economic cycle. A few years ago I could hardly imagine something like this. Ten years after the downgrade by Standard & Poor’s, Moody’s is now officially considering withdrawing the US’s highest credit rating. The rating agency does not mention the high debts or the high budget deficit as the reason for this, but rather the polarization in politics.

While Democrats have for years accepted higher taxes as the only fiscal policy measure, Republicans have just as stubbornly pushed for spending cuts as the only measure. Joseph Schumpeter, who died more than seventy years ago, is said to have said: The essence of economic policy is politics, politics and only politics. Schumpeter was very pessimistic about the future of the free market economy. That should be warning enough for us.

Where do you see the way out of this debt trap?
We must first be honest and admit that a significant portion of global debt will never be repaid

How did you arrive at this pessimistic view?
The simple fact is that there are a lot of bad debtors. About half of all corporate debt has a BBB credit rating. Immediately below this bandwidth, the risks of default increase sharply. According to the International Monetary Fund, about 60 percent of the public debt of all low-income countries is already non-performing or at risk of default. Many countries spend more on interest payments than on their own health care system

Why can’t we get the problem under control?
An important reason is that we still do not have adequate procedures to handle debt restructuring. The world would be terrified if Switzerland had bankrupted Credit Suisse. We have known for a long time that even large, systemically important banks can fail. But we don’t allow this because we fear the chaos that an uncoordinated bankruptcy could cause on the financial markets. We need to start thinking more seriously about the systemic consequences of our monetary and economic policies

Do you mean central banks in the first place?
And not only that, the central banks also have a major responsibility that they have not taken into account far enough over the past thirty years. The financial and currency crises are recurring at increasingly shorter intervals and with increasing severity. When I started working at the BIS in Basel in 1994, the tequila crisis was underway. In 1997, the currency crisis hit Southeast Asia. The bankruptcy of the LTCM hedge fund followed in 1998, which also caused UBS and other major banks to get into trouble. In 2001, the Internet bubble burst on the stock markets and six years later the global financial crisis began.

The response from central banks was the same every time: the markets were flooded with liquidity to calm them down and monetary policy was eased significantly over a long period of time. In principle, most governments also used this same recipe when they protected the economy with gigantic fiscal measures during the Covid pandemic.

Should the crises have run their course every time?
No. Measures to calm the markets are appropriate, but keeping interest rates low for a long period of time is not appropriate. Moreover, solutions become problems when they are applied over and over again. Not only is monetary policy losing its effectiveness, unwanted side effects such as the build-up of global debt are also increasing. Central banks believe too much in the projections of their limited, linear economic models and do not sufficiently take into account systemic and non-linear responses.

Shouldn’t we all take each other by the nose? In Argentina, the people elect a president who sells a prescription that people know does not provide a quick cure.
I fear that voters in Argentina and elsewhere are far more likely to reject the old leaders than to accept the policies of the new ones. The history of many countries over the past century shows that financial crises in particular are often followed by elections that undermine the democratic center in favor of populist extremists.

In the current climate of hopelessness and denial caused by rising inequality in income, wealth and opportunity, the credibility of emerging leaders’ promises is virtually irrelevant. In fact, voters voluntarily decide to jump from rain to rain. (aargauerzeitung.ch)