“The exchange system is not a ‘single and free exchange market,’ but a confusing and dishonest dichotomy, in which there is neither unity nor freedom,” he wrote today. Sunday Cavallo, on his blog, in a post in which he warned that inflation had stopped falling and urged the government to move forward with microeconomic reforms, deregulate the economy, and begin lifting exchange restrictions, eliminating first the fiscal part and then currency trading. Stores.
Citing a chart and data from his economist son Alberto CavalloThe former minister noted that with the inflation rate now falling below 6% per month, “the government should be concerned that it will not rise again in the coming months.” In reality, Alberto CavalloOn May 1, the Harvard University professor indicated that the inflationary trend in Argentina had fallen to 78% annually, half the previous trend. But he noticed last Tuesday on the social network
With this data in mind, Cavallo Sr., who has already warned that under current conditions inflation will have a monthly “floor” close to 5%, wrote this Saturday: “The final attack against inflation with a simultaneous strong reactivation of the economy.” It can only be applied after the exchange rate is unified and liberalized without a jump in currency devaluation.
At the same time, says the former minister, in order to strengthen the fight against inflation, “it is necessary to clarify how we will move towards a monetary system of currency competition.”
In this regard, Cavallo asserts that the current monetary system does not allow the dollar to efficiently perform all the functions of legal tender, especially the “reserve value” function, in order to use dollar savings to finance investments or working capital of people and companies, because stocks prevent this, which is what has been agreed upon. – He referred to it – with the Minister of Economy, Louis CaputoChairman of the Central Bank (BCRA), Santiago Boselli.
The question now is how to dismantle exchange controls. Cavallo distinguishes “trade stocks,” which force exporters to sell dollars from their exports to the BCRA — which also manages import payments — from “financial stocks,” which declare the buying and selling of dollars outside the so-called illegal. The unified and free exchange market (MULC), although it allows under certain circumstances the use of dollar-denominated bonds, tradable in pesos and in dollars, to convert bank accounts from pesos to dollars and transfer capital to and from abroad.
The informal market arises from both stocks. Cavallo explains in this regard: “The dollar bill that is widely circulated in Argentina and the dollars deposited abroad that do not appear in the declared assets of Argentine residents are all blue dollars.” This is a market that feeds on the trade trap of under-invoicing exports and over-invoicing practical imports – as the former minister says – “very widespread after many years of trade traps.” In contrast, financial stocks create two “almost free” markets (which not everyone has access to): the dollar or stock market and the “cash with settlement” market. Cavallo says they are very inefficient markets, because their brokerage costs are very high.
Commercial stocks help the central bank buy dollars from the trade surplus at the official exchange rate, and with financial stocks it seeks to manage the gap through regulations (such as “blind” for exports) and bond operations. That’s why he says it’s “confusing and dishonest, ruling many transactions simply illegal.”
That is why the former minister insists that the first step to regulation will be to preserve the stocks that allow the bank to obtain dollars from foreign trade while completely liberalizing the rest of the transactions, especially those related to services and financial transactions due to the movement. of capital.
“It is the best way to move toward a monetary system of currency competition. There can be no competition between the peso and the dollar as alternative currencies if the dollar’s role as a reserve of value is doomed to be illegal,” Cavallo says, adding that this currency competition will be complete when it can be restored. Unification of the commercial market with the free financial market, but the previous step towards liberalization of the financial market is inevitable.
According to Cavallo, the only mechanism capable of allowing and stimulating the re-liquidation of the economy with dollars is to liberalize the financial market with money laundering and allow banks to receive deposits in dollars “with the same ease and powers that banks enjoy.” Deposits in pesos”
But here a crucial difference emerges between his vision and the president’s vision. Javier Miley And Minister Caputo, who refers to “zero emissions” and even declares that emissions are a crime with no statute of limitations, which means the disappearance of the peso and the disappearance of the central bank.
According to Cavallo, no matter how many pesos the BCRA puts into circulation, the withdrawal or return of cash will arise from the behavior of the inflation rate. If the monetary base remains constant, as Maile and Caputo say, the demand for the peso will increase in real terms “because as the economy contracts, people decide to increase their savings in pesos, so the price level must fall, that is, there must be deflation,” a process Long and painful. On the contrary, he continues, “if people decide to save less in pesos, there must be inflation, even when there is no peso issuance and in both cases the result is negative.”
That is why the former minister emphasizes that if the goal of monetary and exchange policy is to stabilize the price level and avoid deflation and inflation, the Brazilian Central Bank “instead of maintaining a stable monetary base, will have to manage statutory reserves of deposits.” In pesos and dollars, interest rates in the two currencies (through open market operations with bonds in pesos and dollars and intervening in the exchange market by buying or selling reserves in a way that stabilizes the price of the dollar in the peso. This is what the Central Bank of Peru does brilliantly.
That is, between competition for currency and dollarization, Cavallo stands firm in the field of competition for currency, and maintains the presence of the peso and the central bank.
Finally, Cavallo warns that the current rate of the fiscal dollar (MEP and CCL, which closed on Friday at $1,251 and $1,214, respectively) “underestimates the exchange rate that would lead to a single and free market, without stocks.
For this reason, he warns that both the economy and the BCRA could overestimate their ability to contain inflation through… Link crawl (Exchange rate slippage) of 2% per month. He concludes that this in turn “increases the risk that complete demonetisation is not possible without an initial jump in devaluation, which again requires a realignment of the relative prices of tradable goods and prices of public services.”
In addition to the redemption of the inflatable and the recuperation of the economy, Cavallo instagrams the gobierno avanzar in the desregulación, it seems that the mileage is higher than the intension of the elimination of the PAIS and the retension and the entry with the possibility From what Federico Sturzenegger Occupy a ministerial position to advance on both fronts.
In addition, he sees an opportunity in the extraordinary tax collection in May, at a nominal 366% compared to the same month in 2023, to resume public works, improve “the quality of public expenditure adjustment” and negotiate with the provinces. “To accompany deregulation efforts… starting with the reduction of distortionary taxes under territorial jurisdiction, especially those on gross revenues.
In particular, Cavallo recommends restarting public works at the national and regional level that receive external financing (he cites the IDB’s $6.5 billion pipeline waiting to be disbursed to finance projects whose implementation has been put on hold). He points out that its beginning “may begin to reverse the sharp downward trend in the level of activity in the construction sector, which is the area that has witnessed the highest percentage of job losses in the private sector.”
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