By Alejandro A. Tagliavini *
The dollar expanded its gains on global markets on Tuesday, reversing a month-long decline in part as appetite for risk decreased and investors waited for the next data and political speeches. Given the reigning caution, the main stock indices fall and the returns of government bonds advance slightly, with which the attractiveness of the dollar increases, they described from Scotiabank.
Tuesday’s rally canceled out the losses the dollar suffered on Monday after a disappointing report on the US manufacturing index. The currency was 1% from the one-month low to which it fell last week. Although the figures in the main report for April were lower than those for March, the US recovery remained strong and this Tuesday the dollar index rose to 91.25, close to a two-week high. In April, it was down more than 2%.
Now, as Charlie Bilello points out, in a year, Dogecoin rises 10,400%; Gamestop 3,060%; Ethereum 1,101%; Bitcoin 555%; Lumber 276%; crude 272%; corn 94%; copper 85%; soybean 79%; silver 70%; cotton 50%; the S&P 500 48%; coffee 20%; the average price of houses 17%; but the CPI only 2.6%. Something does not close between the CPI and inflation.
As Perianne Boring, among others, points out, the CPI is not a good measure of inflation. And it is less so now given that due to the repression of people and markets – quarantines and others – consumption habits have changed, as pointed out, among others, by Pascal Seiler.
The US Bureau of Labor Statistics defines inflation as «a process of continuously rising prices or, in other words, the constantly falling value of money.» This definition is a kind of dribble to try to disguise the variation in the CPI as inflation, when the truth is that inflation is the depreciation of the currency in question due to excess supply over demand.
Now, the Fed is in the middle of an experiment, according to Business Insider. Instead of raising its benchmark interest rates when “inflation” (the CPI, strictly speaking) is above 2%, the agency will allow price growth to be stronger than usual in the hope of spurring a recovery stronger and a tighter labor market. The Fed’s latest set of quarterly economic projections would trigger its first rate hike sometime after 2023.
The Fed chairman has reiterated that he is not yet thinking of reducing his emergency asset purchases or raising rates. However, he has also pointed out that the recovery of the economy exceeded expectations and apparently reached a «tipping point» in March and, if the reopening of the economy continues, it will probably put production at new all-time highs before the end of the year. . With which the Fed may change its position.
In fact, the US Treasury secretary said that interest rates may have to rise modestly to prevent the US economy from overheating due to higher levels of government spending, without specifying a timeframe. The Biden administration has proposed additional spending packages totaling about $ 4 trillion on top of the 1.9 trillion it injected as of March.
Thus, as the economy surpasses its previous peak, the Fed’s plan to keep rates near zero could present new risks, according to Bank of America (NYSE: BAC) warning, that inflation will rise unchecked, this is, that the dollar depreciates in absolute terms (or the dollar price of all other goods rises).
Now, going to Argentina, as inflation is not the rise in the CPI but the depreciation of the currency, the measurement made by Professor Steve Hanke is more accurate:
As can be seen, the interannual inflation -based on the depreciation of the peso in relation to the blue dollar- is estimated at 30.84%, lower than the 42.60% of official “inflation”, that is, the rise in the CPI. This difference is due, in the first place, to the fact that the real inflation of the dollar should be added to Hanke’s calculation – its depreciation in absolute terms – since the CPI, basically due to state repression, has lagged behind and is now on the way to adjusting.
As can be seen in the following graph, the curve for M2 -the monetary issue- practically coincides with the inflation curve estimated by Hanke. While official «inflation» – the rise in the CPI – was clearly lagging behind.
Now, given the 4.8% increase in the CPI in March, so that Minister Martín Guzmán can meet the goal of 29% «inflation» in 2021, the average monthly increase of the general consumer price index in the 9 months left would have to be around 1.48%. A difficult goal to achieve with a BCRA that expanded the monetary base again in March, after two months of rest, and had to issue $ 65,000 M at the end of March to finance the treasury, adding what it had already issued at the beginning of the month were a total of $ 135,000 M. And for that reason we have seen how the «blue» has shot up somewhat these days and, if this trend continues, it would continue to rise. As seen in this graphic by Roberto Cachanosky, in March, the issuance was the main source of financing:
In recent months, the government had managed to contain the issuance on the basis of lowering spending in real terms. The greatest savings were achieved thanks to the debt swap that transferred interest payments until 2023, then the liquefaction of spending on retirement and pensions higher than 6% in real terms, while the PNC fell 17% and the salaries of public employees fell almost 11% in two years.
But what rises strongly, and this is where things could be reversed and cause an increase in the emission, is in the social plans that rose 200% (Argentina Trabaja, Power, etc.), the subsidies to public rates (65%) and, finally, consumption and operating expenses of the State (10% more).
*Senior Advisor, The Cedar Portfolio
Alejandro A. Tagliavini 
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