Re: Imposing the US Dollar

[Colin Danby <danbyc@xxxxxxx>]

I've suggested in the past that c-boards should be seen as part of the
genre of restrictive monetary rules plus pegs, not exotic alternatives.
I agree with Henry that they must be understood in the context of other
macro policy.   The Martin Wolf column I mentioned the other day notes
that:

  "The arguments for tight currency arrangements - such as a currency
board, use of another country's currency as one's own, or membership of
a currency union - are that they guarantee monetary discipline and
eliminate currency risk. But these risks are merely transformed. In
Argentina, inflation and currency risk have turned into credit risk."

I haven't seen the Robert Samuelson column Barkley mentions, but indeed
this is at base a debt crisis story.  As with past debt crises there is
a relationship between foreign debt and domestic financial structure.
Argentina owes a ton of money and got enough liquidity to cover this
year's payments from the IMF, but everyone can see the writing on the
wall for 2002, especially with a global recession.  This is why Cavallo
is visiting foreign financial centers.  There have also been a number of
partial-default schemes floated -- I think there was one on the WSJ
op-ed page last week.

The "whose interest" PE question is hard to answer generally and
requires attention to relations between local capitalists and
governments.  An exchange rate-based stabilization typically gives you
an initial boom (imports and GDP), fueled by consumer debt, followed by
a slump which breaks the peg.  The ratio of nontraded to traded goods
prices rises rapidly in the boom, then falls when the peg breaks.  What
made Argentina different was that it held the peg after the initial
slump and pursued the only other course, which is to force down nominal
wages to regain "competitiveness."  As JMK argued this is a recipe for
long-term recession.  Though presumably local profit-receivers gain from
a lower wage share, prolonged recession hurts almost everyone.
Argentina's story looks like destructively fierce class conflict, an
insane war of attrition against wage-earners.

Best, Colin