I’ve been participating in a conference in Argentina this week on “Understanding Argentina’s Transformations Under Milei.”

• Part I reviewed the horrible economic conditions that plagued Argentina when Javier Milei took office.
• Part II looked at Milei’s spending restraint and some of the subsequent improvements in fiscal outcomes.
• Part III examined Milei’s remarkable progress with regards to privatization and deregulation.
• Part IV summarized Milei’s efforts to reduce protectionist barriers to trade and investment.

Today’s column will address Argentina’s monetary policy.

Here are some charts from a presentation from Sebastian Katz, an official at Argentina’s central bank. We’ll start by a horrifying look at the nation’s track record on inflation.

As you can see, the bad numbers started right after World War II, which is when Juan Peron took office.

Something else also happened right after World War II. Regular readers know I often focus on convergence and divergence. Well, here are both phenomena in one chart.

You can see that Argentina was one of the world’s rich nations up until the 1940s, but has consistently declined until it now only barely above the average of other major Latin American nations.

So why did Argentina have such high inflation that caused so much damage?

The answer is that politicians in the pre-Milei era financed budget deficits by printing money (they couldn’t borrow money since the world’s investors feared the government would default, and taxes already were so onerous that there was no leeway to finance additional spending with that option).

But this problem disappeared after Milei was elected. He balanced the budget within a month by reducing the burden of government spending.

And since there no longer was a need to print money to finance spending, monetary policy improved. And you can see in the next two charts that inflation has plummeted, whether measured on a monthly basis or annual basis.

I’ll share one more slide.

Professor Jorge Ávila summarized the progress has occurred since Milei was inaugurated in late 2023.

The first two columns confirm that Argentina’s fiscal progress occurred because of spending restraint. The third column shows how Milei’s fiscal discipline enabled the elimination of a debt problem at the central bank. And the final three columns document the improvement in monetary policy.

There’s still a big unresolved issue, which is whether Argentina should drop its currency (the peso) and shift to the U.S. dollar.

This is know as dollarization, and the advantage of this approach is that a future leftist government would no longer be able to engage in central bank-financed spending.

Milei campaigned in favor of this idea back in 2023. Dollarization is not needed while he is in power, but it would be a good idea to tie the hands of future presidents.

P.S. If Argentina has a strong and enforceable spending cap, perhaps dollarization would not be necessary.

P.P.S. The U.S. dollar does not have a strong track record, but the rationale for dollarization is that a nation with a history of terrible monetary policy will be better off by adopting the currency of a nation with monetary policy that is merely bad.

P.P.P.S. I’ve been asked in the past about whether it would be smarter to adopt the Swiss Franc instead of the U.S. dollar. The Swiss Franc is a stronger currency, and Switzerland definitely has more responsible fiscal policy than the United States, but it would be impractical for a large country like Argentina (population of 47 million) to adopt the currency of a small nation (9 million).