2024-03-17 04:49:58
The inflation rate of 13.2% is a “numerazo” and a “tragedy”, both qualifications were expressed by the same person: President Javier Milei, in the interval of one day.
With the same analytical rigor, on the one hand it says that monetary policy has an impact on prices with a lag of 18 months, a definition it provides when inflation rises (25.5% in December), and on the other it ensures that inflation has fallen in the first two months of the year from the maximum recorded at the beginning of the government due to the “impressive” monetary squeeze.
With similar convictions, Milei assures that the State should not interfere in the markets and that monopolies are not a problem, but now that the inflation projection for March indicates that it would be higher than that of February, he endorses that the Minister of Economy, Luis Caputo, intervene in the dynamics of price formation.
The management of the liberal libertarian government is deployed with the same conceptual and discursive contradictions of its leader.
Interventional measures
“We believe in price freedom,” says Milei, however when reality does not conform to theory, he orders the intervention of the State in private sector markets, which Minister Caputo complied with as follows:
- He called on food and hygiene and toilet product manufacturers to pressure them to lower prices.
- He did the same with supermarkets, in addition to making a fool of himself by questioning the 2×1 promotions as the reason why the February index had not offered a final single-digit figure.
- He stated that prices rose too much because companies defined them by calculating one dollar at 2,500 pesos, and even extended the speculation to 8,000 pesos. These would be estimated quotes in the city without giving details regarding who was talking regarding those prices. He did not do it because it would be difficult to do so because there were no such projections, rather the evaluation was that the exchange rate adjustment of last December 13 of 118% was exaggerated.
- It established a mechanism for access to immediate dollars to pay for imports of basic foodstuffs and medicines to “facilitate competition.”
Market failures and monopolies
Caputo was betting on a substantial drop in inflation in March, which he will not achieve despite the recession and the control of the dollar and salaries. This is the reason for the desperation exposed these days.
Milei’s measures and statements to try to stop price increases collide with postulates shouted as a television panelist, then as a candidate and then as President. One of the most provocative was the fundamentalist defense of monopolies and free competition.
The interventionist measures promoted by the State, which involve mass consumption industries, large marketing and import chains, to deal with “market failures” alter the libertarian theoretical framework.
Weren’t monopolies good? Milei had pontificated at the Davos Forum that “regulating monopolies, destroying their profits and destroying increasing returns, would automatically destroy economic growth. In other words, every time you want to make a correction of a supposed market failure, inexorably, By not knowing what the market is, or by having fallen in love with a failed model, they are opening the doors to socialism and are condemning people to poverty.
The free market and anti-inflationary anchors
Milei and Caputo’s fantasy of trying to lower inflation with a chaotic liberalization of prices is having immense costs in labor, social matters and the purchasing power of the majority of the population.
In the absence of a stabilization plan, the Government wants to stop the price stampede using two anti-inflationary anchors: the exchange rate and wages.
The quasi-freezing of the official dollar is under increasing pressure from the agro-export complex, which is waiting next month to define the intensity of the liquidation of the coarse crop (soybeans, corn and sunflower) depending on the Government’s strategy. It might be another devaluation, the reduction of withholdings or the implicit improvement of the effective exchange rate by increasing the percentage (today 20%) of sales in the cash dollar market with settlement.
Each of these options has costs for Caputo’s stability: more inflation due to the translation of exchange rate adjustment prices, loss of fiscal resources that would put at risk the objective of a surplus in public accounts and greater exchange rate delay, respectively.
With the fragility of this anti-inflationary anchor, Economy is also stepping on the approval of joint agreements by ordering salary increases with ceilings of 14% in March and 9% in April.
That is, to stop the lack of control of inflation, Milei and Caputo establish interventionist measures in the formation of prices, insisting on a quasi-frozen official dollar with stocks (control and administration of the exchange market) and limiting wage negotiations of unions and business chambers. In addition, it has postponed the transportation, gas and electricity rates for April so as not to fuel the inflationary fire of March.
With salaries and dollars fixed, two decisions of State intervention, the government seeks to embrace both anti-inflationary anchors. According to Milei, that’s not how free markets work. It seems that the liberal libertarian script has kissed the canvas of the restrictions with which the Argentine economy operates.
Martínez de Hoz also spoke of 17,000%
As if this fiasco were not enough, Milei’s handling of inflation numbers is shocking not only because he shamelessly exhibits the art of throwing fruit, but also because of the silence of those who listen to him.
He repeats that the projected inflation was 3500%, 7000% and even 17,000%, and that his government avoided imaginary hyperinflation.
This last figure is significant in political and historical terms: it is the same one that, with exaggeration and manipulation by annualizing specific numbers, was presented by the Minister of Economy of the last military dictatorship, José Alfredo Martínez de Hoz, in April 1976, on national television.
Milei not only repeats Martínez de Hoz’s economic program of liberalization, privatization, deregulation and opening, but also distorts inflation data as he did.
He stated that the February index would have been in the single digits if prepaid and rate increases were not taken into account. The argument is that these increases were “one-time only”, when it is known that this is not the case. He indicated that last month’s inflation would have been 7.2% if it were not for “the effects of the statistical drag of 4.2%, and what has to do with the increase in rates and prepaid payments.” He then assured that on the 13th, 2% must be deducted six points.
Milei was not original with this manipulation. Martínez de Hoz did it first. In July 1979, inflation had become unstoppable and meat was among the main drivers, having accumulated an increase of 300 percent annually. Martínez de Hoz then launched a price index that did not include red meat or its preparations. This arbitrary handling of statistics was of no use.
Milei did it: a cheap country in dollars to an expensive one in just three months
The overflow of prices with a quasi-freezing of the official exchange rate and with measures that facilitate speculation to keep financial dollars stable led to vertiginous inflation in dollars. In a very short period of time, what was cheap in dollars became expensive.
In addition to the transfer of the megadevaluation of 118% to prices, with a plus for exchange coverage pending a new adjustment, the general inconsistency of the Milei economic program executed by Luis Caputo explains such an alteration. There was an uncontrolled liberalization of prices along with the elimination of laws and trade resolutions regulating markets that led to impressive remarks.
The libertarian flag of free competitive markets was raised on the mast of the financial bicycle offered by the duo of mesadinistas in command of economic policy (Luis Caputo in the Palacio de Hacienda and Santiago Bausili in the Central Bank).
The average inflation in dollars of 80% to 100% in one hundred days of Milei’s government has these drivers:
- The 2% monthly adjustment table of the official exchange rate.
- The interest rate in pesos of 100 percent per year to induce the sale of greenbacks to obtain a spectacular income in dollars.
- The establishment of a differential exchange rate for the agro-export complex (80% official dollar and 20% counted dollar with settlement) that accelerated sales.
- The fabulous liquefaction of the population’s income, which shattered the ability of one part to save – in dollars -, and caused another to lack savings in dollars to cover expenses.
A similar process of lowering the dollar in relation to the prices of goods happened at the beginning of Macri’s government, as a textile businessman had anticipated and recently recalled, although in this case the speed in exposing his inconsistency has been faster.
The inflation game is played in the exchange market
With a depressed demand for dollars, the supply, although not abundant, has stagnated prices in the area of 1000-1100 pesos. With prices in pesos running at an average of 100% despite the collapse of activity and consumption, the Argentine economy became very expensive in dollars for a variety of products, as seen in the table prepared by Celag.
If the financial dollar (mep or ccl) were adjusted for inflation (December-March), the price would be double to reach the highs of the last exchange runs of the previous government.
Without sustained growth in reserves, the pressures of the agro-export complex on the official exchange rate will be very strong. The Central Bank accumulates purchases for 10,610 million dollars, an amount that excites the official press. However, what is relevant is the net balance that totals 6,995 million dollars thanks to a delivery scheme in installments of payment for imports. If the flow of foreign currency to pay for external purchases were normal, the balance would be much lower.
A reflection of this weakness is the desperation expressed by Milei when he said that he is negotiating a loan of 15 billion dollars from the IMF and private investors. While Caputo assures that there will not be another devaluation.
Both messages are directed at the agro-export complex that demands an adjustment of the official exchange rate. The powerful firms that own the dollars do not aspire for it to be one that allows it to reach a fixed price (regarding 1,900 pesos) although they do want one that places it close to 1,500 pesos.
As is known, any abrupt exchange rate movement implies a new inflationary flash with foreseeable political, economic and social consequences.
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