dollar-peso rate

[bigbadwolf]

Over the last eight months or so, the US dollar has weakened against a basket of leading currencies. However, instead of the peso strengthening against the dollar -- which is what one would expect to happen -- it has weakened a bit. This suggests someone -- I presume the Argentine government -- is in the market buying dollars with freshly printed pesos. A Scottish gent (since returned to Old Blighty) informed me this is because Argentina is paying off some of its creditors piecemeal. Right now it's Spain who's to be paid back to the tune of $6bn. This is also the reason, apparently, why inflation is raising its ugly head again: lots of new pesos in the market. Unfortunately I can find no corroboration of this interesting theory on the web. Can anyone shed any new light on this mystery of high finance?

 

[malbec]

Well, can you read castellano? I've seen articles about that quiteregularly in La Nación newspaper. The gov is also very keen tokeep the peso low to attract investment from abroad and topromote export. I don't know if they are actually printing newpesos...the money they collect through tax (in pesos) is beingused to buy hard currency (not only dollars but euros too). Andthe tax is giving the gov record amounts of money.

Somehow I can't see (sadly) that working forever. All in all I think Super-K and Co. have no idea about economics.

 

[JG]

Yes, im curious to know whats really going on too. I do my best to read the papers, but not sure if I get the whole story though and Id like to hear more if anyone can find out and report back.
However, i must say it appears that lots and lots of pesos are certainly being printed, although not by the federal government. I can attest that for the several years Ive been here, every shop, every person is still holding bills up the the light, shaking them, feeling them, and theres no end in sight. If you just got here, believe me, there is no end to it.They know its their governments job to put an end to this rampant counterfeiting (police in on it), but they also know not to expect much from the same.
Allow me to throw out one additional question. If, out of the blue, the exchange went 2 to 1, would you stay? Would paying almost what you paid back home justify dealing with......all we deal with each day, like horrible noise, pollution, slack customer service, very dirty population, and a cigarette in every mouth over 12.

 

[Bill]

If the peso went back up to the U.S. dollar, I have to admit I'd bail out.

 

[realba]

When i was negotiating the long-term rental of my flat, my prospective foreign tenant was wondering why i wanted a peso contract and not a dollar one. He was worried about the peso rising v the dollar making his rent more expensive and i was worried about the reverse. I wrote the following to him:

'At the end of the day, even if the government lets the peso rise to its true
value, we're only talking about a 15-25% increase, to around 2.3-2.6 to the
dollar. And it'll pretty much stop inflation in its tracks so there'll be a
natural levelling of dollar-peso exchange rate and local costs (as in, the
peso will cost more but prices won't be rising so fast so the difference
will be smaller than might otherwise be imagined). I can't imagine the peso
ever rising to more than 2.3, unless there's a major, major dollar crash.
My view is that the peso will be at 3-1 for at least another year and a
half, probably 2 and that inflation will keep ticking along at 8-12%. A year
after the election, Mr Populist Presidente will let the peso rise and take
the credit for the amazing reduction in inflation. The resultant increase in
purchasing power of the peso will see many Argentines being better able to
afford imported goods like electronics and cars and go on foreign holidays.
This will help paper over the cracks appearing in el Presidente's economic
"policies".'
There are quite a lot of articles in the local press about this but none of them have ever properly explained the negatives of 3-1. I can only assume that this is because Kirchner doesn't want the public at large (i.e. the vast majority of the population that doesn't understand inflationary economics) to know the reason why their shopping bills are going up every month and is leaning heavily on the 'papers to stop negative reports being published. This is a common practice by the current government.
I'd agree with 'malbec' about Kirchner knowing nothing about economics but go a little further and say that he knows nothing about governing a democratic country, democratically. The guy is simply a typical Argentine caudillo leading his country straight down the well-known road of boom and bust.

 

[nadia]

If the goverment was printed pesos it would generate more inflation so the peso get less strong and therefore the exchange rate would be 1 dollar = 4 pesos or more in the future.

 

[syngirl]

The economist had an article on this subject in February, it's subscription only so I'll copy some of the juicier bits (including the fact that yes the government is printing more pesos to keep up):
MANY developed-world policymakers might envy Felisa Miceli, Argentina's economy minister. When she took over in December, she inherited a thriving economy which had been growing at an annual rate of around 9% for the previous three years. But if the relatively inexperienced Ms Miceli, chosen primarily for her loyalty to President Néstor Kirchner, is unable to bring the country's resurgent inflation into line within the next 12 months, Mr Kirchner might decide to distance himself and perhaps even use her as scapegoat—lest Argentina's monetary troubles be left at his own political doorstep.
...
On the monetary front, his desire to keep the peso artificially cheap—thereby maintaining the competitive advantage enjoyed by Argentinian exporters and domestic import-substituters—has forced the central bank to print more pesos in order to buy American dollars, thus increasing the money supply and fuelling inflation. Meanwhile, his business-bashing rhetoric and continued price controls have discouraged large investments, causing capacity constraints which have likewise pressured prices upwards.
...
[Kirchner's] strategy has consisted largely of a host of short-term price-freezing pacts with retailers and some suppliers. Typically, these have been extracted either by the carrot of implied government support in forthcoming labour negotiations or by the stick of threatened tax increases. But their primary role appears to be to contain short-term inflationary expectations while awaiting a promised return to fiscal austerity. “Kirchner seems to think that businesses raise prices just because they can unless someone tells them no, so he tells them no,” says Javier Alvaredo, an economic consultant.
...
But the prudence promised on the fiscal side is nowhere to be found in monetary policy. Mr Kirchner has failed to use his sway over the central bank to support a meaningful increase in interest rates, which remain at a negative 7% in real terms. And he has turned the highly inflationary 3:1 peso-dollar exchange rate into a virtual trademark of his presidency. But until Argentina accepts positive real interest rates, prices will continue to rise.

 

[bigbadwolf]

Well, can you read castellano? I've seen articles about that quite
regularly in La Nación newspaper.

Nope, I can't read Castellano, amigo. Leastways, not sufficiently well. Syngirl has copied and pasted a very informative article from the Economist. The part about negative real interest rates (i.e. nominal rate - inflation) presumably means its lunacy to keep money or short-term financial instruments, which lose real value. Better to buy something tangible (house, land, car, new fridge), which as a by-product stokes inflation.
It occurs to me that if inflation continues at around 12% over the next three years, there won't be any upward pressure on the peso (the purchasing power of the peso will have declined to a level where exports will be more expensive and imports less expensive at the 3-1 rate).
Something that I have thought about off and on is the way the devaluation of the peso from dollar parity to 3-1 has changed the purchasing power of different constituencies. It seems reasonably clear to me that the % share of GDP that constitutes wages and salaries has taken a nosedive after 2002, and that business both of the export kind and the import-substitution kind has increased its % share.

 

[malbec]

Better to buy something tangible (house, land, car, new fridge), which as a by-product stokes inflation.

But most land/house prices in Argentina are quoted in us$...as a means against inflation. Through the same mechanism those objects don't stoke inflation (as long as the peso:us$ rate remains constant). I've seen this happening before in Argentina...through inflation properties become cheaper (as it was somewhen in the 90's)

 

[bigbadwolf]

But most land/house prices in Argentina are quoted in us$...as a means against inflation. Through the same mechanism those objects don't stoke inflation (as long as the peso:us$ rate remains constant). I've seen this happening before in Argentina...through inflation properties become cheaper (as it was somewhen in the 90's)

Just to clarify: as long as the exchange rate remains roughly the same (3-1), and there is fairly free convertibility between dollars and pesos, whether the prices of houses and land are in dollars or pesos is immaterial. For example, if I have 600,000 pesos, convert that into USD 200,000 to buy a property, which then increases in price to $270,000, there has been a 35% increase: this is inflation. In Buenos Aires at least, and probably in other areas as well, there has been an increase in such prices over the last few years, so I think it can be argued that these have contributed to inflation. Correct me if I'm wrong. (Of course it's another matter if these items are included in the basket of commodities used by the government to calculate the official inflation rate.)
The scenario you're talking of is perhaps one where property prices may have been quoted in pesos, where the increase in peso prices either didn't happen or was insufficient to compensate for the declining value of peso against dollar, and so properties declined in dollar terms (but this particular scenario didn't happen during the 90s, where the peso was stable against the dollar). Another scenario you may be talking of is where dollar-peso rate is stable, but where rapid (wage) inflation and stagnant property market make properties more affordable to the locals.