re: Dollar or Peso for DR Currency

kingofdice

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re: Dollar or Peso for DR Currency

Of course, not translating peso prices into U.S. currency would be great for a gringo, but what effect do any of our bright DR1ers think dollarization of the Dominican economy would have on the populace or businesses.
 

ERICKXSON

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DR IS REPLACING THE PESO NOT RUNNING 1 TO 1 AGAINST THE DOLLARD. I THINK AFTER THE FIRST 3 MONTHS IT WILL BE SUPER NOT TO GOOD FOR OUR BELOVED CANADIAN FRIENDS THAT LOVE THE DR.
 

Escott

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kingofdice said:
Of course, not translating peso prices into U.S. currency would be great for a gringo, but what effect do any of our bright DR1ers think dollarization of the Dominican economy would have on the populace or businesses.

Short and long term for business would be very good. Stable currency wouldnt be as tough to plan. Also dollar interest would be less. 30-60% interest rates have to be impossible!

Short term for the people would be terrible. The government hasn't the reserves to make it work without a major confiscation of monies ala both Argentina and Ecuador. The government cant print the US dollars like they do the Peso so they will need a MAJOR bailout. The Government will resist dollarization at all costs. They don't want to pay the piper!


Just my opinion of course. I am not a economist but just a student.
 

ERICKXSON

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i think is going to be a really good idea Scott, i know freaking HIPPO will oppsed to it since he just want to suck every single penny out of the DR in to his pockets.
 

Criss Colon

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First of all,it is NOT going to happen!

Now,"speculating" that it did happen,the Dominican inflation rate woud be about 30 % per year to start,and then spiral out of site!So basically,it would just make the "math" easier!CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC
 

mondongo

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Dollarizing or pegging the a country's currency to the dollar does not work. It did not work in Argentina and it is not working in Ecuador (it takes several years for the effect to take hold).

Lets say for example that we DID dollarize the Dr economy. These are the steps that the government needs to take:

1) Acquire roughly US$1billion to put in circulation. This lead to the question: where is that money coming from? The answer is: loans.

2) In order to grow the DR economy, the US$ supply in the DR has to grow. Where is this growth in US$ coming from? If Argentina and Ecuador are any indication, it will come from more loans. You can aslo sell out the national utilities....but the DR has already done that.

3) As with the DR now, many of these loans come with the proviso that a large part of the money be used to purchase goods from the lender.

4) In order to finance these loans and to finance GDP growth in the DR, the DR trade balance would have to be positive. What this means is that the DR export more than it imports. This has the implication that the DR be just as efficient as the USA and other exporting countries.

The bottom line is that when you dollarize, you invariably take out loans with the hope that your economy will outperform that of the USA. These excessive loans push up interest rates significantly and this leads to a poor local economy. A poor local economy cannot pay its loans.....and thus you have a downward spiral.....it aint good....Ecuador is in the process of going down now.

Thes people that are advocating dollarization are doing it for political pruposes only. I cannot believe that grown men and women with advanced Economics degrees would make such an irrelevant suggestion.

http://www.latin-focus.com/countries/argentina/argtrade.htm

This is a great link for looking at economic graphs of Latin American countries. You will clearly see what happened in Argentina and what is starting to happen in Ecuador.
 

ERICKXSON

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Mondongo enlight me alittle bit i'm not to good in this type of issues, what is the difference between Panama, Ecuador and Argentina?.


what i really think is that the Dominican Business Sectore needs to be re-educated and need to re-gain trust in the country my friend works at a bank in downtown miami
(MELLON UNITED NATIONAL BANK) (a Business oriented Bank) and there are over 500 million dollards deposited in accounts at this particular bank from a couple of DR Companies, if that money would of beign in the DR would helped the economy a lot just by being there.

am i wright or wrong?
 

Escott

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mondongo said:
Dollarizing or pegging the a country's currency to the dollar does not work. It did not work in Argentina and it is not working in Ecuador (it takes several years for the effect to take hold).

Lets say for example that we DID dollarize the Dr economy. These are the steps that the government needs to take:

1) Acquire roughly US$1billion to put in circulation. This lead to the question: where is that money coming from? The answer is: loans.

2) In order to grow the DR economy, the US$ supply in the DR has to grow. Where is this growth in US$ coming from? If Argentina and Ecuador are any indication, it will come from more loans. You can aslo sell out the national utilities....but the DR has already done that.

3) As with the DR now, many of these loans come with the proviso that a large part of the money be used to purchase goods from the lender.

4) In order to finance these loans and to finance GDP growth in the DR, the DR trade balance would have to be positive. What this means is that the DR export more than it imports. This has the implication that the DR be just as efficient as the USA and other exporting countries.

The bottom line is that when you dollarize, you invariably take out loans with the hope that your economy will outperform that of the USA. These excessive loans push up interest rates significantly and this leads to a poor local economy. A poor local economy cannot pay its loans.....and thus you have a downward spiral.....it aint good....Ecuador is in the process of going down now.

Thes people that are advocating dollarization are doing it for political pruposes only. I cannot believe that grown men and women with advanced Economics degrees would make such an irrelevant suggestion.

http://www.latin-focus.com/countries/argentina/argtrade.htm

This is a great link for looking at economic graphs of Latin American countries. You will clearly see what happened in Argentina and what is starting to happen in Ecuador.

Well I don't agree with you at all. Ecuador since it switched to the dollar has had a much more robust economy and a better standard of living for its people. Where you come up with it is NOT working is beyond me.

Before they switched their Peso went from 12 to 1 to 500 to 1. Then they took all the dollars in the banks and switched them into their rediculas Pesos that couldnt buy shit even if you had a freakin wheelbarrow to carry the crap around in. People lost 60% of their dollar deposits in the banks when the government confiscated them overnight when they had to pay their bills for heavens sake.

You have to compare it to what it was and not think that the dollarization will make a 15th world country into a 1st world country in a short period of time.
 

kingofdice

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I might take some flak for this reply, but I think the Dominican companies Erickxson referred to as having 500 million U.S. Dollars in a Miami Bank have probably got their wits behind them. That's more than 12 billion $RD pesos. Not that DR banks are unstable, but if it were your money, would you really want a 1/2 billion U.S. Dollars sitting in a 3rd world country. No way. I would not even trust CitiBank.

Regarding your initial comment, I really don't agree that Dominican businesses are the root of the economic problem. It's a PRD government that never learned basic math in school. You can't constantly borrow money and take out loans, without some assemblance of being able to pay those loans back. The foreign exchanges and populace lose confidence in the peso currency and demand dollars. And you can't just print more currency or you end up with situation of hyper inflation like Germany experienced in World War I where 10,000,000 deustch marks buys a loaf of bread. It might be painful initially, but I agree with Jazzcomm that it would be better for the Dominican government to go dollarization.
 
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mondongo

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The exchange rate in Ecuador went form 5000:1 in 1998 to 25,000:1 in late 1999. Inflation was also massive. Corruption there made Mejia look like Mother Theresa. Ecuador banks failed left and right. They were just simply toast. Total collapse. The dollarization, along with (I believe..not real sure) the forgiving or re-structuring of lots of debt and the implementation of measures to increase effciency and competitiveness and limit corruption....did instill a well needed discipline in the Ecuadorian politicians.

But nice behaviour only lasts for a short while. They revert to normal naughty behaviour of overspending. What is happening now is that the effective exchange rate is rising. The economic parameters of the Ecuadorian economy are not what they should be given that they dollarized 3 years ago.

Here is an exeprt from a recent article from the IMF. Note that the IMF usually likes to sugar coat the situations of the countries that they lend money to:


IMF:

"While the economy had begun to recover following dollarization, Directors expressed concern that performance had not been sustained in 2002. Rapid public sector wage increases had undermined the fiscal position and contributed to excessive inflation for a dollarized economy, and to a further appreciation of the real effective exchange rate. Moreover, structural reforms had been suspended in key sectors, further jeopardizing competitiveness. Directors regretted the build up of large payments arrears to domestic and external creditors. Directors also expressed concern about institutional weaknesses that give rise to poor governance and corruption.

Under these circumstances, Directors considered that Ecuador faces major economic challenges"
 

mondongo

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Lets take for example the inflation rate. Its 9.4%% now in Ecuador, 2.5% (or so) in the USA. This is not a sustainable condition. In theory, the inflation rates should be the same. In order to have inflation, you need too much money chasing too few goods. Since Ecuador cannot print US$, then the logical conclusion (as it is happening now) is that the amount of goods (GDP) has to either go down or deccelarate. This is exactly what we are seeing now.

The new populist govt has promised to curtail corruption and improve productivity. Lets hope they succeed.
 

mondongo

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ERICKXSON, Argentina and Ecuador pegged their currencies to the US$ for the same reason. They had just endured many years of terrible economic conditions, mainly due to hyperinflation. Argentina, for example, had a 5,000% inflation rate just before it pegged its currency to the US$.

This hyperinflation was the result of many years of spending money on un-productive matters. Basically, it was the result of politicians unable to turn off the money spigot. In Argentina, this process toook decades to come to a boiling point.

This is why I'm concerned with the non-stop borrowing of Mejia. If this money were put to productive uses....then fine....but its not...and the long term consequences are clear and dangerous.


PS Sorry for all these long diatribes.
 

mondongo

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Dollarization:
1) most countries with full dollarization are very small (100,000 total population). Panama was the biggest, but now Ecuador is the biggest.
2) Most dollarized countries have used the dollar since the country's creation.
3) Most dollarized countries' exports are to the USA.
4) On the average, the growth rates of dollarized countries has no statistical significance.

European countries effectively "dollarized" to the EURO. There has been no effect. In fact, most Europpean countries are worse off now than before the Euro.

The bottom line is that the latest countries like Ecuador who want to dollarize are doing it because they are incapable of managing their own business. They want a daddy in the form of the USA. What dollarization does is instill discipline and foreign investor confidence. If the local politicians don't change their behaviour, this confidence will erode and the country will end up in the same troubled place.

ERICKSON:
Panama has been Dollarized since 1900 or so. Its economy is heavily tied to the USA. They have one of the wolrd's largest free trade zones. What this means is that a large part of their economy is mainly free from local intervention and whose output goes almost directly to the USA. It is almost basically another State in the USA. The USA has been calling the shots there since the Panama canal was built.
 

socuban

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This is why I'm concerned with the non-stop borrowing of Mejia. If this money were put to productive uses....then fine....but its not...and the long term consequences are clear and dangerous.


PS Sorry for all these long diatribes.

~~~~~~~~~~~~~~~~

This is great reading! If and when the s**t hits the fan, can Hippo's gov confiscate monies deposited in local banks, from locals as well as foreigners?