Argentina’s world-beating currency rally puts pressure on Javier Milei \ stacker news ~econ

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Argentina’s world-beating currency rally puts pressure on Javier Milei www.ft.com/content/cdcdbf7b-6c88-4ca7-94c0-3628e3ac7e56

697 sats \ 27 comments \ @south_korea_ln 28 Dec 2024 econ

What do the economists here make of this article? Do you agree with the interpretation and conclusions made from the available data? This kind of discussions is outside my comfort zone, so i tend to believe whomever writes more convincingly~~ An Austrian interpretation would thus be nice too.

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572 sats \ 21 replies \ @SimpleStacker 29 Dec 2024

Essentially, what the article is saying is that Argentina is currently keeping the Peso strong artificially, by offering to buy Pesos for an above market-rate amount of dollars. This is pressuring their dollar reserves, so there's a question of how long they can keep it up. It also leads to fears of destabilization when the currency control regime ends (what will happen if there's a sudden devaluation?)

And of course, there are the usual concerns about export competitiveness, with a strong local currency usually meaning weaker exports, though the article says that exports haven't fallen off by much yet.

I didn't see anything in the article I disagreed with. I think it's important to note that Austrians do not support currency controls and would prefer to let the market dictate the exchange rate of currencies. And, according to this article, Milei himself wants to end the currency controls, but wants to find the right time to do it.

Currency controls are distortive of efficient economic allocation and are usually put in place because the government has decided, due to politics, to support a particular segment of the economy. As the FT article mentioned, maintaining a strong peso favors middle class consumers because it allows their pesos to go further when consuming international goods and services. But other countries may do the opposite, like China maintaining a weak currency in order to favor exporters.

An Austrian would probably argue that this type of political favoritism is bad for the economy in the long run because it doesn't allow resources to go towards their most efficient use, which can only happen when prices are allowed to freely adjust in the market to reflect the demand and supply of the market participants.

341 sats \ 20 replies \ @Undisciplined 29 Dec 2024

I'm not a macro or monetary economist, so I feel a bit out my depth with most articles like this.

I recall reading about how Milei's government has been trying to unwind the program that maintained an unrealistic exchange rate. As the article notes, Argentines were not allowed to exchange pesos for dollars at the government's rate.

@didiplaywell reminded me that a lot of the seeming change in exchange rates has just been the nominal rates adjusting to reflect what has been the real exchange rate.

Otherwise, I cosign @SimpleStacker's comments.

1353 sats \ 13 replies \ @didiplaywell 29 Dec 2024

To wrap up:

What defines a "strong" currency is it's devaluing rate, not the exchange rate per se. The Peso didn't get stronger because of how the central bank sells dollars. Think about it: if that was to be the case, last year the Peso should have been 3 times stronger than it's now, because the dollar was 3 times cheaper than now (right before the elections). So how is it that now the dollar is 3 times more expensive yet the Peso got stronger than ever? Because money emission was shut down.
Now, right after money emission was shut down, there's still an inertia effect in the market: merchants simply know that next month the dollar will be more expensive and then everything will be more expensive, and if you don't update prices accordingly in time, you go bankrupt next month, because you will not be able to restock for it will be more expensive than the price you sold stock the month prior. And so on. In a context of non-stop emission, that prediction is always right. Now, when emission stops, who will be the first one to stop incrementing prices? Will my provider stop? Will my provider's provider stop? Will my provider's provider's provider stop? I don't know, I can't take the risk. Everyone will think the same, and as the "prisoners dilemma" states, for some months, I will be indeed right in my fear. This inertia can last up to a year or two, for there's a delay between the monetary base change and the inflation index impact it has, as Milton Friedman noted, and as it's being our case, thus empirically demonstrated (once again).
And it's indeed a good thing that inflationary inertia is fading slowly. Can you imagine if all of a sudden prices correct to actual index? Everything is twice as much expensive all of a sudden: no one can restock, commerces go bankrupt by the minute, no family can afford anything and nothing can be bought from nowhere because everyone went bankrupt thus goods are getting scarcer by the minute and thus more expensive and so on. That's indeed the hyperinflationary death spiral that was menacing the economy and that was so carefully dismantled.
So, now we understand that there's an inflationary inertia that must fade smoothly, giving time to everyone to sync. But... to what value? ...there's no more inflation, ok... what's the final ARS/USD rate? ... since in the very process of undoing it's monetary control policy the government can control said smoothing effect, then it aimed for a rate as close as the one the ARS/USD soared to at first in the black market in the initial months, which is currently set at 1500 ARS/USD by the end of MIlei's term. Which is indeed the worst price it got to in his first months. That's a psychological choice, because it's the value people already saw, so it's the safest to aim for. Now, how so? By stopping inflation, policies tending to suck pesos from M0 create immediate scarcity which pressured the dollar downwards. Dollars from exports, renegotiated debt, and foreign investment cause a surplus that pushes the dollar price (in the black market) down even further. As you can see in the curve of the historic price chart, at some point it even reached the official price. Direct intervention was used to avoid panic bank runs like the one that happened in the middle of the year, which would have caused temporal noises that would have disrupted the smooth transition, potentially causing bankruptcies and social distress. That noise-suppression policy will continue until the economy can be dollarized, but for that enough dollars are needed, so the government is aiming to a final 1500 ARS/USD rate (worst case scenario, optimistic is 1200) based on the assumption that this path will ensure enough dollars will be available to dollarize at that rate in a couple of years.
Before energy exports, foreign investment and renegotiated credit at lower rates was possible, we only had debts and a net negative balance in the central bank, so the actual rate if things where to be updated from day one would have been 3500 ARS/USD in the most optimistic scenario. That would have caused an inflationary spike of 300% in a matter of HOURS. Try to picture the consequences.
Finally: you need to sell cheap to be competitive, not ruin the entire economy. No economy works like that. You might get a temporal advantage by devaluing the currency but no successful country was created that way. Devaluing the currency is never, absolutely never done to "create an economic advantage". That's just the way corrupt governments like disguise as good intentions the act of stealing from peple via emission. Devaluing is never good, in no context. Conversely, every country with a sound economy haves a stable enough currency, or even an increasingly valuing one.

61 sats \ 12 replies \ @south_korea_ln OP 29 Dec 2024

This will take some time for me to digest. Thanks for taking this time to write up your thoughts.

49 sats \ 11 replies \ @didiplaywell 29 Dec 2024

My pleasure Sr, happy to clarify any point :)

20 sats \ 10 replies \ @Undisciplined 29 Dec 2024

How did you think the article was, in the general sense of accurately portraying the situation in Argentina?

Were the basic facts fairly accurate, even if the interpretation was lacking?

36 sats \ 9 replies \ @didiplaywell 29 Dec 2024

I didn't even try because I could feel from the distance what I was going to face. It was far more productive to address the comments on this post directly.

At you request, I took a look. Exactly what I expected.

Right from the title: "fuelling competitiveness concerns". There are no such concerns whatsoever, in the least, as explained in my previous comment. The economy has been recovering since "monetary competitiveness was lost", how so??... Whenever you read the "monetary competitiveness" argument, safely assume you are wasting your tame. It's not that "they get it wrong", it's a deliberate state propaganda method to justify plunder.
Right from the first paragraph: "even as economists question the sustainability of high prices in Argentina". High prices being unsustainable is the reason inflation is coming to an end. With deflation in some sectors. Note how they manipulate something so basic.
Third paragraph: "The gains for the government-set exchange rate have been replicated on several legal and illegal parallel markets". It's the exact opposite. The government-set exchange rate, coupled with the monetary policy I explained in my previous comment, tries to close the gap with the black market value. You can see the historic evolution of that process here.
Bis. The "access to the official rate is restricted" isolated expression is unreliable and must be further explained: yes, people can only buy a certain amount of dollars from the banks per month, but not at the official rate. That was possible more than 4 years ago, but the previous govt imposed a tax on buying dollars so that the end result is even more expensive than buying it from the black market (75% tax at its peak, lowered by Milei to 60% until very recently, and on the path of getting lower). So, it's still cheaper to get dollars from the black market than from the bank. The true devaluing rate of the peso was hidden by the previous government by setting an "official rate" way below the true rate and compensating the difference via taxation. So while on paper the official rate is lower, in practice it's even more expensive. The reason people still buys it instead of using the black market is because bank delivered dollars are traceable and thus legal to own, which is required for certain transactions. Plus most people don't know nor trust the black market, so they try to buy/sell via friends and relatives. That causes the bank to still be the first source of dollars for most.
"The trend is popular with Argentines, who have seen average salaries almost double in dollar terms". This is not due to the appreciation of the Peso. At it's peak the Peso touched 1500 ARS/USD and now it's at 1200ARS/USD, a ratio that can not explain by itself current salaries appreciation rate. That statement ignores that due to inflation being almost a tradition, even the shittiest employee contracts consider some sort of inflation compensation over time, usually by semester. In an inflationary context, said compensation can never catch-up, leading to slower but consistent salary reduction in real terms. But, since it remained in place in what's now a context of inflation reduction, compensation rates were able for the first time to catch up, hence the salary recovery effect.
"Argentina’s central bank has struggled to rebuild its virtually empty hard currency reserves as it spends dollars to keep the peso strong." it's true that it has been difficult to keep up reserves, but it's not due to reserves being spent to keep the peso strong, as I explained. The struggle comes from massive debt obligations left by all the previous socialist regimes.
"a potential tariff spree by incoming US president Donald Trump": Trump as been clear that tariffs will be applied only to non cooperative countries. And indeed, a free-trade agreement is on the works with Argentina.
"but the peso’s appreciation is the greatest risk going forward": that's violently contrary to reality, both current and historical. This must be coupled with "demand for cheap dollars could surge, increasing the risk of devaluation" to draw the actual picture: dollar scarcity is the risk, whatever the ARS/USD ratio is. A more devalued peso is what increases devaluation risks, not the opposite, for it will take even more pesos to buy scarce dollars. A strong peso decreases the devaluation risk, for it's closer to match usd scarcity, or to surpass it (as it happened). However, the volatility due to usd scarcity is still bad towards any direction, so that's why the challenge is on usd scarcity, for the govt must ensure that enough is available to dollarize once and for all and end the madness for good.

This is not even a third of the article and I still have to stop at literally every word. I'm tired already, but if I continue this comment will be too long. I think I have made my point. So, once again, for the 100th time, please, stop wasting your time with leftist propaganda.

53 sats \ 4 replies \ @SimpleStacker 30 Dec 2024

Interesting. There is a lot of subtext here that I totally missed, not being from Argentina myself.

Am I right to say that your main area of disagreement with the article is that you think keeping the peso strong is not as risky as the article suggests and is actually an important policy for bringing down inflation?

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30 sats \ 3 replies \ @Undisciplined 29 Dec 2024

Based on our previous conversations, I had the impression that they were getting lots of stuff wrong. That's why I also stopped reading it in detail and just mentioned the one thing that was nagging at me the most.

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45 sats \ 0 replies \ @south_korea_ln OP 29 Dec 2024

Thank you both for your insights. Very helpful.

24 sats \ 4 replies \ @Bell_curve 29 Dec 2024

What happened to dollarizing in Argentina 🇦🇷? That was one of his campaign promises?

11 sats \ 2 replies \ @didiplaywell 29 Dec 2024

On the roadmap. Will take time. Everything on schedule as of now.

30 sats \ 1 reply \ @Bell_curve 29 Dec 2024

Nice!

Can't believe it's already been one year, over one year!

11 sats \ 0 replies \ @didiplaywell 29 Dec 2024

Me neither buddy. It's being a surreal travel all the way, for what has been accomplished in only one year far exceeds my most optimistic expectations for the entire term. So much to do still!!