The Government is sounding the alarm for a new phase in the fall of the demand for money. All of the country’s monetary aggregates are shrinking relative to nominal output, and despite the softening of the money supply, prices continue to rise with a floor of 6% per month.
The failure of the Massa plan and the lack of credibility resulted in a new shock regarding the call for people to accumulate pesos in any form, either for purely transactional use or for depositing in instruments of the financial system. Instead, people are increasingly betting on reliable assets like the dollar to hedge against inflation.
Demand for pesos measured by the monetary base has fallen from 7.3% of GDP in March of this year to 5.74% at the end of September, as confirmed by the Central Bank.
Likewise, demand as measured by aggregate M2 (which includes time deposits and other accounts) fell from 15.3% of GDP to 13.2% between March and September.
The monetary base only recorded an increase of 34.6% over the past 12 months and the currency for transactions did so by 45%, at the same time that retail prices increased by 88% and wholesale prices exceeded 80%.
The fact that inflation rises above the money supply indicates that Argentines increasingly want to hold fewer pesos.
High frequency indicators suggest that demand for the peso has continued to decline so far and this week has accelerated its decline. The informal dollar climbed to parity at $306, while the financial dollar Cash with Settlement (CCL) reached $324 on Wednesday.
The higher demand for dollars is nothing more than the counterpart of the lower demand for pesos.
For the government, the shock to peso demand is an ominous sign that risks exacerbating the inflation rate and leaving the already very uncertain 2023 inflation target completely out of the question.
The Secretary for Economic Programming, Gabriel Rubinstein, admitted that the fall in the demand for money generates a direct inflationary effect and is similar to that of the increase in the fiscal deficit financed by emission. Even limiting the monetary issue, if the demand for pesos decreases, inflation will continue to rise unabated.
“We are experiencing a decline in the demand for money. In macro terms, this is equivalent to an increase in the deficit”, explained the secretary.
However, Rubinstein ruled out the possibility of higher exchange rate measures or “shock” as he assured that the government does not have enough credibility or consensus to open the exchange market or change the current scheme. If it tried, the economist warned, there would be a hidden danger of a “Rodrigazo” and a violent burst of inflation.
With information from The Right Daily
