In recent weeks the exchange rate trap returned to the center of the discussion. A debate driven both by the increase in exchange rate gap up to percentages higher than 50% due to the few details in the government’s economic plan. Faced with this uncertainty, the president added fuel to the fire by stating that in order to get out of the currency controls, the Central Bank’s remunerated liabilities must first be eliminated, the puts must be ended and inflation must be close to 0% per month.
The market is getting impatient and must separate the wheat from the chaff in official communications on economic issues every day. Milei and his officials often contradict each other. Let us suppose that the president is the one who draws up the broad outline of the economic plan, what did he mean by these conditions for lifting the exchange controls? In short, since he is unable to generate income from dollars, he wants to eliminate the largest possible amount of pesos that could go towards the purchase of foreign currency once the exchange controls are lifted. It is contradictory that an economic team led only by men from the financial market who prioritize destroying national production to show better financial indicators should also destroy pesos because they cannot find tools in the market. In the end, The libertarian Toto Caputo suffers the errors of the Macrista Toto Caputo.
The elimination of the peso was already sought with the supposedly already finished stage of liquefaction. A very negative interest rate that caused a strong loss in the purchasing power of fixed-term deposits, that is, the savings of families and companies. As the government was forced to stop this dynamic, it is now readapting its strategy. The liquefaction is stopped, but the higher returns that the fixed-term deposits will receive will be paid with the Treasury’s fiscal surplus and not through the monetary expansion that this usually causes. There is nothing to celebrate, they stop liquefying and the only solution they find is to tighten even more. The strategy changes, but the middle class always loses.
In addition to the elimination of remunerated liabilities, there is also the goal of ending puts. In other words, the insurance that banks received to ensure that they could always sell the Treasury bonds they held to the Central Bank. This decision also eliminates a source of monetary issuance with the downside of being able to make it difficult to renew Treasury debt. Why would banks be willing to take on more risks? Especially when the president accuses some of them of conspiring against him.
The elimination of two sources of monetary expansion are measures that, beyond their costs and risks, the government can carry out in the short term. In this sense, what seems to completely remove the possibility of lifting the exchange rate restriction is the need to first achieve zero inflation. A result that not even the United States has been able to achieve in recent years. The idea is quite basic: if there is no inflation, people will not be desperate to get rid of the few pesos they still have saved at that time. The problem is that the only thing the government does to lower inflation is take measures that destroy our economy, such as generating a strong recession and falling wages.
The conclusion of Milei’s statements is that she has no plan to get out of the exchange rate trap beyond destroying the peso and some in the financial market began to realize it, they began to see it.
Economist, Director of Banco Ciudad
Source: Ambito
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