By Roberto H. Cachanosky, Libertad y Progreso
We know that Argentina ran out of currency a long time ago, at least if we understand currency as merchandise that is widely accepted as a means of exchange and a reserve of value. The peso is not a reserve of value and, therefore, has ceased to be currency because it does not meet one of the two requirements necessary to be considered one.
It can be argued that both June and December are months in which the demand for currency increases. I allow myself to disagree with that statement because if it is accepted that the demand for currency is the number of pesos that people want to have immobilized in their pocket, then there is no way to measure how the demand for currency evolves. Currency demand is a concept that cannot be measured easily, although it can be perceived. For example, when there is an increase in the amount of currency issued and prices rise, it is because the demand for currency is falling or because the supply of currency is increasing, but not the demand. That is, more pesos are produced than people want. Thirdly, it can happen if the supply of money grows faster than the supply of other goods and services. The amount of pesos circulating grows faster than the number of goods offered by producers.
Argentina is particular in that the supply of currency tends to increase, the demand for currency falls and, at the same time, the supply of goods and services decreases or grows very little. In this scenario, inflation shoots up and reaches levels like our current ones, which will perhaps be higher in the not too distant future.
Last December, a record for monetary issuance was broken to finance the treasury. By looking at the monetary base and taking the daily average for December of the monetary base and comparing it with the daily average for November, a growth of 8.6% is observed, something which is reflected in core inflation, as can be seen in graph 1. In December, core inflation shot up compared to previous months, which, by the way, had already been high, exceeding 3% per month.
When looking at the first 19 days of January and comparing it with the same period in December, an increase in the monetary base of 11.2% is also verified. Thus, it should not be surprising that inflation is at increasingly high levels and has a tendency to rise and the dollar at the black market is skyrocketing in the face of a chaotic macroeconomic scenario and a political context that adds fuel to the fire in terms of uncertainty. Faced with such an issue of wallpaper that nobody wants and in this context of economic and political uncertainty, the rise of blue even seems soft.
Moreover, in December monetary issue was at a record, with the main income being the inflation tax, followed by VAT, Employer Contributions, Personal Contributions, etc. That is, the inflationary tax was 4 times larger than the VAT when estimating the treasury’s income, and the VAT was the tax that collected the most for the treasury.
In other words, in December, given that the monetary issue was equivalent to 86% of the treasury’s tax revenues, for each peso the treasury collected in taxes to finance its expenses it financed almost another peso of spending with monetary issuing.
While this fiscal and monetary mess is observed, the president takes care to point out the agreement with the IMF as being responsible for all our economic dramas.
The president says that he is not going to sacrifice growth to comply with the adjustment requested by the IMF. The reality is that the adjustment is being made by adjusting public wages and pensions below the inflation rate.
The question that arises, given so much insistence on gradualism that the government wants to apply to reduce the deficit, is the following: how does the treasury plan to finance the fiscal deficit between now and 2027, which is when it is supposed to reach fiscal balance according to Minister Guzmán?
Considering that there is no room to squeeze the taxpayer for more resources and that, with a country risk of almost 2000 basis points, the international financial market is closed for Argentina, there are only two options left to the government if it wants to be gradual in the reforms. They are: 1) take more internal debt in the local market, displacing the private sector and preventing it from accessing the scarce credit that remains (between the BCRA and the treasury they are taking what little there is of internal savings ) and 2) printing money, accelerating the inflationary process.
The government does not have many other options to reduce the fiscal deficit gradually and that is why it does not reach an agreement with the IMF.
Whichever of the two options you choose, issuing or borrowing in the domestic market, inflation will increase and we will see an increasing adjustment to the private sector either via liquidation of real income or more public spending to cover the interest that will have to be paid due to the greater stock of debt. This greater stock of debt will cause the default of the internal debt or require a phenomenal monetary issue to pay for it.
In short, with such a level of monetary issue, it should not be surprising that the the dollar has skyrocketed in the black market and that the agreement with the IMF is delayed, considering the ideological rift that Kirchnerism has with the institution. Kirchnerism subordinates the welfare of the population to the anti-IMF discourse hard-core Kirchnerists like to hear. The political discourse of the barricade prevails over the convenience of the country to put its economy in order, agreeing with the IMF or without the IMF.
Roberto H. Cachanosky is a member of the Academic Council of Libertad y Progreso.