Argentina’s Javier Milei has made a horrible mistake

[Quilombo]

What’s stopping him leaving things exactly as they are? In spite of the insane prices most Argentinians aren’t complaining (beats me why) about the situation, so he has no reason to do much of anything

Because it's not sustainable. Economists of different stripes all tend to agree that the peso is overvalued, and this starts producing all sorts of different macroeconomic distortions as we're beginning to see.

Look at the above referenced Big Mac Index for one small example. Since June, the price of a Big Mac sandwich has risen to $8,000 making the peso 38.1371% overvalued compared to the dollar, and it's going to continue to get worse month after month.

While this example may seem only applicable to a single hamburger, it can be extrapolated broadly. Brazil has devalued the Real, and it exports basically the same things we do, to the same countries, and in much higher volume. If you need to buy soy and Argentina offers the same soy as Brazil for a 38% premium, why would you buy it? This is where the big problems start, because it means less dollars for the BCRA, and less dollars to intervene in the forex market with to keep the peso artificially valued, and to service international debt.

It flew under the radar on the week of Milei's anniversary, but the BCRA still operates in basically flat or negative net reserves when assets and liabilities are accounted for, and this means that Argentina will require an IMF or private loan disbursement to be able to make payments on the soon maturing international debt in H1 2025. The pro-Milei press likes to say stuff like "Incredible! Look how many dollars the BCRA bought in [month]!" but the BCRA did so because that's how they pay these loans. If you have a savings and checking account it would be akin to your spouse saying "Wow! My wife just put another $1,000 in our checking account this month!" despite the fact she did so because the mortgage payment is scheduled to be withdrawn the following day. Seems a lot less incredible, doesn't it?

Anyways, while monthly inflation is now a single digit, people are only spending money on the basics (rent, food, utilities, etc.) and this continues the economic recession, job losses, shrinking tax base, etc. which put further strain on a country to remain in a budget surplus/able to service it's debts when it's international reserves are flat, and it's currency is overvalued. Austerity is often penny wise and pound foolish because it can end up costing societies millions more than they end up saving by diminishing a country's capacity to grow and collect tax revenue.

Milei knows that the status quo isn't sustainable, but he's also afraid of letting the market determine the exchange rate because everyone knows it will cause upwards of 40% to do so. This is where the title comes from: a horrible mistake. He had a chance to let the market determine the exchange rate, to let the chaos occur during his first year, to keep the devaluation in line with inflation, but he chose not to in order to kill inflation faster, and now he will reap what he has sowed.

 

[TWB103]

..They don't have to deal with rent going up and up, and the price of all types of food going up and up, while the value of our incomes goes down and down and down..

Er..yes they do.

 

[LuckyLuke]

Because it's not sustainable. Economists of different stripes all tend to agree that the peso is overvalued, and this starts producing all sorts of different macroeconomic distortions as we're beginning to see.

Look at the above referenced Big Mac Index for one small example. Since June, the price of a Big Mac sandwich has risen to $8,000 making the peso 38.1371% overvalued compared to the dollar, and it's going to continue to get worse month after month.

While this example may seem only applicable to a single hamburger, it can be extrapolated broadly. Brazil has devalued the Real, and it exports basically the same things we do, to the same countries, and in much higher volume. If you need to buy soy and Argentina offers the same soy as Brazil for a 38% premium, why would you buy it?

Excellent analysis. I've often wondered where will the cracks appear and how will it affect the long term sustainability. Exports certainly seems like the first domino. Agro exporters may rotate crops to domestic consumption, to try to offset flagging sales. This, as you pointed out, will reduce a key source of dollars. Milei will have no choice but to reduce export retention taxes to prevent this. Unless rising petrol exports can offset the agro loss.

In either case, you see the BCRA running critically low on dollars and until a sudden default being the end of the 2% fakeflation?

Question...why do you think the price of a hamburger will continue to get worse and worse every month?

 

[Redpossum]

Nobody reading this is struggling to survive. Cutting back isn't struggling.

Says the man who's spent the last year and a half boasting about how rich he is.

I totally think the same re the dollarisation. This year, all those rents that were dollarised rents in 2023 have not increased much, if at all, this year.

My rent went up twice so far in 2024, for a total increase equal to 10% of my monthly income.

 

[retiredbanker]

Says the man who's spent the last year and a half boasting about how rich he is.



My rent went up twice so far in 2024, for a total increase equal to 10% of my monthly income.

Don't know about your rental increase issues but I suggest you schedule a vision check as your claim to something I purportedly said is only in your purview. You must be seeing things, Red.

 

[JeffR]

"He may muddle through if we really are on the cusp of another commodity super-cycle, though in no better shape than emerging market peers. Or he may impale himself on the peso. Either way, an army of ideological fans around the world are projecting a lot of wishful thinking onto their libertarian pin-up politician."

And that's the thing. His "ideological fans around the world" are not here. They don't have to live with the consequences of this "first experiment in Austrian economics ever attempted in a modern developed state". They don't have to deal with rent going up and up, and the price of all types of food going up and up, while the value of our incomes goes down and down and down.

To them we are an experiment, like little lab rats. But to us, this is our lives, this is our struggle to survive.

Yes. Whenever I hear people babbling about the "Milei Miracle" that they have read about somewhere, I always ask if the have ever been to Argentina before, and if so for how long. 99.99% of the time they never have, but assure me they will just as soon as Milei turns things around.

 

[Quilombo]

Yes. Whenever I hear people babbling about the "Milei Miracle" that they have read about somewhere, I always ask if the have ever been to Argentina before, and if so for how long. 99.99% of the time they never have, but assure me they will just as soon as Milei turns things around.

I'll believe the economy is good when Marcos Galperin changes his fiscal residency back to Argentina instead of posting Milei loving cringe from Uruguay. People need to put there money where their mouth is.

 

[Quilombo]

Excellent analysis. I've often wondered where will the cracks appear and how will it affect the long term sustainability. Exports certainly seems like the first domino. Agro exporters may rotate crops to domestic consumption, to try to offset flagging sales. This, as you pointed out, will reduce a key source of dollars. Milei will have no choice but to reduce export retention taxes to prevent this. Unless rising petrol exports can offset the agro loss.

In either case, you see the BCRA running critically low on dollars and until a sudden default being the end of the 2% fakeflation?

It's hard to say, I think the BCRA is running on fumes and something has to give to result in another influx of dollars to keep the pyramid scheme going. As you said, it could be lower retentions (further hurting tax revenue), or, IMO, more likely in the immediate future, another one of these rob Peter to pay Paul loans where they give Argentina another disbursement of funds once it makes the payments due in H1 2025 for it's international debt maturities (including those due to the IMF itself).

The problem is once again this isn't sustainable, the underlying problem is that the peso is expensive, dollar cheap, and tax pressure high along with the Argentine economy in recession. The only thing keeping the lights on is the fact that we're not in a global commodities bust cycle. If we enter one all bets are off. That being said, it might not even take that level of chaos to cause the exchange rate to return to reality. It's possible that the IMF forces Argentina to end the cepo, which in doing so would be a double edged sword because the BCRA would get dollars needed to pay loans, but inflation would rise again.

The irony of all of this of course is that the exchange rate causing inflation only matters for as long as there is a peso. If Milei actually did what he campaigned on (or didn't artificially prop up the peso) this wouldn't be an issue. If he wants someone to blame, look in the mirror.

I think what we're seeing is the crux of the author's piece from the original article: it didn't have to be this way. Even if you disagreed with dollarization (like many of us, myself included did) doing so would have likely been less destructive in the long term than whatever it is we have now. We have no dollarization, cepo intact, a dollar tarjeta of $1,664, dollarized prices, no BCRA reserves, increased tax pressure, inflation ready to shoot up once the cepo is removed, and everything from flour to smart phones which are made here being cheaper abroad in wealthier countries.

Question...why do you think the price of a hamburger will continue to get worse and worse every month?

Because the laws of supply and demand are ignored in Argentina. Demand falls, so prices increase here to make up the lost revenue. It went from 6K to 8K from June to December, why wouldn't it repeat the same upward trajectory for as long as there is inflation?

Last night someone was in the US and posted the price of a bottle of Argentine wine in a grocery store there vs. Coto. If I remember correctly, it was $25 USD and 35K ARS respectively. It doesn't make sense. Even if we assume that wine has a 0 rate export tariff here (which I don't think it does), and a 0 rate import tariff in the US (again, don't think it does, could be wrong) that would make it roughly the same price, $25/bottle before including things like shipping, insurance, delivery, brokerage fees, etc. Now, I assume, again, this isn't the case, which means the winery is probably exporting it for much less, because these costs have to be added, plus the grocery store is still making a profit on the wine, yet it's STILL cheaper than being sold here having traveled to the other side of the planet.

This means, to me, the most likely explanation is that Coto and the winery are gouging Argentine consumers, and it's not as the libertarians like to claim, the VAT's fault, otherwise the price in the US would be much higher if both bottles of wine are being sold to wholesalers for $25/each. This is why I think the price will continue to increase, because they can get away with it.

 

[Che1990]

It's hard to say, I think the BCRA is running on fumes and something has to give to result in another influx of dollars to keep the pyramid scheme going. As you said, it could be lower retentions (further hurting tax revenue), or, IMO, more likely in the immediate future, another one of these rob Peter to pay Paul loans where they give Argentina another disbursement of funds once it makes the payments due in H1 2025 for it's international debt maturities (including those due to the IMF itself).

The problem is once again this isn't sustainable, the underlying problem is that the peso is expensive, dollar cheap, and tax pressure high along with the Argentine economy in recession. The only thing keeping the lights on is the fact that we're not in a global commodities bust cycle. If we enter one all bets are off. That being said, it might not even take that level of chaos to cause the exchange rate to return to reality. It's possible that the IMF forces Argentina to end the cepo, which in doing so would be a double edged sword because the BCRA would get dollars needed to pay loans, but inflation would rise again.

The irony of all of this of course is that the exchange rate causing inflation only matters for as long as there is a peso. If Milei actually did what he campaigned on (or didn't artificially prop up the peso) this wouldn't be an issue. If he wants someone to blame, look in the mirror.

I think what we're seeing is the crux of the author's piece from the original article: it didn't have to be this way. Even if you disagreed with dollarization (like many of us, myself included did) doing so would have likely been less destructive in the long term than whatever it is we have now. We have no dollarization, cepo intact, a dollar tarjeta of $1,664, dollarized prices, no BCRA reserves, increased tax pressure, inflation ready to shoot up once the cepo is removed, and everything from flour to smart phones which are made here being cheaper abroad in wealthier countries.



Because the laws of supply and demand are ignored in Argentina. Demand falls, so prices increase here to make up the lost revenue. It went from 6K to 8K from June to December, why wouldn't it repeat the same upward trajectory for as long as there is inflation?

Last night someone was in the US and posted the price of a bottle of Argentine wine in a grocery store there vs. Coto. If I remember correctly, it was $25 USD and 35K ARS respectively. It doesn't make sense. Even if we assume that wine has a 0 rate export tariff here (which I don't think it does), and a 0 rate import tariff in the US (again, don't think it does, could be wrong) that would make it roughly the same price, $25/bottle before including things like shipping, insurance, delivery, brokerage fees, etc. Now, I assume, again, this isn't the case, which means the winery is probably exporting it for much less, because these costs have to be added, plus the grocery store is still making a profit on the wine, yet it's STILL cheaper than being sold here having traveled to the other side of the planet.

This means, to me, the most likely explanation is that Coto and the winery are gouging Argentine consumers, and it's not as the libertarians like to claim, the VAT's fault, otherwise the price in the US would be much higher if both bottles of wine are being sold to wholesalers for $25/each. This is why I think the price will continue to increase, because they can get away with it.

On your last point, I’m always amazed at the discounts you get in Coto and other supermarkets with the bank promos, every weekend 20-25% that applies even to existing offers like 3x2s etc. The margin they have must be huge to be able to offer those discounts.

And yes it feels like everything is cheaper buying from abroad. I was looking at melatonin in Farmacity, it’s USD$0.19 per capsule. Buying Nature’s Bounty through Grabr even with the fees works out at $0.07 per capsule.

I really hope opening the economy and forcing local industries to compete makes things come down in price (and improve in quality).

 

[Ries]

This article seems to assume, without any evidence, that Milei actually could have done things that he wanted to. But he had no political base in congress,and he simply did not have the votes to do it. A lot of forces never intended to let him do all that crazy hayakian stuff. He does not have the ability to drop all import restrictions, to install “ free trade “ or to get rid of the bureaucracy.