“Peso is lava” and nobody wants to burn: what drives the parallel dollar rise

“The floor is lava” is a hit entertainment show produced by Netflix and has a very simple scheme. It involves a group of people crossing a room from side to side without touching the floorprecisely because the floor “is lava”.

It could be said that for today’s Argentines “Weight is lava”. Whoever has it wants to get rid of it, because it burns in the hands.

Beyond the metaphor, the consequence is that in order not to be exhausted, the Argentines, each according to their possibilities, he gets rid of pesos as soon as he has them in his possession. For a very simple reason. The longer it takes to spend them, the less purchasing power those pesos will have.

Since it turns out very unattractive to save on pesos, the decision is to go out and buy anything, but preferably durable or semi-durable goods, but also basic necessities. When the salary is deposited in the account, the pesos arrive in the pocket, what remains after paying the debts quickly goes to consumption. Of course, another highly valued asset is the dollar. If there is a lot of demand, for example, for durable goods, the price goes up. If there is a lot of demand for dollars … the answer is known.

For economists, it is a typical phenomenon of drop in demand for pesos and, in relation to this, increase in the speed of circulation of money. Therefore, the same $ 1,000 note is used on days when the speed of money circulation increases to settle more transactions than in “normal” times.

In any case, the consequence is an increase in prices – inflation – or the dollar – devaluation of the peso -. What we are seeing these days, where inflation is going higher and higher and alternative dollar prices are doing the same. No matter how hard the government has tried to convince the company that the concern for the dollar “It’s a cultural question” people perfectly understand what is happening. Buying dollars, like it or not, is an act of self-defense.

Interest rates are amazing. One of the first slogans expressed by Minister Silvina Batakis was to announce that she would seek bring interest rates into positive territory, i.e. above expected inflation.

That is, those who decide to invest their pesos, for example, in a specific time, receive an interest rate that exceeds the inflation rate. It didn’t happen. In fact, last Thursday, after having known the CPI of June, the BCRA decided not to touch the rates of the regulated fixed time. He announced a “Interest rate broker”, which did not have the desired effect. How come? The economist Andrés Borenstein explains: “The problem is that the corridor was semi-distorted, even if they put a higher rate as a ceiling than that of the Leliq. Today the broker does not serve the banking or financial markets, mutual funds because this market, like that of loans to front-line companies, has as its reference the repo rate, which has remained in the 46% nominal per year. This means that it is still very cheap to borrow pesos.

Borenstein also doesn’t believe the Central Bank has added fuel to the fire in the past month, despite this 1.2 billion pesos issued, to finance the deficit and buy back Treasury bonds in pesos. “He brought out some brutality, but most of those burdens were absorbed by Leliq. Today, punctually, it is not a question of an excess supply of pesos, but of a brutal drop in the demand for pesos ”. In other words, pesos burn and nobody wants to burn.