WEBVTT - Lots More with Brad Setser 0:00:00.320 --> 0:00:04.200 Hey, Brad, I didn't realize you're gonna be in person. 0:00:05.440 --> 0:00:06.840 I didn't realize you're going to be in person. 0:00:08.760 --> 0:00:12.160 I thought you're like and normally we're just disembodied voices. 0:00:13.840 --> 0:00:16.360 Singing country tunes from some unders. 0:00:18.000 --> 0:00:23.960 I wish, Oh my god, I did a deadlift one, two, three, 0:00:26.800 --> 0:00:31.280 so many uh barges. This isn't after School Special, except. 0:00:31.040 --> 0:00:33.560 I've decided I'm going to base my entire personality going 0:00:33.600 --> 0:00:36.840 forward on campaigning for a strategic pork reserve in the US. 0:00:36.920 --> 0:00:38.640 Where's the best with imposta? 0:00:38.840 --> 0:00:41.400 These are the important question? Is that robots taking over 0:00:41.440 --> 0:00:41.800 the world? 0:00:41.880 --> 0:00:44.720 No, I think that, like in a couple of years, 0:00:44.880 --> 0:00:47.200 the AI will do a really good job of making 0:00:47.200 --> 0:00:50.560 the odd launch podcast And people say I don't really 0:00:50.560 --> 0:00:52.400 need to listen to Joe and Tracy anymore. 0:00:52.640 --> 0:00:53.599 We do have. 0:00:57.120 --> 0:00:59.279 Until then. This is lots more a. 0:00:59.240 --> 0:01:01.880 Weekly chet about whatever is on our minds. 0:01:01.920 --> 0:01:05.960 And we really do have the perfect guests. 0:01:08.880 --> 0:01:11.200 Do you recall the first time we talked about Argentina? 0:01:12.160 --> 0:01:16.200 Yes, worst position of my life? 0:01:16.240 --> 0:01:19.520 No, not at all, the worst, without a question, the 0:01:19.600 --> 0:01:25.319 worst interview I've done as being interviewed, the biggest bomb 0:01:25.400 --> 0:01:25.960 I've ever had. 0:01:26.040 --> 0:01:27.199 Will you tell me this story. 0:01:27.360 --> 0:01:29.240 Yes, So I was. 0:01:29.200 --> 0:01:31.720 Two thousand and six, probably maybe two thousand and seven, 0:01:31.880 --> 0:01:33.560 two and six, I think it was two thousand and five, 0:01:34.080 --> 0:01:36.080 maybe it's two thousand and five. I was living in 0:01:36.120 --> 0:01:39.000 New York. I was more or less unemployed. I think 0:01:39.000 --> 0:01:41.240 I was doing like, you know, temp work or something 0:01:41.280 --> 0:01:44.720 like that. And I saw an ad online I forget 0:01:44.760 --> 0:01:49.160 where that the Rubini Global Economics was hiring for someone 0:01:49.240 --> 0:01:52.200 going to do economic analysis. And I was like, I 0:01:52.200 --> 0:01:55.480 need a job, and I'm kind of interested in economics. 0:01:55.480 --> 0:01:57.600 I just stopped a job that I had working for 0:01:57.600 --> 0:02:01.160 a small portfolio management company, and so I sent an 0:02:01.200 --> 0:02:03.160 email and I'm like, I think I've studied a little 0:02:03.160 --> 0:02:05.520 economics and maybe I could do this. And I went 0:02:05.560 --> 0:02:07.760 to an office on the Lower West Side. I think 0:02:07.800 --> 0:02:11.600 it was Tribeca. Was that where it was Brad somewhere road? 0:02:12.520 --> 0:02:14.720 Maybe it was the north of Tribeca. 0:02:14.960 --> 0:02:18.040 Okay, it's like there's a warehouse off to the west 0:02:18.120 --> 0:02:18.880 of soho. 0:02:19.280 --> 0:02:22.040 I met with Brad. I was applying for the job 0:02:22.080 --> 0:02:26.200 I met with Brad. I knew actually in advance of 0:02:26.280 --> 0:02:30.640 this interview, that Brad was interested in Argentina specifically, and 0:02:30.680 --> 0:02:32.920 all the problems that it had, and I tried to 0:02:33.040 --> 0:02:36.560 cram the day before to learn something about Argentina, and 0:02:36.840 --> 0:02:39.320 I think the first question Brad asked me something about 0:02:39.360 --> 0:02:42.520 how you know, what would some policy prescription I'd have 0:02:42.639 --> 0:02:44.840 for it? And you know that experience, like if you're 0:02:44.960 --> 0:02:47.400 trying to speak a foreign language that you used to 0:02:47.440 --> 0:02:49.120 know fifteen years ago and you think maybe you know 0:02:49.160 --> 0:02:52.280 it in your mouth opens but nothing comes out. Yeah, 0:02:52.280 --> 0:02:52.640 that was me. 0:02:52.800 --> 0:02:55.600 I also know the experience of like having a bad 0:02:55.680 --> 0:02:58.960 interview in real time and you realize that it's going terribly. 0:02:59.120 --> 0:03:01.160 Oh it's just like the mouth opens and it is 0:03:01.240 --> 0:03:03.760 like no words came out, and I'm like, well, I 0:03:03.800 --> 0:03:06.079 guess I'm going to do something else. Anyway, it worked out. 0:03:06.560 --> 0:03:12.120 We should have hired you on the st blog alone anyway, 0:03:12.440 --> 0:03:13.480 bad business model. 0:03:15.000 --> 0:03:16.520 Anyway, we should have recognized it. 0:03:16.560 --> 0:03:18.760 We should have moved to meet the talent where the 0:03:18.800 --> 0:03:19.800 town is incredible. 0:03:19.800 --> 0:03:22.880 Eighteen years later, here we are, seventeen years later, Here 0:03:22.919 --> 0:03:25.440 we are and people are still talking about Argentina. 0:03:25.960 --> 0:03:30.480 Yeah, well we are here with Brad Setzer, a senior 0:03:30.480 --> 0:03:33.200 fellow at the Council on Foreign Relations. He's been on 0:03:33.240 --> 0:03:34.840 the show multip many times. 0:03:35.000 --> 0:03:36.839 He's got to be c he might be the number 0:03:36.880 --> 0:03:37.240 one now. 0:03:38.320 --> 0:03:38.880 I don't know. 0:03:39.240 --> 0:03:42.960 I'm sure I've been eclipsed. I was out of commission 0:03:42.960 --> 0:03:43.480 for two years. 0:03:43.640 --> 0:03:44.160 That's true. 0:03:44.240 --> 0:03:47.640 When Brad was at a treasury there were a couple 0:03:47.640 --> 0:03:49.120 of years where we didn't get to speak. We didn't 0:03:49.120 --> 0:03:50.480 get a chance to speak to him. But it's been 0:03:50.520 --> 0:03:51.119 a lot now. 0:03:51.960 --> 0:03:55.440 But to your point, Joe, it doesn't. It always feels 0:03:55.440 --> 0:03:58.480 like deja vu with Argentina. Like it's always it's either 0:03:58.600 --> 0:04:02.320 they've just defaulted on ball because someone decided to give 0:04:02.360 --> 0:04:06.040 them money again for reasons I don't understand, or something 0:04:06.240 --> 0:04:09.120 kind of crazy is happening. Like with Argentina, it just 0:04:09.120 --> 0:04:12.560 feels like the craziest outcome is like the one that 0:04:12.760 --> 0:04:13.560 tends to happen. 0:04:13.680 --> 0:04:16.840 And the thing is to Tracy is that all the 0:04:16.920 --> 0:04:20.840 years years later, I actually still have no conceptual understanding 0:04:20.839 --> 0:04:23.920 of what's actually the problem with the Argentine economy. I 0:04:23.920 --> 0:04:27.120 don't understand why. You know, several years ago, I think 0:04:27.120 --> 0:04:33.120 they elected some pretty like normy reasonably centrist neoliberal president 0:04:33.160 --> 0:04:35.040 and it was like, oh, he's going to shake hands 0:04:35.040 --> 0:04:37.320 with Wall Street and here, and it didn't work, and 0:04:37.360 --> 0:04:39.240 you know, and so I don't really understand. I don't 0:04:39.240 --> 0:04:42.720 know what Prohnism is exactly. I'm not sure anyone totally does. 0:04:43.160 --> 0:04:47.200 I don't know why there's this perpetual seeming basket case 0:04:47.200 --> 0:04:50.280 that has rapid inflation after all these years. I would 0:04:50.279 --> 0:04:54.000 bomb another interview if I were being asked any Argentina question. 0:04:54.160 --> 0:04:56.800 And I've gotten good at bsing on other topics, but 0:04:56.920 --> 0:05:00.400 even though I can't even begin to BS on Argentina. 0:05:00.600 --> 0:05:04.360 Brad, what's your summation of the Argentine economy? Like if 0:05:04.839 --> 0:05:07.960 Joe was interviewing you for a job, what would you say. 0:05:08.320 --> 0:05:10.880 Oh, well, I have a thesis. It may be a 0:05:10.920 --> 0:05:13.800 wrong thesis, but it is. It's an economy with a 0:05:13.920 --> 0:05:17.680 very small banking system, so it has difficulty financing fiscal 0:05:17.720 --> 0:05:21.680 deficits domestically. It tends, therefore, to try to borrow a 0:05:21.760 --> 0:05:25.920 lot externally, and it has a relatively small export sector, 0:05:26.080 --> 0:05:29.120 very ag based, with a lot of volatile export revenues, 0:05:29.760 --> 0:05:33.200 and it tends to overborrow relative to his export capacity. 0:05:33.800 --> 0:05:36.200 And when you can't borrow externally, it tends to print money. 0:05:36.800 --> 0:05:40.799 So you get this combination of default inflation and periods 0:05:40.800 --> 0:05:41.920 of stability. 0:05:41.760 --> 0:05:44.200 And all of that definitely makes sense, so when you 0:05:44.360 --> 0:05:46.359 spell it out like that, but it also seems like 0:05:46.440 --> 0:05:48.880 doesn't it apply to a bunch of country like, you know, 0:05:49.240 --> 0:05:54.839 not a very depthful domestic financial system. Commodity exporters so 0:05:54.960 --> 0:05:57.680 obviously exposed to very volatile like aren't a lot of 0:05:57.680 --> 0:06:00.200 countries in this predicament, And why is it seen like 0:06:00.320 --> 0:06:05.520 Argentina specifically. People think it theoretically can get out of it, 0:06:05.560 --> 0:06:07.640 but it just can't. It seems to just keep tripping 0:06:07.640 --> 0:06:08.239 over itself. 0:06:09.120 --> 0:06:12.919 Well, I think actually, compared to most other commodity exporters, 0:06:12.960 --> 0:06:16.279 like commodity exports is a share of GDP aren't all 0:06:16.320 --> 0:06:19.920 that high. It's just there's very few manufactured exports, so 0:06:19.960 --> 0:06:25.599 it's a relatively low level of commodity exports relative to 0:06:26.320 --> 0:06:28.880 the size of the economy. And I think people tend 0:06:28.880 --> 0:06:32.520 to think that because it's a relatively big economy, it 0:06:32.560 --> 0:06:37.000 can support more debt. Man it can given these constraints. 0:06:37.360 --> 0:06:39.919 So that's kind of my my thesis. But you know, 0:06:39.960 --> 0:06:43.640 there are there are countries around it that are have 0:06:43.680 --> 0:06:46.760 commodity dependent economies. They are more mining, less. 0:06:46.600 --> 0:06:53.520 Ag but a much bigger export base and less debt, 0:06:53.640 --> 0:06:56.520 and they've built up over time monetary policy credibility in 0:06:56.560 --> 0:06:59.760 a way that you know, boringly, and Argentina has not 0:07:00.160 --> 0:07:00.680 very clearly. 0:07:00.880 --> 0:07:05.040 Okay, so this feeds into my big question here, why 0:07:05.040 --> 0:07:07.839 do people keep giving Argentina money? Because this is like 0:07:08.160 --> 0:07:10.600 a joke in the market. And I think I tweeted 0:07:10.600 --> 0:07:14.120 this once but the distracted boyfriend meme, you know, turning 0:07:14.120 --> 0:07:19.120 away from defaulted Argentina bonds and looking at more Argentina bonds. 0:07:19.440 --> 0:07:21.800 And also I didn't realize this, but Argentina is the 0:07:21.800 --> 0:07:23.680 IMF's biggest creditor. 0:07:23.280 --> 0:07:27.040 Now, which well they owe more to the orry. Let 0:07:27.040 --> 0:07:30.080 me restay that they were the biggest creditor, will be 0:07:30.120 --> 0:07:32.320 in a very different situation. 0:07:31.960 --> 0:07:34.880 The biggest debtor. But you know what they say about debtors, 0:07:34.960 --> 0:07:37.000 if you're big enough, you kind of enough. 0:07:37.080 --> 0:07:39.000 I guess they're plenty big enough. 0:07:39.200 --> 0:07:41.400 Okay, So why do they keep getting money? 0:07:42.400 --> 0:07:46.320 Well, actually, Argentina didn't get money for a long time 0:07:46.400 --> 0:07:50.640 after their two thousand and one two thousand and two default. 0:07:50.760 --> 0:07:53.400 They didn't eventually do a restructuring. It took a while, 0:07:53.960 --> 0:07:55.920 and then after they did the restructuring, there are a 0:07:55.960 --> 0:08:00.360 lot of holdouts and they really didn't regain market acts 0:08:00.400 --> 0:08:03.640 for a long period. And then you know, Joe's right, 0:08:03.720 --> 0:08:08.200 I mean a centrist relatively a center right really maybe 0:08:08.360 --> 0:08:12.360 more right than center right. President was elected President Machli. 0:08:12.760 --> 0:08:15.000 He brought in a bunch of Wall Street bankers to 0:08:15.080 --> 0:08:18.080 run his economic team, and they had a clear theory 0:08:18.080 --> 0:08:21.000 of the case that Argentina had under borrowed. They would 0:08:21.040 --> 0:08:24.000 settle with the holdouts. They would go out and raise 0:08:24.560 --> 0:08:27.880 a certain amount of bonds that would cover fiscal deficits 0:08:27.920 --> 0:08:31.800 associated with tax cuts, like a very conventional center right 0:08:31.880 --> 0:08:36.560 to write agenda finance with external foreign currency borrowing. And 0:08:36.559 --> 0:08:38.120 they went out and they did a lot of that. 0:08:38.960 --> 0:08:41.920 But apart from that one borrowing spree, which was big, 0:08:42.040 --> 0:08:45.280 like forty fifty billion and maybe more in two years, 0:08:45.960 --> 0:08:50.400 Argentina really hasn't had access to external bond markets. But then, 0:08:50.440 --> 0:08:54.760 you know, the IMF saw a group of non parentist 0:08:54.880 --> 0:08:59.920 reformers struggling and it gave them a structure reform. They were, 0:09:00.120 --> 0:09:02.600 you know, they are going to backing certain structural reforms. 0:09:02.840 --> 0:09:06.520 Mackri was friends with Donald J. Trump and they came 0:09:06.520 --> 0:09:10.040 from real estate development families. He got a big IMF loan. 0:09:10.200 --> 0:09:13.000 But then the current government, they the previous government had 0:09:13.000 --> 0:09:15.120 borrowed so much from the IMF, they've not had access 0:09:15.160 --> 0:09:17.840 to new money. They clearly don't have access to the 0:09:17.840 --> 0:09:20.720 bond market. Their bonds have been trading in you know, 0:09:20.760 --> 0:09:23.280 between twenty and forty cents on the dollar ever since 0:09:23.320 --> 0:09:24.599 the twenty twenty restructuring. 0:09:24.720 --> 0:09:28.559 So obviously we want to talk about the theoretical economic 0:09:28.600 --> 0:09:32.559 agenda of the president elect, and is talk about dollarization 0:09:32.920 --> 0:09:34.680 just real quickly before we sort of get to the 0:09:34.720 --> 0:09:38.160 present moment. What failed about the Mockery plan? Like when 0:09:38.200 --> 0:09:40.480 he you know, as you say, it sounded sort of 0:09:40.520 --> 0:09:44.920 normal on paper and standard maybe you know, conservative government 0:09:45.000 --> 0:09:48.280 staffed with Wall Street friendly tych Why didn't that put 0:09:48.320 --> 0:09:49.360 the country on a new path. 0:09:50.320 --> 0:09:52.520 I think he just borrowed too much. 0:09:52.360 --> 0:09:55.920 In a conservative version of the same old problem. 0:09:56.000 --> 0:09:57.720 I mean, I think if you were going to fund 0:09:57.960 --> 0:10:00.559 a big tax cut, his thesis was, as you would, 0:10:00.760 --> 0:10:03.800 you know, provide the sugar before you do the tough 0:10:03.800 --> 0:10:06.360 structural re form. The sugar was a round of tax cuts, 0:10:06.400 --> 0:10:09.880 and they were going to slowly phase in spending, protecting 0:10:10.360 --> 0:10:13.760 social spending. So the first effect was a bigger deficit, 0:10:14.040 --> 0:10:18.520 fully financed by external foreign currency borrowing and the market 0:10:18.640 --> 0:10:23.160 and I guess the Mocker government overestimated their capacity to 0:10:23.200 --> 0:10:27.200 sustain a higher level of external debt and sort of 0:10:27.200 --> 0:10:30.240 things went downhill. I there was, you know, the standard 0:10:30.280 --> 0:10:33.880 cyclical fluctuations which made it hard to bring the fiscal 0:10:33.880 --> 0:10:37.400 deficit back down, and they were reluctant to do brutal 0:10:37.440 --> 0:10:39.960 cuts because they thought they would lose the election. And 0:10:40.000 --> 0:10:42.520 if they lost the election, we'd be back in paranism. 0:10:42.559 --> 0:10:45.080 We would surely have a default. But it ended up 0:10:45.240 --> 0:10:48.600 adding clearly like one hundred billion to Argentina's external debt 0:10:48.920 --> 0:10:49.720 in a four years. 0:10:49.800 --> 0:10:51.880 I shouldn't laugh, but it's something grim, opit. 0:10:52.000 --> 0:10:52.360 I mean it was. 0:10:52.520 --> 0:10:56.200 It was a stunning spree of external borrowing. And you know, 0:10:56.240 --> 0:10:59.040 they didn't want to let the currency weaken too much 0:10:59.600 --> 0:11:03.000 because were worried about inflation. So the current account was 0:11:03.040 --> 0:11:07.439 not helping them, and so you know, I think they 0:11:07.520 --> 0:11:10.559 just borrowed too much. To be honest, you can fund 0:11:10.600 --> 0:11:13.480 tax cuts if you can fund them domestically, but funding 0:11:13.520 --> 0:11:19.040 them with external dollars when you're a dollar constrained economies risky. 0:11:32.240 --> 0:11:34.800 We're recording this on November twenty ninth, and I feel 0:11:34.840 --> 0:11:37.520 like I have to caveat the conversation with the exact date, 0:11:37.600 --> 0:11:41.800 because things move fast in Argentina. And in fact, I'm 0:11:41.880 --> 0:11:44.800 looking on the Bloomberg terminal now and it looks like 0:11:44.960 --> 0:11:48.840 the new president, Javier Millay, has just picked his economies 0:11:48.880 --> 0:11:52.920 are and it's someone who I think wasn't the front 0:11:53.000 --> 0:11:56.920 runner like a week or two ago. Anyway, we wanted 0:11:56.960 --> 0:12:02.960 to talk to Brad about dollarization, and I don't know 0:12:03.200 --> 0:12:06.480 much about this process. I am very willing to admit, 0:12:06.840 --> 0:12:10.360 you know, I think it's happened in like Panama and Ecuador. 0:12:10.720 --> 0:12:13.400 But can you talk generally to begin with, like what 0:12:13.679 --> 0:12:15.600 does dollarization actually mean? 0:12:16.320 --> 0:12:19.439 I think you can think of dollarization as two things. 0:12:19.960 --> 0:12:24.360 One is just a buyback of your own currency. People 0:12:24.440 --> 0:12:27.760 have currency in circulation bills. You buy them back and 0:12:27.800 --> 0:12:31.960 you give them dollars. Euroisation in the Euro area becomes 0:12:32.000 --> 0:12:36.520 the legal currency that settles all transactions. If the dollar 0:12:36.600 --> 0:12:40.679 is the legal currency settling all transactions, then debts that 0:12:40.720 --> 0:12:44.040 were previously in your local currency also have to be 0:12:44.080 --> 0:12:47.480 redenominated in two dollars. So the second component is a 0:12:47.520 --> 0:12:52.120 redenomination of debt in two dollars. And so you combine 0:12:52.160 --> 0:12:56.440 those two things. Dollars have replaced currency in circulation, dollars 0:12:56.480 --> 0:12:58.880 are legal tender, and your debts are in dollars. 0:12:59.440 --> 0:12:59.960 You dollars. 0:13:00.640 --> 0:13:02.600 What's the problem that you're actually trying to solve. 0:13:03.200 --> 0:13:05.760 Usually you're trying to solve a problem of inflation that 0:13:05.800 --> 0:13:09.280 you're trying you basically need to tie your hands. It's 0:13:09.320 --> 0:13:13.400 like Odysses going through the straits with the sirens, you know, 0:13:13.600 --> 0:13:17.440 lashing himself to the mass and will not be tempted 0:13:17.480 --> 0:13:20.040 to print money. You have no capacity to print money. 0:13:20.520 --> 0:13:22.160 So if you want to spend money, you got to 0:13:22.240 --> 0:13:24.760 raise money. You know, you're you have to raise hard 0:13:24.800 --> 0:13:26.600 dollars to fund domestic spending. 0:13:26.760 --> 0:13:30.200 It sounds like you need money to do this as well, though, 0:13:30.320 --> 0:13:34.439 like the idea of your you know, replacing your existing currency. 0:13:34.480 --> 0:13:36.960 So I guess in this case the Argentine peso with 0:13:37.800 --> 0:13:40.600 the dollar, like you would need dollars in order to 0:13:40.640 --> 0:13:41.520 do that. 0:13:41.520 --> 0:13:46.840 That is a very important insight chasing, thank you. That 0:13:47.000 --> 0:13:49.920 is one of the problems that Argentina faces. They're trying 0:13:49.960 --> 0:13:52.160 to dollarize and the central bank is out of dollars, 0:13:52.240 --> 0:13:56.400 which is is an interesting theoretical problem. 0:13:56.440 --> 0:14:00.160 So this new incoming president, Tamil he said he he 0:14:00.240 --> 0:14:02.520 wants to dollar rise. He's also talked about getting rid 0:14:02.520 --> 0:14:04.640 of the Central Bank. Of course, we don't know what 0:14:04.640 --> 0:14:06.480 he's going to do, and it's possible that he sort 0:14:06.480 --> 0:14:09.359 of ends up governing the country as a sort of standard. 0:14:09.520 --> 0:14:12.400 Well, he's kind of going back and conservative. 0:14:11.960 --> 0:14:15.080 You know, center right Latin American president. As you know, 0:14:15.160 --> 0:14:17.600 often countries go back and forth between left and right. 0:14:17.840 --> 0:14:20.720 Like I get that impulse actually, which is that you know, 0:14:20.760 --> 0:14:24.240 if your country has a pattern of just printing too 0:14:24.320 --> 0:14:27.360 much money historically, then you solve the problem by essentially 0:14:27.640 --> 0:14:30.840 throwing away the printing price. There's literally no way Argentina 0:14:30.880 --> 0:14:34.680 can print dollars dollars for pretty stable. Is there a 0:14:34.720 --> 0:14:37.040 path to doing that given the lack of dollars? 0:14:38.520 --> 0:14:43.160 Not unless a generous benefactor we're willing to lend Argentina 0:14:43.240 --> 0:14:44.080 a bunch of dollars. 0:14:44.240 --> 0:14:45.280 Is it the IMF again? 0:14:45.440 --> 0:14:49.240 Sorry, well, I don't think the IMF is actually willing 0:14:49.280 --> 0:14:52.160 to provide the dollars. I mean, I think the IMF 0:14:52.240 --> 0:14:55.000 believes that it needs to finally get a little money back. 0:14:55.360 --> 0:14:57.520 But you know, conceptually, it could be the IMF, it 0:14:57.560 --> 0:15:00.720 could be the United States, it could be the private 0:15:00.840 --> 0:15:03.640 Argentines who have a lot of dollars offshore who band 0:15:03.760 --> 0:15:07.040 together and provide a generous loan. But Argentina doesn't actually 0:15:07.080 --> 0:15:10.080 have the capacity to pay very much interest on the 0:15:10.160 --> 0:15:12.240 dollars at borrows, given how much is paying on this 0:15:12.360 --> 0:15:17.320 existing dollar debt. So there are some real challenges coming 0:15:17.400 --> 0:15:20.280 up with the dollars, which is probably why Malay is 0:15:20.320 --> 0:15:23.480 at least you know, the last I had read he's 0:15:23.600 --> 0:15:26.640 said the dollarization is a goal, is you know, he said, 0:15:26.840 --> 0:15:29.680 it's something that doesn't need to be accomplished on day one. 0:15:30.520 --> 0:15:33.160 They're not going to, in the first instance, shut down 0:15:33.200 --> 0:15:37.120 the central bank, and their first move, supposedly last I saw, 0:15:37.600 --> 0:15:39.360 was going to be, as you know, Joe suggested a 0:15:39.440 --> 0:15:45.800 sort of standard but harsh fiscal consolidation budget tightening, which 0:15:45.880 --> 0:15:48.280 is also just a reflection of reality. At this point 0:15:48.480 --> 0:15:52.400 Argentina is it cannot finance its fiscal deficits right now. 0:15:52.720 --> 0:15:56.760 Bret. You know you mentioned earlier the Argentina economy is 0:15:56.800 --> 0:16:01.320 sort of characterized by a small banking system. Would dollarization 0:16:01.840 --> 0:16:05.600 help with expanding the financial system in the sense that 0:16:05.760 --> 0:16:10.960 like maybe you're encouraging more faith in the money and 0:16:11.000 --> 0:16:14.360 that would translate into more willingness to actually put money 0:16:14.640 --> 0:16:17.080 into bank deposits, and then banks would be able to 0:16:17.160 --> 0:16:17.600 lend more. 0:16:18.480 --> 0:16:23.040 So there are two I think offsetting effects. One is, 0:16:23.080 --> 0:16:26.000 at least in theory, there are a lot of dollars 0:16:26.040 --> 0:16:28.880 in circulation in Argentina, a lot of dollars locked up 0:16:28.880 --> 0:16:32.560 in safe deposit box. The black market, well it's black market, 0:16:32.720 --> 0:16:36.840 plus you know some wealthy Argentines just rather than trusting 0:16:36.840 --> 0:16:39.680 the banking system. You know, have a certain number of 0:16:39.720 --> 0:16:42.120 dollars in Miami and a certain number of dollars under 0:16:42.120 --> 0:16:45.800 the mattress. So there are dollars in circulation, the black market, 0:16:45.880 --> 0:16:48.720 there are dollars under the mattress, and then there are 0:16:48.880 --> 0:16:54.560 offshore dollars in the offshore banking system. Conceptually, some of 0:16:54.600 --> 0:16:58.160 those dollars could migrate into the domestic banking system, which 0:16:58.200 --> 0:17:01.720 would expand the deposit base, allow the banks to lend more. 0:17:01.760 --> 0:17:04.440 They have to lend more in dollars, and they could 0:17:04.680 --> 0:17:09.000 conceivably provide more dollar financing to the government. So that's 0:17:09.080 --> 0:17:14.600 kind of EFFECTA effect B is that you really don't 0:17:14.600 --> 0:17:18.399 have a lender of last resort, so you know, banks 0:17:18.440 --> 0:17:21.840 are in the business of maturity transformation, particularly if you 0:17:21.880 --> 0:17:25.240 don't have a printing press if you don't have your 0:17:25.280 --> 0:17:30.639 own central bank. So if depositors ever want their deposits back, 0:17:31.040 --> 0:17:33.760 you have to provide them with dollars cash. 0:17:34.320 --> 0:17:36.560 So either you get those. 0:17:36.400 --> 0:17:39.320 Dollars from your central bank again the central bank doesn't 0:17:39.359 --> 0:17:43.520 have dollars, or you have to hold as assets a 0:17:43.520 --> 0:17:49.240 lot of offshore dollars. So it tends to have offsetting effects. 0:17:50.320 --> 0:17:53.080 If it worked, it could bring money into the banking system. 0:17:53.400 --> 0:17:55.960 If it doesn't work, you will have converted a bunch 0:17:55.960 --> 0:17:58.840 of peso deposits into dollars. People will show up and 0:17:58.840 --> 0:18:01.399 ask for their dollars back, and the banks will be 0:18:01.480 --> 0:18:04.679 unable to honor those dollar promises, and you'll end up 0:18:04.720 --> 0:18:06.560 with a frozen banking system. 0:18:07.240 --> 0:18:12.360 Are there other ways besides dollarization, in which I mean 0:18:12.400 --> 0:18:15.600 because you're trying to solve an institutional problem, and you know, 0:18:16.040 --> 0:18:18.840 I love the analogy of tying yourself to the mast, 0:18:18.920 --> 0:18:21.320 and so you don't have the temptation to do an 0:18:21.880 --> 0:18:25.639 Are there other examples, either historically or around the world 0:18:25.680 --> 0:18:30.800 where countries solve the institutional problem of essentially self constraint 0:18:31.320 --> 0:18:34.439 other than sort of dollarization, which seems kind off the 0:18:34.480 --> 0:18:35.960 table without the. 0:18:35.920 --> 0:18:39.400 Dollars, so you can do various forms of pegs which 0:18:39.400 --> 0:18:40.479 are just sort of softer. 0:18:40.760 --> 0:18:41.840 Yeah, but you know, but. 0:18:41.840 --> 0:18:42.800 You can always break a peg. 0:18:42.960 --> 0:18:44.760 You can always break a peg. You can do various 0:18:44.800 --> 0:18:44.960 you know. 0:18:45.080 --> 0:18:46.680 But again, you can always undollarized too. 0:18:47.200 --> 0:18:49.919 It's hard to it's harder to undollarize, but you know, 0:18:50.000 --> 0:18:54.080 it's conceptually, I mean, remember Argentina got off a currency board, right, 0:18:54.119 --> 0:18:55.240 which was supposed to be the. 0:18:55.320 --> 0:18:57.120 Is a board in a peg basically the same thing 0:18:57.440 --> 0:18:58.920 a board as you fully. 0:18:58.600 --> 0:19:00.640 Back all currency and circus relation with. 0:19:00.640 --> 0:19:02.840 Dollars or whatever your peg do. 0:19:03.000 --> 0:19:05.600 So you anyone who has a peso could get a 0:19:05.640 --> 0:19:08.959 dollar and those dollars are available at the central bank. Now, 0:19:09.000 --> 0:19:10.800 it doesn't solve the problem of a lender of last 0:19:10.800 --> 0:19:13.800 resort to the government or to the banking system, but 0:19:13.880 --> 0:19:16.960 it means like every peso is backed by a dollar 0:19:16.960 --> 0:19:20.560 at the central bank. So it is more constraining that respect. 0:19:21.119 --> 0:19:23.879 You know, a peg is a function of credibility, and 0:19:23.920 --> 0:19:27.000 if you're really, really really committed to the peg, and 0:19:27.119 --> 0:19:31.520 if you have a really tight budget, you could conceivably 0:19:31.560 --> 0:19:35.119 make it work. But it's basically ultimately it hinges on 0:19:35.720 --> 0:19:36.840 fiscal discipline. 0:19:36.880 --> 0:19:38.679 I mean, it kind of goes back to being boring. 0:19:39.400 --> 0:19:41.840 Tracy, I'm just looking on the terminal. You know, you 0:19:41.960 --> 0:19:45.480 mentioned the new finance minister. Huh the title our colleague 0:19:45.480 --> 0:19:49.280 Sebastian Boyd who wrote it one of a great colleagues, Milaipics, 0:19:49.440 --> 0:19:53.080 architect of Argentine borrowing boom to run economy. And then 0:19:53.320 --> 0:19:55.879 if one of the capudo was the financial minister for 0:19:56.000 --> 0:19:59.280 Mauricio Mockery and ran the negotiations with bondholders that paved 0:19:59.280 --> 0:20:02.400 the way for a return earn international markets in twenty sixteen. 0:20:02.520 --> 0:20:05.440 So this just proves my point that like the craziest 0:20:05.440 --> 0:20:08.600 outcome is always like what's going to happen with Argentina. 0:20:09.040 --> 0:20:14.040 What's the scorecard for dollarization in places where it's actually happened. 0:20:14.080 --> 0:20:17.399 So I mentioned Ecuador and Panama, and I see like 0:20:18.119 --> 0:20:21.719 different interpretations of the success of those programs. So some 0:20:21.760 --> 0:20:25.399 people look at Ecuador and say, well, Ecuador growth is 0:20:25.440 --> 0:20:29.920 still relatively sluggish, whereas Panama has boomed. But with Panama, 0:20:30.359 --> 0:20:33.439 it's hard to kind of disentangle the factor of the 0:20:33.440 --> 0:20:36.919 Panama Canal and having like an offshore financial center and 0:20:36.960 --> 0:20:40.080 things like that. So how would you evaluate the success 0:20:40.119 --> 0:20:42.440 of previous dollarization programs? 0:20:43.240 --> 0:20:46.800 So yeah, I've spent more time thinking about Ecuador than Panama. 0:20:46.880 --> 0:20:50.280 I would tend to think that Panama's success is a 0:20:50.359 --> 0:20:52.520 function probably less of the canal and more of being 0:20:52.520 --> 0:20:56.240 an offshore financial center and the Panama papers, and a 0:20:56.280 --> 0:21:01.119 set of less savory aspects of contemporary globalization, which are 0:21:01.160 --> 0:21:04.600 probably they are facilitated by doing business and dollars. I mean, 0:21:04.720 --> 0:21:08.199 presumably some Argentines have their offshore dollars in banks and 0:21:08.240 --> 0:21:13.959 Panama with Ecuador. Look, Ecuador has stuck by dollarization, so 0:21:14.000 --> 0:21:17.480 in that narrow sense it has worked. The banking system 0:21:17.680 --> 0:21:21.480 has not imploded, there have not been runs, Ecuador has 0:21:21.520 --> 0:21:26.760 not grown especially rapidly compared to its Andean peers that 0:21:26.840 --> 0:21:30.560 have not dollarized. You know, Colombia, Peru, Chile have generally 0:21:30.640 --> 0:21:34.520 outperformed Ecuador and Ecuador rather clearly, and this is I 0:21:34.520 --> 0:21:37.840 think an important principle. You know, dollarization doesn't end the 0:21:37.920 --> 0:21:41.480 risk of default, and when oil prices go down, Ecuador 0:21:41.560 --> 0:21:45.639