Decades of rapid loss of their currency’s purchasing power (against the dollar) and other turmoil, such as hyperinflation and political crises, have long made Argentinians prefer the dollar to save and calculate. Hence, distrust in the government and its central bank (BCRA) grew over time—so by the end of 2023, when Javier Milei took over the presidency of Argentina, the estimated dollars held by its local citizens outside the national financial system amounted to around 43% of its GDP.
Leaving history behind, Argentina has a system in which the most important foreign exchange transactions take place. Through the BCRA and other agencies, the government intervenes in the exchange market, including the obligation that dollars be exchanged with the BCRA at the exchange rate fixed by the BCRA to participate in foreign trade. In addition, the government sets the reference values of the dollar and regulates the official exchange market through different exchange rates, determining the amount of dollars that can be accessed and by whom—and even the transfer of dollars abroad is severely restricted. Thus, demand for dollars is slowed by the various restrictions.
But there is also a parallel and much less relevant exchange market, in which transactions are free. And in an attempt to balance the supply of dollars in the broad exchange market, the government takes measures such as forcing exporters to sell 20% of their dollars in the parallel market.
The government-fixed exchange rate ensures a more stable dollar price and may reduce information costs for people who can more easily forecast future prices. However, the fixing does not represent the subjective valuations in the peso-dollar relationship that market participants would otherwise freely set, leading to significant coordination costs.
Nevertheless, in order to facilitate the entry of capital into the legal market, the Milei administration granted an amnesty for the entry of dollars into the banking system, without paying taxes or facing penalties up to US$100 thousand. The amnesty is divided into three stages, and the first ended in November 2024 and regularized US$20,631 million in cash and US$2,690 million in other assets.
The Money Supply
As for money creation, there is essentially no difference between currency and electronic reserves at the BCRA. In Argentina, with respect to the monetary aggregates of the money supply: M0 is the official monetary base, which is composed of currency held by the population and banks plus the current account at the BCRA; M1 is currency held by the public, cancelable checks and checking accounts; M2 is M1 plus savings accounts; and M3 is M2 plus time deposits and other items. While these aggregates do not explain the development of all economic events, their definitions are useful to know some facts.
By January 2025, monetary circulation (M0 minus the current account at the BCRA) increased 165.8% in the last year. And although the BCRA no longer finances the Treasury by printing new pesos since December 2023, thus preventing the inflow of new money into the market through government spending, all monetary aggregates have risen greatly from then until November 2024: M0 147.7%, M1 108.4%, M2 74.6%, and M3 110.6%.
Less than a year of Milei was sufficient to surpass the previous four years in terms of M0, M1 and M3, and the new reserves give banks the ability to pyramid new money by giving new loans.
Credit Inflation
Throughout the nine interest rate cuts implemented to date under Milei, BCRA interest rates fell from 126% to 29%, and deposit interest rates fell from 119.5% to 32.9%. Though these changes may be related to the reduction in inflationary expectations, the economy cannot deliver what the people have not produced: Not only have savings not increased so much and so fast that interest rates have simply kept pace with the increase in supply, but the number of people who exchanged their saved dollars to make ends meet increased more than tenfold during the first half of 2024.
As banks must expand credit to benefit from the expansion of reserves, a boom and bust wave is underway, driven by credit inflation. But since the supply of goods in the economy is neither the cause nor the consequence of the increase in reserves and money supply and the artificial expansion of credit can only rearrange this supply, prices will be higher and maladjustments will be more promoted than would have been the case with less of these developments, no matter what price inflation figures say. In the meantime, the social rate of time preference remains more constant than suggested by the changes occurring or propped up by the government. Among these changes, private sector foreign currency deposits and loans expressed in dollars have generally increased in 2024: with a decline in deposits since November after a very sharp rise since September; and with a greater and steadier rise in loans.
The financial market and the business cycle
Since interest rates fall below the level they would have otherwise reached and some people receive additional purchasing power with new funds, more investment projects appear. Yet, in Argentina, it is the financial market that has been offering the more profitable and faster projects. In this sense, for example, government securities are issued in pesos or dollars, with maturities of more than one year for bonds and less than one year for Treasury bills. The government interacts with investors or intermediaries in the initial placement of a financial instrument in the primary market, and there is also a secondary market where instruments already placed can be traded. Meanwhile, the liquid assets ratio—which measures the ability to pay short-term financial obligations using liquid assets and had been declining for the four years prior to Milei—has finally been rising again—liquid assets are the easiest to turn into cash, such as marketable securities and accounts receivable.
Given that the BCRA forces the value of the peso by fixing exchange rates artificially low and twists interest rates, conditions are created to bet on the peso interest rate and the official dollar price. Accordingly, as a financial strategy, some people have been relying on time deposits or government securities, betting on the peso and making a profit by repurchasing dollars later, but assuming that the exchange rate will remain stable and that the interest rate will exceed the peso devaluation rate—which was 2% per month from January 2024 until the recent change to 1% starting in February 2025.
During 2024 in the private sector: time deposits rose and fell but overall increased; while, although more irregular in their movements, demand deposits fell and rose but overall decreased; and peso loans more than doubled. These movements are in line with the strategy explained above—known as carry trade—and for which exchange rate expectations play a crucial role. The carry trade fuels a financial demand for pesos, and relies on government arbitrage to ensure exchange stability when “too many” dollars are demanded. So, the government has been continuously obtaining dollars to meet demand and commitments with the help of loans, surpluses, capital and exchange controls, new dollar deposits, and the issuance of new pesos to buy dollar reserves.
When the newly created monetary substitutes are used for the expansion of productive activities, as investments are not backed by real savings, intertemporal misalignment and the emergence of the boom-bust business cycle follow. And yet, malinvestments will tend to occur later the more the newly created funds are used for speculation in the financial market, where they would cause less distortion, at least in the short run, than the funds invested in productive activities—because in the financial market the funds will affect asset prices, but the production structure will not be immediately affected by it.
Production and Investment
The financial phenomenon is contrary to the prospects of productive efforts in Argentina, which has become much more expensive in dollar terms in just one year, even making its citizens spend more money abroad than foreigners in Argentina during 2024. And the incentives to invest with dollars are still stuck despite the program established in August 2024 to attract foreign investment, which remains very low from 2020 compared to the years 2007-2019.
On the other hand, almost 10,000 SMEs were lost in 2024, resulting in the loss of more than 217,000 jobs. Current affairs and opportunity costs make it easier and more profitable to invest in financial strategies than in structures and capital goods for production, which requires more real and freer monetary stability and usually more time, apart from coordination of market resources.
As the financial world observes the management of public debt and the overall decrease in the country risk index under the Milei administration, coupled with the financial opportunities promoted by monetary dirigisme, financial investors could still have positive expectations in the short and medium term. But the financial upturn may soon collapse with the drift of a single exchange rate, or with a signal that makes people run to the banks or the exchange market. And if either of these things were to happen, it would reaffirm the fact that the inflow of dollars into the banking system—with half going to the BCRA and also used to cover dollar demand—has served more to maintain financial stability than to bring a substantial and steady flow of real investment into the economy.
