Milei’s Monetary Conundrum

by
Oscar Grau
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The monetary route in Argentina appears to be entering a new phase, and some form of currency competition was implied in the July 2024 statements of Minister of Economy Luis Caputo. The route is akin to a regime where transactions are legal in multiple currencies, but only the peso holds legal tender status. Caputo anticipated that Argentinians will soon have to sell dollars to pay taxes, and remarked that if they have savings in pesos and dollarize them, later they will have to sell dollars again to pay taxes. In Caputo’s competition, the peso will be “the strong currency.” Likewise, he explained that as time goes by, “there will be fewer and fewer pesos, because no more pesos will be printed for any reason and pesos will be absorbed by surplus.”

Surplus of mistakes

Leaving aside the fact that currency competition is a system of partial barter, which can only be the outcome of government coercion in the path of rational economic conduct and is dysfunctional of the purpose of money, if currencies could truly compete, the government would not legally privilege the status of any currency. There would be a level playing field, including for tax and debt payments.

Surpluses happen when more money is collected in taxes than spent by the government during a period, and since they are funds drawn from the private sector, they are part of the fiscal burden. But no monetary unit exchanged in the market disappears from the money supply, unless it ceases to exist or fiduciary media used as money disappears in a fractional-reserve system. Surpluses as such remain in the money supply. The ones under Milei are not burned, which prevents deflation. And if they are used for redeeming debts held by banks, the deflationary effect will not be a credit contraction but create more dislocations and distortions. In short, Milei’s surpluses absorb nothing.

The CEPO and the dollar

Argentina’s decades-long history of chronic inflation—including hyperinflations and devaluations—has long made Argentinians prefer to save and calculate in dollars. The economy has essentially operated in dollars ever since. In fact, Argentinians have been saving in dollars for decades, and Argentina is one of the countries with the most dollars per capita in the world. Whether they are stored in homes, banks or safety deposit boxes, the distrust of Argentinians in their government is enormous, and the dollars held outside the national financial system exceed one third of Argentina’s GDP. In any event, legal tender laws prevail, and people must use pesos most of the time.

Nevertheless, getting dollars in Argentina is not as easy as in most countries, because the government intervenes severely in the dollar-peso exchange. While restrictions as such began in 2001, a price control—along with numerous regulations—known as the CEPO has been in place since 2011 (except between December 2015 and September 2019). The CEPO is a type of foreign-exchange control by which the government fixes an official dollar price in pesos that is always lower than its free price. This price is raised periodically at the discretion of government personnel, and also regulates access to dollars with different exchange rates (favoring some people over others). The CEPO generates excess demand and a shortage of dollars.

Trade control

The CEPO is also a policy of foreign trade control, which is rather proper for a planned economy. Although it cannot fulfill the purpose of determining the real dollar-peso exchange rate, the CEPO fulfills the determination of which individuals are subsidized in carrying on foreign trade and which are limited or completely precluded from engaging in foreign trade. And as long as the CEPO is in effect, Argentinians are a step away from being forced by their government to deposit all dollars with itself or the central bank at the artificial rate, along with more new pesos forced on them.

Since the peso is overvalued with the CEPO, there is less incentive to invest with the dollar. And the government also puts obstacles in the way of investors who want to take their dollars abroad. In sum, the CEPO hinders and disincentivizes exports, imports, and investments, but it is maintained because there are some people who benefit from it.

Saving and investing

Caputo warned Argentinians who buy dollars “thinking that it may be a good investment,” that this “will not happen.” Yet, buying dollars to save is not the same as investing: For one, savings is the supply of present goods offered for exchange against future goods. For another, investments are the demand for present goods capable of yielding future returns. And lastly, what balances social savings and investment is the market interest rate, which is the aggregate sum of all individual time preference rates reflecting the social rate of time preference. This rate can vary from person to person and from one moment to another, and determines the amount of savings and investment, as well as the height of the premium that present goods command over future goods.

Since changing pesos for dollars is more difficult due the CEPO, the peso’s rapid loss of purchasing power increases the time preference of people as pesos’ holders and makes them change their pesos for goods earlier and more than they would without the CEPO, diminishing their chances to save or invest as these goods are not the most easily resold and readily accepted goods (monies), thus reducing savings and investments in general. And as the menace of devaluations keep lurking around, changing dollars to pesos is discouraged—which is one more reason why the government is concerned about people holding on to their pesos as long as possible, because once exchanged, people hardly want to exchange their dollars back for pesos.

Savings and investment pave the way to a more prosperous and advanced economy. So anything weakening both also weakens the productive output, which is the fund from which the government draws resources. Despite this, beyond deregulations and some selective tax cuts, instead of not further weakening this fund, the Milei administration has maintained the CEPO and increased much broader taxes, even introducing an income tax on hundreds of thousands of salaried workers.

Currency market share and inflation

Although inflationary expectations have been reduced and price inflation numbers indicate lower percentages almost every month, the Milei administration has actually printed pesos at a much higher rate than the previous one. A difference with the latter is that Treasury financing ceased almost immediately under Milei, but printing for other central bank’s activities continued. However, this can only delay the inflow of new pesos into the market. Anyway, the strategy now aims at freezing the issuance of pesos.

Milei argues that any increase in the demand for money will have to be met with dollars, gradually reducing the peso’s share in the market. But this does not have to be like this: Any quantity of pesos in the market should always be sufficient to secure all that money can do for people. And if the peso continues to lose less and less of its purchasing power, much less any increase in the demand for money will have to be met with dollars—because people do not want a particular number of pieces of money, but an amount of purchasing power. That is, any increase in the demand for money can also be met by the peso’s share in the market, unless any dollar’s share is already, and will continue to be, forced by the government to increase the demand and value of the peso artificially—which is precisely the case.

Roughly speaking, since the money of productive people is the dollar, and the one of non-productive people is the peso and its artificial revaluation at the expense of productive people is uneconomic and forced, Milei’s monetary performance is remarkably statist. Then, any increase in the economy’s ability to provide wellbeing and satisfy people’s goals is in spite of Milei’s redistributionist monetary policy, which benefits comparatively more the unproductive with the revaluation of the peso. In addition, incentives to remain unproductive expanded with the expansion of welfare programs. And even if the peso stabilizes at some point, this will come at the cost of revictimizing the productive people who were forced to pay and suffer to get to the peso’s dismal situation in the first place.

The current stance

Caputo’s words imply an unfortunate situation for households and companies outside the privileged and unproductive classes. Since they have saved dollars for years, having to sell them is not a good sign. And indeed, to cope with the rising cost of living under Milei, many have turned to their savings: the middle class and retirees are the hardest hit.

By not eliminating the CEPO, Milei could be avoiding currency runs that would cause the peso’s purchasing power to plummet at an accelerated pace and the insolvency of the central bank and the banking system in the matter to materialize. Hence, Milei’s current stance has much to do with political expediency and the interests of bankers, special groups and state agents. However, because of its implications, the removal of the CEPO was crucial from the outset. Having failed in this, and continuing on this path, Milei is not different from his Peronist predecessors.