Hope for Argentina

Four months ago I proposed "A simple fix for Argentina's peso." Late last month, after some much-needed changes in leadership, the central bank announced an agreement with the IMF in which they proposed to do exactly as I recommended: sharply curtail future money printing. In fact, the central bank vowed to deliver zero growth in the money supply over the next year. Wow. Milton Friedman would be jumping for joy.

I'm happy to report that the central bank appears to be honoring its pledge. Over the past four weeks, year over year growth in Argentina's M2 money supply has plunged from 32% to 19%, which corresponds to a 10% outright decline in M2 over a 3-week period. Not surprisingly, this impressive resolve has translated into an almost 13% gain in the peso's value vis a vis the dollar. (Boosting short-term interest rates to 73% certainly helped in this regard, by stimulating demand for pesos.)

In dollar terms, the value of the Argentine stock market has plunged 57% since its January '18 high, but it has been relatively stable for the past two months. The economy is in recession, and discontent with the Macri administration is rampant. There's no assurance things will hold together for another 11 months. How will the government borrow what is needed to fund its deficit (3-4% of GDP) if it can't ask the central bank for free money? Only time will tell. But if the central bank can maintain its resolve for a few more months, a surge of confidence could produce a wave of foreign capital inflows more than sufficient to do the job. There is hope.

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