In my previous post, I wrote about one of the two most important prices in the Argentine (or any) economy- exchange rates.
That brings us to the other of the two most essential prices in the economy, the one that is THE most important price, the time price of money, the interest rate. Interest rates are no less distorted in Argentina nowadays than the price of the local currency compared to other currencies.
Consider the short-term liabilities of the Argentinean central bank that Mr. Caputo, the Argentine finance minister, is concerned he will be forced to monetize if exchange markets are liberalized.
Do you know the nominal rate they are paying per year? An APR of 100%, or about 9% per month. In nominal terms, that seems a lot; however, when inflation is running at 25% per month, the interest rate in real terms is negative to the tune of two digits per month!
No wonder people flee those deposits the first opportunity they have…
Talking about the return to the gold standard after WWI, Mr. Jacques Rueff argued that no country needs gold to resume redemption; they must be willing to pay the interest rate necessary to keep depositors invested in the countries’ currency. That century-old lesson is as valid for Argentina today as it was then.
The demand for pesos is low, because any cash balance you hold in that currency is losing purchasing power at 15% a month- even if you have an interest-bearing investment! In any modern economy, there are many distortions in the price of money; Argentina is an outlier in terms of the extent of the distortions but not their existence. It is not easy to allow financial markets to reveal the actual price of capital in the middle of so many interventions, but that is not an excuse not to liberalize markets and allow them to reveal the natural scarcity of savings in the Argentine economy.
The fiscal needs of the state are indeed forcing the administration to continue to crowd out private investments to carry most of the existing savings to the funding of the public deficit, if not by paying higher interest rates, by creating other regulatory costs that make the more than 15% monthly loss the least bad of the investment alternatives peso holders have. Again, to bring the interest rate to something closer to market reality, to the time preference of Argentinean society, would imply positive interest rates, that is for sure…
With that, Mr. Caputo is wasting the good will with which the new administration was received in its early days thanks to the significant majority of the votes it received in the recent elections and risking the success of the Milei’s administration.
Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain.
