George Friedman’s Thoughts: Passion and Aristotle’s Four Virtues

Aristotle’s virtues, like passion, have a complex and important relationship to geopolitics.

By George Friedman

Of late I have been writing on issues like passion, and some have asked what this has to do with geopolitics. Geopolitics is the dynamic between nations, but it also defines internal dynamics, where ethnicity, wealth and religion all matter. And this, in turn, relates to the family and the individual. It is not that individuals are decisive, but rather that they both shape and are shaped by the foundation of the nation. The question of passion and its basis in civilization is therefore connected to, for example, Sino-American relations in complex yet important ways.

In response to my view on passion, some argued that passion is necessary for success. But passion is a poorly defined concept. Passion can be used to describe Christ on the cross, a wealthy man’s desire for more money, or Churchill’s definition of a fanatic as someone who can’t change his mind and can’t change the subject. Passion is a form of anger that hides itself under the cloak of civility. The fanatic shows his hand; the passion that frightens me is the rage of certainty masquerading as calm.

Aquinas, Maimonides and al-Farabi all regarded Aristotle as the greatest thinker of all time, as do I. He had a simple but powerful matrix of the virtues a man must have. Aristotle never embraced passion. He spoke of passion but regarded it as far below the virtues; as he said in his work on ethics, any beast can possess passion, and men who are passionate and nothing else are beasts.

Aristotle identified four virtues and the one that was both lowest and the foundation of all others was courage. When we think of courage, we think of war. But courage went beyond that.

For Aristotle, courage was also the ability to stand alone regardless of the opinions of the many.

The need to be well-regarded would lead men to betray themselves. That is what Socrates refused to do.

But courage was also for him a necessity of everyday life. We have all lived through nights when we dreaded the coming of morning. The courage to confront the dawn and face the day is perhaps the most fundamental and necessary part of courage. Life is difficult, and death is terrifying. We live between the two and without courage could not go on. I think this is why Aristotle treated it as the most fundamental of the virtues.

But courage is also a form of madness. I remember a night in Islip on Long Island in New York. I was driving a well-seasoned Plymouth Belvedere, against a knight astride a Chevy Impala. Dying was better than flinching as we engaged in the ancient game of chicken. In the end, I swerved. We were both drunk on courage, but the prize was not a substitute for the abyss.

Aristotle despised this sort of impassioned bravery.

Aristotle’s second virtue was prudence. Prudence was intended to moderate courage; it is the scale on which courage is measured and tempered. The willingness to die is not an eagerness to die. Risking your life might be too high a price to pay for the prize. Other means might be found to satisfy the need.

Prudence alone devolves into a careful calculation that neglects the soul. Courage is indispensable to life, and prudence without courage knows the price of everything and the value of nothing. Courage without prudence is recklessness, which risks all for nothing. For the crazy brave, the risk of everything is an end in itself, and it leaves his flank uncovered. Prudence without courage is Shakespeare’s Shylock wailing over his daughter and then his money, knowing the price of each but knowing nothing of their value.

At the same time, the perfect balance of prudence and courage leaves open the end toward which prudence will guide courage. Perfectly balanced, it is the sphere of the banal man who has courage but is constantly restrained by prudence to be far less than he can be. For Aristotle there is, therefore, a third virtue: justice.

Where prudence shapes and restrains, justice demands that men act in its name. It takes the mediocrity of prudence and courage and turns it into a moral imperative. With justice, we know what we owe and to whom. Prudence now becomes a servant of justice, making certain that courage is shaped properly in pursuit of justice.

Of course, the nature of justice is itself mysterious. Is it the interests of my nation? Is it the teachings of my God? Is it a vision of perfection that other men have conceived? Is it the right of the strong to rule the weak? Geopolitics teaches that between nations there is courage and prudence, and that justice is merely the expression of the interests of each nation. If that is all that justice is, then it is far from a binding power.

To give your life to that would please the crazy brave but repel all others. Humans have a need for something truer and nobler to which to commit their lives, fortunes and sacred honor. But where is it be found? Is it in the habits of my people or in the coming of a new age wrought by revolution?

The American founders sought to solve that problem by melding habits with revolution. It has worked, but the habits and the moral principles of the revolution have always been uneasy partners. And America was invented. Justice could be invented as well, but it has always required a seductive poem to be recited, diverting our eyes from its complexity.

In all of this, then, there is a fourth virtue: wisdom. Wisdom recognizes what matters and what does not. It’s what the philosopher is said to possess. Wisdom knows that justice is absolutely necessary, and it understands that just because it is necessary does not mean that it exists. The fact that it exists does not mean that it applies in this time and place. And the fact that it applies does not mean that men will believe in it.

Wisdom understands the needs and limits of humankind and the gorgeousness of the true and the beautiful. And it understands the tragedy of being human, which is that the true and the beautiful blind the eyes of the many, so that they can only have second best – a poem that is built on the truth but expressed as a lie intended to seduce, to give the needed justice rather than the true.

Wisdom is, therefore, the highest sort of prudence, just as justice is the highest moment of courage.

Plato spoke of the noble lie. The noble lie was built on the truth that men could not bear to know and was presented to them in the form they required. The rare wise man recognizes the true and beautiful and the fact that gazing upon it would drive ordinary people mad or blind.

So, a lie is invented that rests on truth, and that lie becomes the foundation for men to be courageous. Wisdom understands the limits of truth.

It is like the story of Moses, who, on seeing the promised land, was not permitted by God to enter it because he had struck against God in anger. God knew that Moses could lead a rebellion against Egypt and God himself. But he could not govern. So, he replaced Moses with a lesser man, Joshua, who had never spoken to God but believed that God had spoken.

Joshua was a warrior, a man of courage, who prudently sent spies into Jericho. He believed in the justice of his cause, dubious though it might have been. But he was never wise as Moses had been. And that made him suitable to serve the geopolitical needs of his people, without being troubled by things that were beyond him.

Here's The Real Takeaway From The Fed Meeting

by: The Heisenberg


- Thanks to a seizure in funding markets, many desks were forced to reassess their expectations for the September FOMC meeting at the last minute.
- The only thing that mattered on Wednesday was what Jerome Powell said about the squeeze and how the Fed planned to address it.

- He was characteristically unconvincing on that score, but did manage to stumble into the "correct" answer when prodded by CNBC's Steve Liesman.

- Forget any other Fed takes you might have read. This is the real story.

You may not know (or even care to know) the specifics, but most investors are probably aware of the fact that funding markets suffered something of a seizure earlier this week.
The squeeze, which saw GC repo surge (visual below), was attributable to the collision of structural/legacy issues (e.g., Fed balance sheet runoff, Treasury supply to finance the deficit and bloated dealer balance sheets), and idiosyncratic factors (e.g., corporate tax payments, coupon settlements and last week's bond rout, the worst since the election).
The New York Fed was forced to intervene on Tuesday for the first time in a decade, after the effective funds rate was dragged through the upper end of the target range. The visual below, for those who still haven't come to terms with what happened, represents the Fed quite literally losing control of rates - albeit temporarily.
On Thursday morning, the New York Fed injected liquidity for a third consecutive day.
As I was writing this post, they announced they'd conduct a fourth operation on Friday.

The insanity (and it truly was chaotic, as detailed in Bloomberg's dramatic retelling) forced Wall Street to reassess their expectations for the September FOMC meeting at the last minute.
For the uninitiated, this can be an intimidating subject, but stick with me, because this is important - I'll keep it as brief as posible.
On Tuesday, some desks suggested the Fed might be compelled to announce its intention to expand the balance sheet imminently and/or launch a long-rumored standing repo facility.
Some high profile names got in on the act. Jeff Gundlach, for instance, said in a webcast (and also in an interview with Reuters) that the Fed would launch "QE-Lite" "pretty soon" to address the pressures that contributed to this week's funding squeeze.
The idiosyncratic factors cited above notwithstanding, the overarching issue is reserve scarcity.
BofA's Mark Cabana has been one of the most persistent voices in documenting this in near real-time over the past several months. There are people who will take you as far down into the "plumbing" as you want to go (with Zoltan Pozsar being perhaps the best example), but Cabana's cadence is relatively user-friendly as this discussion goes.
"The increase in funding pressure as reserves declined to ~$1.35tn likely suggests that the market is on the upward sloping part of the reserve demand curve, below the minimum amount of reserves needed for an ‘abundant reserve regime'," he wrote on Monday evening, as it became apparent that this week would be all about the funding squeeze. Here are two key visuals (note the X-axis is the FF-IOER spread, which you can put in the context of the second chart above):
Here is Goldman saying the same thing in a Wednesday note out prior to the Fed decision:

Until last week the relationship between FF-IOER and aggregate reserves largely seemed to track the curve imputed from the Fed’s Senior Financial Officer Survey, which suggested a substantial buffer (i.e., the “steep” part of the curve was probably at reserve levels below $1.2tn). However, at current levels of aggregate reserves (which we estimate had dropped to about $1.34tn this week), the realized FF-IOER spread, at 15bp on Monday and 20bp on Tuesday, is nearly 7bp to 12bp above where we would have anticipated it to be based on the survey.
That is what CNBC's Steve Liesman was referring to in the press conference on Wednesday when he asked Jerome Powell if the Fed might have "underestimated the amount of reserves necessary for the banking system." Powell's response was lengthy, but here's the abridged version:
We try to assess what that is. We’ve tried to combine that all together, we’ve put it out so the public can react to it. But yes, there’s real uncertainty and it’s certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought. That’s always been a possibility and it certainly is now. Again, we’ll be looking at this carefully in coming days and taking it up at the next meeting.
Powell's remarks amounted to an acknowledgement that the Fed will need to expand the balance sheet imminently, but the nuance (i.e., the "organic" bit) is crucial and I'll get to that below.
As far as the amount goes, BofA's Cabana on Tuesday estimated that the Fed probably needs to buy $250bn in assets in the secondary market in order to get back to an "abundant" reserve regime with a buffer. Going forward, the Fed would need to persist in outright purchases of around $150bn/year to maintain that level. That gives you an idea of the scope.
It's not a coincidence that stocks turned around as Powell discussed this during the press conference. And indeed, Nomura's Charlie McElligott suggested ahead of time that because the nuance around this isn't well understand, many market participants would rely on "muscle memory" conditioned over the post-crisis years to buy on any headlines around balance sheet expansion. "If we get a 'Fed balance sheet expansion' headline, the equities market risks an overly-bullish interpretation," he wrote, in a Wednesday morning note.
Although we did not, in fact, get an announcement of balance sheet expansion, Powell's discussion during the press conference was seen as confirmation that it's coming, and probably son.
And yet, it's crucial that investors understand that this isn't really "QE", per se. One commenter elsewhere claimed that Powell had left "QE Easter eggs" in his remarks at the presser. That is indicative of the general investing public not understanding the dynamic.
Here's McElligott again (from a Thursday note):
The danger near-term however is that so many in markets equate “balance sheet expansion” to a resumption of “outright QE” and LSAPs…despite a much more nuanced “organic growth” / “QE-Lite” message from Chair Powell at this juncture to “offset +” further Reserve depletion—thus a risk of a near-term bullish sentiment overshoot surrounding this misnomer of “balance sheet expansion = QE.
So, again, you have to understand this in the context of this week's funding squeeze which itself has to be couched in terms of reserve scarcity and an apparent miscalculation of what level of reserves count as "ample."
The September FOMC statement and the dots betrayed a divided committee. Frankly, it doesn't even make sense to speak of "forward guidance" when it comes to the Powell Fed. One is lucky to be able to divine anything about what went into this meeting's decision, let alone what's coming next. The dissents (Rosengren and George in favor of staying on hold, Bullard in favor of a larger cut) don't help.
But really, that was beside the point on Wednesday. What mattered was that the Fed definitively address the funding squeeze or, barring the announcement of balance sheet expansion or a standing repo facility, that Powell demonstrate during the press conference that he takes the situation seriously.
Instead, we got another IOER tweak, the promise of ad hoc, "as needed" liquidity injections (i.e., the operations the New York Fed conducted on Tuesday, Wednesday, Thursday and will conduct on Friday) and remarks from Powell that were anything but forceful.

The IOER tweak and the overnight repo operations are Band-Aids, almost by definition. They buy time, that's all. To address the issue sustainably requires balance sheet expansion, one way or another.
As far as Powell goes, here is another excerpt from his response to Liesman (you can watch the exchange here):
Of course, we were well aware of the tax payments and also of the settlement of the large bond purchases. And we were very much waiting for that. But we didn’t expect … The response to that was stronger than we expected. And by the way, our sense is that it surprised market participants a lot too. I mean, people were writing about this and publishing stories about it weeks ago. It wasn’t a surprise, but it was a stronger response than, certainly than we expected. So, no, I’m not concerned about that, to answer your question.
He elaborated further, but his response was wholly insufficient in my judgement, and I'm hardly alone in that assessment.
Irrespective of whether you think Powell managed to come out unscathed thanks to the reference to balance sheet expansion (and, again, equities' response to that was likely a reflection of market participants not fully understanding the situation) please note that if you read any account of Wednesday's press conference that suggests the Fed chair threaded any needles or otherwise navigated these choppy waters deftly, those accounts are not accurate.
Here, for instance, is what TD rates strategist Priya Misra said as Powell spoke (this was carried on the Bloomberg terminal):
This is disappointing. He is not addressing the structural issues at all. He is not acknowledging the reserve scarcity point and in fact says that we are operating at an ample reserve regime. I expect repo vol to stay high and then rise again at quarter end and year end.
Not every account was as critical as that one, but the fact is, there were no needles threaded on Wednesday. There was just Powell stumbling his way through another somewhat painful press conference, dodging questions when the going got tough and coming across as insufficiently concerned about the only thing that really mattered this week - the funding squeeze.

All of that said, you should also be wary of accounts that suggest this week's turmoil in funding markets represents some kind of 2008-style freeze-up. That isn't the case for a variety of reasons.
Here's a simple assessment from a much longer Credit Suisse note:
What we have seen this week is not a crisis but a symptom that we have reentered an old regime for Fed policy operations. To answer the question, is the Fed losing control, we say no it isn’t, but it must now move to allowing its balance sheet to grow in order to maintain its interest rate target.
And therein lies the problem. What the market got on Wednesday was an IOER tweak and a promise of ad hoc liquidity injections in perpetuity. They're putting duct tape over an earthquake fissure.
That characterization isn't meant to suggest that temporary measures can't close the fissure for a spell, or that the fissure is going to widen out and swallow us all. Rather, it's just to say that the issue at the heart of this week's funding squeeze wasn't addressed in a sustainable way at the September Fed meeting.
Going forward, the important thing will be for the Fed to communicate effectively ahead of the inevitable announcement of balance sheet expansión.
This is a subject that is poorly understood by most, and understood down to the granular details by a relative handful of rates strategists and those active in money markets. That means the Fed is walking a (very) fine line between educating the 99% of people who don't understand (so as to avoid accidentally creating the impression that "QE 4" is about to be launched), and convincing the 1% of people who do understand that the Fed isn't asleep at the wheel and appreciates the urgency of addressing reserve scarcity.
I wish them the best of luck in that endeavor and I wish you the best of luck in re-reading this post from the beginning so that you can be sure you're a well-informed investor.

Why central bankers may be hurting rather than helping lenders

Cutting rates below zero distorts the market for banks and for investors

Huw van Steenis

The European Central Bank in Frankfurt © EPA-EFE

As central bankers weigh up cutting interest rates deeper into negative territory, investors should consider when the risks of this trend will begin to outweigh its benefits.

With almost $17tn of negative-yielding debt already out there, I fear we have already hit the reversal rate — the point at which accommodative monetary policy “reverses” its intended effect and becomes contractionary for the economy.

Conventional macroeconomic models typically take banks and other intermediaries for granted. As a result, the overall benefits of cutting rates below zero may have been exaggerated.

Like steroids, unconventional policy can be highly effective in short dosages, but just as long-term usage of steroids weakens bones, so below-zero rates can weaken the financial system.

Negative rates erode banks’ margins and distort their incentives. They encourage lenders to seek out opportunities overseas rather than in their home markets. They also risk disrupting bank funding.

All these effects run counter to the central banks’ desire to ease credit conditions and support financial stability. How policymakers assess where and when the reversal rate kicks in will be pivotal to how investors should weigh up different policy packages from the European Central Bank and others.

Japanese banks, and more recently their European counterparts, have illustrated some of the problems caused by cutting rates. Japan’s regional banks have among the lowest returns on assets of any around the world.

Larger banks have fared somewhat better, in part by lending more overseas. Japanese banks bought about a third of the higher-rated tranches of US collateralised loan obligations — investment vehicles that buy leveraged loans — in the past few years.

Quantitative easing programmes have helped the global economy and enabled banks to repair their balance sheets. Low rates have improved the affordability of their loans, reduced bad debts and lifted the value of assets.

Japanese banks have relied upon capital gains from owning government bonds to offset pressures on profitability. But increased ownership of bonds can become a dangerous dynamic, a phenomenon known as a “doom loop”, magnifying the effects of swings in prices.

Lower profitability also reduces the ability of banks to upgrade their technology and enhance cyber defences, storing up future risks to financial stability.

Suppressing bad debts in the eurozone via QE has been useful for the banks, but this has largely come from indirect benefits, such as by reducing the difference in yield between German and, for example, Italian bonds. If central bankers really want to help increase the flow of credit, then buying the banks’ own debt as part of QE, which is still a taboo for the ECB, may be a better option than cutting rates further.

One counterargument is that the impact of negative rates appears to have been fairly benign in Sweden, Denmark and Switzerland, through the tiering of rates, where only part of banks’ reserves at the central bank are penalised. While these measures help, they are no panacea.

Banks have sought to offset negative rates by charging higher fees, repricing mortgage spreads and, in some cases, lending more aggressively. The longer the experiment lasts, the more Danish and Swiss banks are having to pass on negative rates to clients.

These tiering schemes were explicitly designed as foreign exchange policies, to deter inflows and protect banks. The spillover effects via the currency need to be weighed carefully. Should the ECB follow the Danish model, it may inadvertently exacerbate investors’ trade war concerns.

Pension funds’ asset allocations are increasingly being distorted by negative rates, too. One of the most striking consequences has been to encourage investors out of Japanese and more recently European markets and into US credit and equities instead. The thirst for yield has led to a self-reinforcing bid for longer-dated bonds.

As most savers target a particular level of retirement income, the lower rates go the more they will need to save to hit their targets, reducing their ability to spend today.

Investors are no longer sure how low rates might go in a range of countries. As long as this uncertainty remains, it is hard for banks to know whether the loans they are making are economically sensible or for investors to price the securities of financial institutions with confidence.

The assumption of a world without financial friction has been a fundamental weakness in much macroeconomic analysis. Where the reversal rate may be, and how long companies can endure these conditions, should be central to the policy debate. Otherwise, central bankers could end up doing more harm than good.

Huw van Steenis is senior adviser to the chief executive of UBS.

Professor Charles Goodhart of the London School of Economics also contributed to this article.

The Saudi oil crisis, volatile leaders and the risk of escalation

All sides have an interest in compromise — but that does not mean it will happen

Gideon Rachman

© FT montage/Getty

For decades, any list of global geopolitical risks will have had “attack on Saudi oil facilities” near the top. Now it has happened.

The good news is that the world is less vulnerable to an oil price shock than it was in the 1970s, when the Opec oil embargo created turmoil in the global economy. It is also true that all of the major powers involved — Saudi Arabia, Iran and the US — have strong incentives to avoid an all-out conflict.

The bad news, however, is that the key decision makers in this particular drama — Donald Trump, the US president, Mohammed bin Salman, the crown prince of Saudi Arabia, and the leadership of Iran — are all headstrong and prone to taking risks.

It is likely that, if the US sticks to its claim that Iran was behind the attack, it will stage a military response. If and when that happens, there are no guarantees that the conflict will not escalate further. Given that the weekend attacks have already caused a 20 per cent spike in the price of oil, the potential for further mayhem on the markets is clear.

The importance of Gulf oil to the wider world has been imprinted on the collective memory of the west ever since Opec imposed an embargo in 1973. It caused oil prices to quadruple, doing serious damage to markets and the world economy. The lesson learnt — that stability of Gulf oil supplies is crucial to the world economy — helped drive the west’s ferocious response to Iraq’s invasion of Kuwait in 1990.

Almost 30 years after the first Gulf war, western economies are considerably less vulnerable than they were to disruption of oil supplies from the region. The rise of shale-oil production in the US means that American oil imports from Saudi Arabia are now just one-third of the level they were in 2003.

But less vulnerable does not mean invulnerable. There is still a global price for oil; and Saudi Arabia remains the world’s leading oil exporter. So if Saudi supply is disrupted, consumers and industries across the world will quickly feel the impact.

The vulnerability of Saudi oil facilities to attack has also just been demonstrated. If the attack was carried out by drones, as first reported, it is a shocking insight into how open advanced industrial facilities are to assault by cheap and widely available new technologies. The Saudis also have cause to worry about the safety of their water supplies. The kingdom gets around half of its drinking water from desalination facilities, one of which was targeted in a rocket attack last June.

Awareness of their vulnerability to further attack should make the Saudis wary of escalating the conflict. The kingdom’s social and political stability is also a factor; the ruling family has long fretted about the threat of internal unrest from their large Shia minority.

Despite massive military spending, Saudi Arabia has also been unable to prevail in a brutal war in Yemen — which is a much less intimidating proposition than Iran. So while the Saudis have been ardent supporters of the Trump administration’s policy of “maximum pressure” on Iran, they have minimal interest in an actual war.

Iran also has a strong interest in avoiding an all-out conflict, which would expose the country to the firepower of their well-armed Gulf neighbours and, above all, to attack from the US. In recent months, the Iranians have staged an array of provocations including seizing western oil tankers in the Gulf and (probably) encouraging its Houthi allies in Yemen to hit soft targets in Saudi Arabia.

But this kind of Iranian brinkmanship has been interpreted by most western Iran-watchers as an effort to demonstrate that Tehran is not powerless in the face of sanctions. The Iranians were also seen as attempting to gain leverage ahead of a possible resumption of talks with the US.

As for Mr Trump, despite his bellicose rhetoric, the US president’s most recent actions have shown that he is keen to make a diplomatic breakthrough with Iran. One important reason that Mr Trump fired John Bolton last week is that his former national security adviser was too hawkish and opposed suggestions that American sanctions on Iran should be eased in the interests of getting talks started.

So all sides have economic and strategic interests to step back from the brink. Unfortunately, all sides have also shown themselves to be erratic, emotional and prone to miscalculation.

Saudi Arabia’s Prince Mohammed has demonstrated his own propensity for violent miscalculation through his conduct of the Yemen war and by apparently authorising the gruesome murder of the journalist, Jamal Khashoggi. As for the Iranians, if they did indeed authorise an attack on Saudi oil facilities they have taken an enormous risk, with consequences they cannot control.

Mr Trump’s volatility has been amply demonstrated. The US president’s willingness to rip up the Iran nuclear deal — but then sack his most hawkish adviser on Iran — also does not inspire confidence that he knows what he is doing. It also means that the White House is entering what could be the biggest security crisis of the Trump years, with no national security adviser in place.

Ever since Mr Trump’s election in 2016, nervous observers have wondered how the president would behave in a real foreign policy crisis. We are about to find out.

A Dollar for Argentina

Argentines prefer to hold greenbacks. Why not bury the peso?

By The Editorial Board

Argentina is back in the soup, as it so often is. The prospect that Peronists might retake power has Argentines fleeing the peso for dollars, and on Monday the center-right government of PresidentMauricio Macriimposed capital controls. Here’s a better idea: Replace the peso with the U.S. dollar as Argentina’s legal tender.

The actual election is in October but the August primary victory of left-wing populists—presidential candidateAlberto Fernándezand his running mate, former presidentCristina Kirchner —has triggered a monetary panic. The demand for dollars has soared, the peso has fallen some 20% against the dollar, and central bank reserves are declining.  

President Macri has done nothing to shore up confidence. After the primary vote foreshadowed a likely defeat in his bid for a second term, he announced a gasoline price freeze, a minimum-wage hike and new subsidies for special interests. This Peronism-lite did nothing to restore government credibility.

Last week Argentina failed to roll over its maturing dollar-denominated debt, and candidate Fernández, who is promoting the impression of chaos, said the country is in “virtual default.” The capital controls will limit access to dollars for businesses and individuals. Exporters will be required to bring their hard-currency earnings back to Argentina.

Argentina needs access to capital markets but its history of stiffing creditors makes it high risk. EconomistSteve Hankerecently wrote in Forbes that Argentina had “major peso collapses” in 1876, 1890, 1914, 1930, 1952, 1958, 1967, 1975, 1985, 1989, 2001 and 2018. Each time Argentines have had their savings, earnings and purchasing power diminished.

Now the government is telling investors that if they put their money in Argentina, they can’t be certain they can take it out. This is sure to be a drag on growth. The economy is expected to contract this year and next.

Dollarizers face resistance from the Peronist party, which relies on the inflation tax to fund its populism when revenues run low. Yet demand for dollars suggests that Mr. Macri would have popular backing for adopting the greenback as the national currency. Lawyers in Argentina differ about the legality of dollarization under the Argentine constitution, but our sources believe Mr. Macri could dollarize with the backing of a majority in Congress.

Panama has used the dollar as legal tender since 1904, and El Salvador and Ecuador dollarized in 2000. Ecuador did it to resolve a banking crisis and El Salvador did it to bring down interest rates. El Salvador and Panama now have the lowest domestic borrowing rates in Latin America and the longest maturities. Ecuador has price stability not seen in at least a half century.

One objection to dollarization is that Argentina would lose the profits a central bank earns by printing its own currency, known as seigniorage. But this is a political excuse disguised as economics. What is lost in seigniorage will be more than offset by ending peso crises.

Setting the right exchange rate also matters. Several Argentine economists propose converting short-term government paper to longer-term bonds to reduce the number of pesos that need to be exchanged for dollars in the short run. But the best rate is probably the black-market rate where the peso now trades.

Dollarization eliminates the moral hazard that central-bank rescues encourage in the banking system; international capital markets become the lender of last resort. Another benefit is that it would be nearly impossible to reverse, unlike Argentina’s one-to-one convertibility law with the dollar of the 1990s, which politicians violated when they were back in hock in the early 2000s. Argentines also ought to have the right to keep their dollars abroad if they choose. This would alleviate the worry that the government might “corral” bank accounts as it did in 2001.

A Macri decision to dollarize would break this ugly cycle by giving Argentines a store of value and a medium of exchange they can rely on. It might not save his Presidency, but it would ensure a legacy for Mr. Macri as the leader who dared to defend Argentine savings from a marauding future government.