“The exchange system is not a ‘single and free exchange market’ but rather a confusing and insincere split, where there is neither unity nor freedom,” he wrote today. Sunday Cavalloon his blog, in a post in which he warned that inflation had stopped falling and urged the government to advance in microeconomic reforms, deregulation of the economy, and begin to lift exchange restrictions, first eliminating the financial part and then the trade of the stocks.
Citing a graph and data from his son, the economist Alberto Cavallo, the former minister that with inflation now below 6% monthly, “the government has to worry that it will not increase again in the coming months.” In fact, Alberto Cavallo, a professor at Harvard University, had indicated on May 1 that the annual inflationary trend in Argentina had been reduced to 78%, half of its previous trend. But last Tuesday he noted on the social network
Taking these data into account, Cavallo Sr., who had already warned that under current conditions that inflation would have a monthly “floor” close to 5%, wrote this Saturday: “the definitive attack against inflation with simultaneous vigorous reactivation of the economy “It can only be applied after exchange rate unification and liberalization is achieved without a devaluation jump.”
At the same time, says the former minister, for disinflation to be consolidated “it is necessary to clarify how we will move towards the monetary system of currency competition.”
In this regard, Cavallo emphasizes that the current monetary system does not allow the dollar to efficiently fulfill all the functions of a legal currency, especially serving as a “reserve of value” and using savings in dollars to finance investments or working capital of people. and companies, because the stocks prevent it, something in which he agrees – and points out – with the Minister of Economy, Luis Caputoand the president of the Central Bank (BCRA), Santiago Bausili.
The question is how to dismantle exchange controls. Cavallo differentiates the “commercial stocks,” which forces exporters to sell the dollars from their exports to the BCRA, which in turn administers payments for imports, from the “financial stocks,” which declares the purchase and sale of dollars abroad illegal. of the so-called Single and Free Exchange Market (MULC), although it allows under certain conditions to use bonds in dollars, quotable in pesos and in dollars to convert bank accounts from pesos to dollars and move capital to and from abroad.
The informal market emerges from both stocks. Cavallo clarifies in this regard: “the dollar bill that circulates abundantly in Argentina and the dollars deposited abroad that do not appear in the declared assets of Argentine residents, are all blue dollars,” fed by the commercial trap via under-invoicing of exports and over-invoicing of Practical imports – says the former minister – “very widespread after so many years of commercial restrictions.” In turn, the financial stocks cause the existence of two “pseudo free” markets (because not everyone can access them): the MEP dollar or Stock Market and the “Cash with Settlement”. They are very inefficient markets, says Cavallo, because they have very high intermediation costs.
The commercial stocks help the BCRA to buy the dollars from the commercial surplus at the official exchange rate, and with the financial stocks it seeks to manage the gap through regulations (for example, the “Blend”) and bond operations. That is why he says that it is a confusing and insincere split “that condemns many transactions simply to illegality.”
That is why he insists that a first step to begin to order is to maintain the stocks that allow the BCRA to obtain dollars from foreign trade but to fully liberalize all the rest of the transactions, fundamentally those of services and financial transactions due to the movement of capital.
“It is the best path to move towards a monetary system of currency competition. There can be no competition between the peso and the dollar as alternative currencies if the role of the dollar as a reserve of value is condemned to illegality,” says Cavallo, who adds that this currency competition will be perfected when the commercial market can be reunified with the free financial market, but the previous step towards the liberalization of the financial market is unavoidable.”
According to Cavallo, the only mechanism capable of allowing and inducing the re-monetization of the economy in dollars is the liberalization of the financial market together with money laundering and the authorization of banks to receive deposits in dollars “with the same ease and prerogatives of deposits in pesos”
But from there a crucial difference between his vision and that of the president appears. Javier Milei and Minister Caputo, who point to “zero emission” and even to declare the emission an imprescriptible crime, which would mean the disappearance of the peso and also of the Central Bank.
According to Cavallo, regardless of how many pesos the BCRA puts into circulation, demonetization or remonetization will arise from the behavior of the inflation rate. If, as Milei and Caputo say, the Monetary Base will remain constant, the demand for pesos will increase in real terms “because as the economy deflates, people decide to increase their savings in pesos, the price level will have to be reduced, that is, it will have to there will be deflation”, a long and painful process. If, on the contrary, he continues, “people decide to save less in pesos, there will have to be inflation, even when there is no issuance of pesos.” In both cases, the result is negative.
That is why the former minister emphasizes that if the objective of monetary and exchange policy were to stabilize the price level and avoid both deflation and inflation, the BCRA “instead of maintaining the monetary base constant will have to manage the legal reserves of deposits.” in pesos and in dollars, the interest rates in both currencies (through open market operations with bonds in pesos and in dollars and intervening in the exchange market by buying or selling reserves in such a way as to tend to stabilize the price of the dollar in pesos. This is what the Central Bank of Peru does masterfully.
That is, between currency competition and dollarization, Cavallo stands firmly in the field of currency competition, maintaining the existence of the peso and the Central Bank.
Finally, Cavallo warns that the current price of financial dollars (MEP and CCL, which on Friday closed at $1,251 and 1,214 respectively) “underestimates the exchange rate that would result in the single and free market, without stocks.
For this reason, he warns, both the Economy and the BCRA could overestimate their ability to contain inflation through the crawling peg (exchange slippage) of 2% monthly. That in turn, he concludes, “increases the risk that the complete elimination of the stocks will not be possible without an initial devaluation jump that once again requires realignment of relative prices of tradable goods and rates of public services.”
To make real progress in reducing inflation and recovering the economy, Cavallo urges the government to advance deregulation, praises that both Milei and Caputo have declared their intention to eliminate the PAIS tax and withholdings and is enthusiastic about the possibility about what Federico Sturzenegger occupy a ministerial position to advance on both fronts.
In addition, he sees a window of opportunity in the extraordinary tax collection in May, of 366% nominal compared to the same month in 2023, to restart public works, improve “the quality of the adjustment of public spending” and negotiate with the provinces “to accompany deregulatory efforts…beginning with the reduction of distortionary taxes that fall under provincial jurisdiction, particularly those levied on gross receipts.
In particular, Cavallo recommends restarting national and provincial public works that have external financing (he cites IDB lines for USD 6.5 billion pending disbursement to finance projects whose execution has been suspended). The start of it, he points out, “could begin to reverse the sharp drop in the level of activity in construction, an area in which the highest percentage of private job losses have occurred.”
