What Milei said about the dollar and currency controls

This leads central banks to tighten monetary policy, to raise interest rates, and everyone enters a more compromised situation in terms of activity and inflation.

Now, the interesting thing is: what would have happened to us in another context? Today the interest rate, for example, on American bonds is around 5.5. Can you imagine what it would have been like that in front of... We have to roll over 25 billion dollars. Since we do not have a deficit, we only have to roll over. Imagine if we also had 35 billion dollars of deficit. That is to say, can you imagine what Argentina would be today having to go out and look for 60 billion dollars in the market? With interest rates in the United States at 5.5. Another government would have ended up defaulting, and this would be a true disaster. Experience shows that both the government of Macri and the government of Alberto Fernández, in their periods, had 20 points of fiscal deficit.

So at this point, we have already returned 100 billion dollars to the Argentines. And see what the counterpart is. I don’t have to go looking for those 60 billion dollars in the market. And not only that, but we had an energy deficit, and we went from -5,000 to +10,000, and today we would be around -20,000 million dollars.

So we would have an explosion of pesos and many fewer dollars. And besides, when we arrived, the exports in the knowledge economy were zero. Today they are 10 billion dollars or more. When you want to realize it, all the changes that took place from the time we took office until now, the change is, in the logic of the exchange market, 100 billion dollars. Shall we go? At another moment in Argentine history, today we would be in hyperinflation and with a decline in GDP between 10 and 15 percent. And today we are discussing that the economy is slowing down and that inflation is decreasing more slowly. Ok, yes. I did not choose the international context. I did not choose the miserable actions of my political opponents. But it is what it is. One of the things that you should never overlook are the restrictions.

And I mention this because, if one considers that oil jumped from 60 dollars to 110 dollars, that American interest rates are at their highest levels in the past 30 years, because it is around five and a half percent. I look at the analyses done by my road companions from my previous life, also known as econochantas, and I say, we have the whole financial program closed. I still remember a chanta, “the chanta of the dye”, we had sent the payment order for the bonds and that same night, I mean, the night before the payment he said we weren’t going to pay. You remember that very well. Well, we paid, and we also have next year’s financial program closed. If they studied the fine print of our SAP contracts well, they would know that very well, right? But well, what can we do? There is no one more blind than the one who does not want to see.

With a sound Central Bank, we eliminated the need to issue money, fundamental to lower inflation, and we also eliminated the currency controls. And as if that were not enough, we removed 18,000 regulations. That is to say, we cleared stones from the road. Regulations are basically of two types: if you look and observe what is happening in Argentina to see the impact that each regulation we are removing has. You can see that Argentina is becoming a tremendous exporter in oil and gas.

And without going too far, we have just gone through one of the most complicated years globally, with commodity prices soaring, international rates skyrocketing, and thanks to having the macroeconomy ordered, the dollar remained stable, and we maintained record levels of reserve purchases throughout the year. This is also important to note, because aside from the fact that in this same macroeconomic configuration, at another time in history, we would have blown up, it is also important to understand what is happening in the world and how it impacts us.

Additionally, in a context like this, we are not stopping buying dollars in a massive way. That is to say, if we had let the exchange rate fall in this context, if we applied a linear model, the exchange rate would be at 1,000. This is to have a sense of the magnitude of what is happening. Or look, everybody is falling, everyone has problems with inflation. We see that with slower growth and see it with a slower inflation deceleration, but notice that what happens to us in terms of interest rates, this is interesting: we have been rolling the debt all the time, sometimes with clear positive differences, ending up absorbing pesos, without moving the local interest rate. This shows the strength of the program.

So, when these moments appear, so to speak, the utility increases substantially.

That said, one of the things I want to share is how this approach to economic growth is the determining element for which we design public policies, particularly economic policy. We essentially have to face two situations. One is the situation and how to link the situation to the long term, which is what makes up economic growth. At the time we received the Argentine economy, we had the worst of the three major crises in Argentina; we had a monetary imbalance that was double that of what we experienced in ‘75, which was an inflationary explosion with six times the inflation rate. Imagine that it was double, the best manifestation is that the exchange rate gap, that is, between the official exchange rate and the parallel one, had a difference of three times, that is 200%; the other thing we were facing was the situation of a bankrupt Central Bank and a large fiscal imbalance with social indicators worse than those we had prior to the 2001 crisis.

In this context of political uncertainty, Country Risk skyrocketed, aptly nicknamed kuka risk, which led to a fall in demand for assets denominated in pesos, as the peso was attacked by the equivalent of 50% of M2, that is, about 41 billion dollars. Interest rates were soaring, activity came to a screeching halt, and the decline in transactional demand for pesos caused the inflation rate to accelerate. It is clear that this coup adventure was not without cost. According to our estimates, we lost two and a half points of growth, meaning the kuka risk also cost us 25 billion dollars in terms of GDP.

The first will allow for the continued reduction of Country Risk, hence the rate in dollars; while the second will make it possible for the nominal interest rate in pesos to decrease, while also reducing the distortion of relative prices caused by inflation. Note that this results in a better allocation of resources and an endogenous decrease in the interest rate, which leads to greater capital accumulation, higher productivity, higher wages, and lower levels of poverty and indigence.

Thus, as net worth becomes increasingly negative, a higher price level is needed to liquidate the debts of the Central Bank, so that it adjusts to the real size of its assets. In this sense, as the treasury finances itself by placing worthless securities at the Central Bank, the long-term price level is higher and, with it, the inflation rate in the present is also greater. Put like this, it is very easy to understand why since the exit from convertibility the price of the dollar has multiplied by 1200 times.

In the last 25 years, policies via the Central Bank have robbed Argentines of more than 100 billion dollars. Therefore, given such destruction of assets, it should be no surprise the inflationary disaster we have lived through in the last 20 years. And, since the dollar is just another price in the economy, it is almost natural that it has systematically skyrocketed without finding a ceiling.

The present agreement seeks to restore the assets of the Central Bank and thus its net worth, so that inflation becomes only a bad memory of the past. Thus, the money that enters the national treasury will be used to pay off its debt with the BCRA. Moreover, since these securities do not trade at par, the gross debt of the treasury will fall.

Put differently, in the coming days we are going to a level of gross reserves such that the monetary base could be redeemed at an exchange rate of 650 pesos, while if we take the definition of broad monetary base, it could be done at 911 pesos. Moreover, if we use the upper limit of the band presented by Minister Caputo, not only could the entire broad monetary base be redeemed, but there would be around 15 billion dollars left over.

Thanks to taking away from politics the power to regulate prices at will, we managed to solve supply problems in key sectors, such as fuels, and we were able to correct the enormous problem of relative prices they left us. Upon taking office, we had about 20 different exchange rates, with a gap between the official and the free that had reached levels of 200%. Today, the gap stands at values below 15%.

We have moved from an economy where installments had ceased to exist to an economy where there are thirty-year mortgages. That is to say, we have gone from talking about hyperinflation to talking about long-term stability. Along the way, we eliminated and reduced taxes and tariffs of various kinds, seigniorage, which is the issuance of money to finance the deficit that translated into inflation and stole fifteen percentage points of GDP from Argentines; the Country Tax, and definitively eliminated export taxes for regional economies and temporarily for traditional products, which we will eventually eliminate sooner or later.

In this regard, as the Treasury finances itself by issuing worthless securities at the Central Bank, the long-term price level is higher, resulting in a greater inflation rate in the present.

From this perspective, it is very simple to explain why since the end of Convertibility the price of the dollar has multiplied by 1200 times. Firstly, due to the massive scam of asymmetric pesification, which implied that the policy stole 14 billion dollars that backed the monetary base in 2001; and that in today's money adjusted for American inflation equals 30 billion dollars. In other words, with asymmetric pesification, that joke so cheerfully pushed and supported by Clarín, which later had its Media Law so it wouldn’t go bankrupt, there they stole 30 billion dollars from Argentines.

Furthermore, the currency controls, another inheritance from this government, not only constitute a social and productive nightmare, because they imply high interest rates, low levels of activity, scant formal employment, and miserable real wages, which drive the increase in poor and indigent people, but also, the surplus of money in the economy is now double that which existed before the “Rodrigazo”.

To have an idea of what that implies, let us remember that the “Rodrigazo” multiplied the inflation rate six times. Therefore, a similar event would mean multiplying the inflation rate by 12 times, and given that it has been traveling at a rate of 300 percent, we could hit an annual rate of 3,600.

Consequently, there is no alternative solution to adjustment. Moreover, the inheritance does not end there; the imbalances in tariffs are only comparable to the disaster left by Kirchnerism in 2015. On the exchange rate side, the gap ranges between 150 and 200 percent, levels also similar to those we had during the “Rodrigazo”. Furthermore, the debt with importers exceeds 30 billion dollars; and the retained earnings of foreign companies reach 10 billion dollars. The debt of the Central Bank and YPF totals 25 billion dollars, and the pending treasury debt amounts to about an additional 35 billion dollars. This is the bomb - in terms of debt - it amounts to 100 billion dollars that must be added to the almost 420 billion dollars of existing debt.