Bessent Is Paying for Milei to Repeat Argentina’s Mistakes

A customer pays for food with Argentine peso banknotes in Buenos Aires. Inflation slowed to 31% last month, down from more than 200% a year prior. (Tomas Cuesta/Bloomberg)

About the author: Desmond Lachman is a senior fellow at the American Enterprise Institute. He was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

Stanley Fischer, the late MIT economist and distinguished central banker, was fond of saying that where one stood on an issue depended very much on where one sat. This would certainly seem to be true of Treasury Secretary Scott Bessent on exchange rate policy.

In 1992, when he was a managing partner with George Soros’ firm, Bessent saw merit in shorting an overvalued British pound. In the end, that bet broke the Bank of England and earned Soros some $1 billion. As treasury secretary, Bessent now sees merit in helping out an overvalued foreign currency. Bessent wants to prop up the inflated Argentine peso to support Argentine President Javier Milei, someone who shares the Trump administration’s economic policy approach, in the run up to the Oct. 26 Argentine legislative elections.

Argentina is no stranger to failed attempts to defend overvalued exchange rates over the past few decades. Those failed attempts have made Argentina the International Monetary Fund’s largest debtor, with more than $41 billion currently owed to the IMF. Unfortunately for both the U.S. taxpayer and for Argentina, Bessent’s proposed attempt to prop up the Argentine peso with a $20 billion swap line is all too likely to add to the list of failed Argentine exchange rate experiments. This time, the U.S. taxpayer will be on the hook, and Argentina will be more indebted, with very little to show for it.

There can be no gainsaying Milei’s economic achievements since he took office in December 2023. Through wielding his famous chainsaw, he has succeeded in streamlining the country’s bloated government bureaucracy and producing the country’s first budget surplus in over a decade. He has also succeeded in bringing annual inflation down from nearly 300% when he took office to its present level of around 30%. At the same time, he made great strides in deregulating the economy and liberalizing trade.

Milei’s economic approach, however, repeats the mistake that many of his predecessors have made: excessively relying on an overvalued exchange rate to help reduce inflation. Instead of allowing the exchange rate to float freely to maintain Argentina’s international competitiveness, he has confined it to a band of 1000-1475 pesos to the dollar. He has also limited the adjustment of that band to a rate of 1% a month, or about one-third the current pace of inflation.

The trouble is that inflation, as noted, has far outpaced the movement in the currency. According to many analysts, that has led to an overvaluation of the Argentine peso by anywhere between 20-30%. In turn, that has given rise to strong speculative pressure against the currency band and led to a steady depletion in the Central Bank of Argentina’s international reserve holding as it tries to keep the exchange rate in the prescribed band. It has also led to a large loss in international competitiveness for Argentina’s beleaguered manufacturing companies and thereby contributed to a rise in unemployment.

Milei’s attempt to radically reform the Argentine economy certainly warrants U.S. economic support. If Mieli were to succeed in truly reforming the Argentine economy by ending its public spending addiction, he would put an end to the country’s sad history of decades of relative economic decline.

However, Bessent would be doing Argentina no favor by writing it a blank check to support an overvalued exchange rate. All that would do is finance the sort of capital flight that has occurred time and time again when the Argentine peso has become overvalued and when inflation hasn’t been brought fully under control.

If the U.S. really wants to help Argentina, it should make its loans conditional on Argentina following a more competitive exchange rate policy that would be supported by deep economic reforms and appropriately restrictive monetary and fiscal policies.

It isn’t clear Bessent intends to impose such conditions. He said this week that aid is predicated on “robust policies.” But Bessent also professed to be “very happy with the current currency arrangement.”

If the forthcoming Argentine legislative elections don’t give Milei the needed political support for such an economic program, Bessent would be doing both Argentina and his future reputation a favor by walking back his proposed $20 billion lifeline for the Argentine peso.

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