A good way to think about money is to compare it to water moving through a circuit with cracks. If the water circulates strongly, some of the walls of the circuit may be damaged, opening leaks and diverting the liquid to unwanted places for those who thought about assembling the circuit.

In this way, one risk is that the circuit dries out, another that the water stagnates.

Originally intended to mitigate currency flight, the first measure aimed at imposing a exchange rate It dates back to October 31, 2011, when AFIP begins to issue authorized purchase permits, and companies are pressured to reduce their imports.

Continuing with our metaphor, we sought to correct the water circulation pressure, which was going to end up drying the circuit, by implementing a valve to be managed by the Central Bank.

The problem is that by doing this, the pressure only decreased on one side. On the opposite side of the valve, the pressure had to be supported by the rest of the circuit.

What was that pressure? In it excess demand that was bidding to acquire a greater amount of dollars at the price of the official exchange rate. Logically, when the price of the currency was below the equilibrium price, a leak arose: the black market to supply the demand of small savers with its corresponding price, the blue dollar.

But also, a fissure opened: the flight of foreign currency abroad by companies through the intensive use of buying and selling bonds that are quoted in dollars and are susceptible to being traded abroad, also with their corresponding price, the counted with settlement.

The consolidated information of our monetary report It takes place in the month of July of this year. At that time, there were no indications that a change in the management of the national government was going to occur, much less that the stocks were going to be lifted on December 17.

However, what the information definitely shows is the strong pressure that treasury financing exerted against the central bank, with the consequent expansion of the monetary base. That is, the injection of a greater amount of pesos into the stock of the economy.

In fact, at the end of the month of July, the monetary base It stood at around $520.170M, showing a year-on-year increase of 39,95%, being well above the average year-on-year growth of 2015.

In other words, the month of July not only ratifies the long-term tendency exerted against the exchange system by the public, but also that it is a month where this pressure is accentuated due to the lack of sterilization measures.

Note that in the previous graph, the reserves are expressed in millions of pesos, and even so the gap between both series has been deepening month by month.

What are you trying to point out with the above? To construct the series, the central bank's dollar reserves were converted into pesos at the official exchange rate in force at each month-end. That is, reserves (in dollars) multiplied month by month by exchange rate.

In a context in which the exchange rate policy followed a scheme similar to crawling pegs ascending, much of the growth in the series is explained by increases in the exchange rate. Note also that this acquires a positive slope after the devaluation of January 2014, of around 17% depending on the reference period.

many valves

In recent times, history has been strongly appealed to as a source of interpretation of present events. Strikingly, a fact that has not been mentioned much in this week's public debate is that since the 50s, Argentina has had several experiences of multiple exchange rates which - in retrospect - were not positive.

Ultimately, they generated an increase in the assets of Argentines abroad.

In general, when multiple exchange rates persist long enough for agents to generate strategies to arbitrate between the different prices of the currency, international transfer systems are created with the aim of maintaining stocks of foreign currency in foreign accounts. , or to be negotiated in the local free market segment, obtaining significant profits with detriment to the national economy.

Furthermore, speculation is not only financial. Multiple exchange rate systems have generally led to over-invoicing of imports and under-invoicing of exports.

In previous paragraphs we mentioned that the imposition of the stocks provided a strong incentive for the different types of agents to satisfy -even partially- their demand for dollars.

But the story does not end there. Argentina's tax scheme also generates different exchange rates to be taken by agents as a reference depending on the branch of activity.

In this way, until before exchange rate unification, the country had the following currency prices:

Official Dollar: It is the value of the dollar published by the Central Bank of the Argentine Republic (BCRA).

Dolar blue: It is the transaction value of the dollar on the black market. As we have stated in previous paragraphs, this denomination began to be used in the country since 2011, due to the restrictions on the acquisition of foreign currency imposed by the Federal Administration of Public Revenue (AFIP) and the Central Bank of the Argentine Republic.

Counted with Liqui: Also known as gray dollar, breakout dollar, or simply stock market dollar. It is what companies usually use to withdraw funds abroad through the purchase and sale of bonds. The procedure of this mechanism consists of acquiring public debt securities issued in dollars within Argentina, such as: Boden 2012, Bonar X or Boden 2015; which are listed on the New York Stock Exchange. Through a financial institution, an account is opened abroad, to which the asset is transferred. Then, it is settled in cash (hence the name) abroad, and those dollars are credited to the account created outside the country.

Tourist Dollar: Also called card dollar. It is the value that arises from adding a 35% surcharge to the price of the official dollar, imposed by the AFIP for purchases with credit and debit cards abroad. The same mechanism applies to online purchases from foreign websites.

Dollar Savings: After two years of prohibitions, at the beginning of Juan Carlos Fábrega's presidency at the head of the Central, the Argentine government once again allowed foreign currency purchases in the official market, subject to a series of conditions. Dollars were allowed to be purchased at the official exchange rate with up to 20% of declared monthly income, with a maximum limit of US$2.000. If the client wanted to obtain the dollars in cash, a 20% penalty is applied to the official quote. On the other hand, if the foreign currency was deposited for a year in a commercial bank, the penalty was not enforced.

Soy Dollar: It arises from the calculation of taking the official dollar rate and subtracting the withholdings applied to the product when it is going to be exported. In other words, it is the dollar profit that soybean producers receive after the government applies the relevant withholdings. There are also sunflower dollar and wheat dollar variants.

Future Dollar: A future contract is a commitment to buy or sell an asset at a future date, at a certain price. At the time of expiration, the seller (buyer) obtains a profit (loss), depending on whether the price is higher or lower than the agreed upon price.

Generic positions regarding unification

As we always mention in our reports, in economics every benefit has its cost. The following graph shows the evolution of reserves denominated in dollars and the official exchange rate. As can be seen, the rate of loss of reserves month by month is practically constant since the beginning of the reported series; But the trend not only does not break, but rather deepens with the first measure of implementation of the stocks.

Only after the devaluation of early 2014, the level of reserves stabilizes, and is subsequently maintained with the different executions of the sections of the Swap with China.

When it comes to rigorously analyzing the success of the implementation of the stocks, the previous graph is not the best indicator. Strictly speaking, to complete the analysis a counterfactual. That is, a similar graph that estimates what would have happened if the different measures had not been implemented.

Or better yet, several counterfactual scenarios that reflect the behavior of the series before the execution of other economic policy measures. Unfortunately, we do not yet have the technical possibility to conduct randomized controlled experiments on macroeconomic issues.

Therefore, our analysis must focus on the observed series. Note that both in the implementation of the stocks, and with the devaluation and flexibility of 2014, the reserves react positively during the four months immediately following the measure, and then resume the downward spiral.

In summary, so far we have seen that each package of measures aimed at stopping the outflow of dollars from the economy has only had a positive effect in the months following it, but without being able to twist the long-term trend.

Of the three analyzed, the stocks represented a restriction on quantity, the devaluation and flexibility a relaxed restriction on price; and the swap a relaxation of restrictions. The last one is the one that seems to have worked best in the short term.

In other words, throughout the entire series the underlying problem It persists, although we have not yet ventured to analyze what the cause is. The current government's solution, by lifting the stocks and unifying the exchange market, aims to restrict the market by price, and provide incentives to relax the restrictions.

However, as was the case with previous measures, the consequences will not be observed for approximately six months. All of which results in three types of positions - let's say, generic - on what the consequences of this measure will be.

On the one hand there are those who think that, given the large monetary issue, the repressed inflation, and the high exchange rate gap; An immediate unification and liberalization of the exchange market will take the price of the dollar in the single and free market to the previous level in the parallel market in the medium term.

They maintain that the strong devaluation of the peso in relation to its previous price in the official market will increase inflation; causing a large drop in real wages, and launching a distribution struggle.

On the other hand, there are those who think that unification will produce an avalanche of capital from abroad that will lead to an appreciation of the peso, with the consequent loss of competitiveness of the export and import substitution industry. According to this conception, the undesirable effect could be eliminated by eliminating all taxes that affect competitiveness and discourage efficient investment.

Finally, the last position maintains that the unification and liberalization of the exchange rate will not cause the much feared dollar-price-salary spiral, to the extent that a consistent economic plan is presented, which generates confidence in economic agents and allows for increasing Central Bank reserves.

Stocks, novelty and after

What news do the new measures bring with respect to strictly exchange rate policy? First of all, we are seeking to abandon the type scheme crawling pegs, of progressive and ascending devaluations, of the previous management.

Note that the value of the official exchange rate at the beginning of the series is above 300% at the end of it. In other words, a gradualist policy has been replaced by a shock one (which is not captured by the series).

But perhaps the biggest novelty, which is also the biggest challenge for this government's exchange rate strategy; is to replace the monetary anchor current –the exchange rate- by an inflation targeting program. What does this mean? When setting contracts, agents seek information about their present and future activity in the market.

In an inflationary environment, where it is estimated that prices are going to rise progressively (although the amount is unknown); The signing of contracts ends up adding extra uncertainty. To deal with this, local agents use the exchange rate as a reference.

In this way, in the event of a devaluation by the government, a transfer at prices, well above the tradable component of the goods or services that are exchanged in the economy.

Without going any further, this was exactly what happened in the devaluation of January 2014. After the measure, the interannual growth rate of the Cenda-Congreso CPI stood at an average rate of 38,56% annually.

Meanwhile, once expectations regarding this type of policies were dissipated, during 2015 the interannual growth levels of prices were again around 28,63% annually.

How is the replacement of the monetary anchor achieved to break the price transfer mechanism? The proposal of the current management is to create a monetary program that indicates to the market what the inflation goals that the central bank agrees to meet will be.

Which, in addition to the complexity that honoring this type of commitment already entails, is missing from the equation a key component to shape expectations: a credible price index on which the BCRA reports.

In this way, until the economy has this tool, it is likely that most of the news that impacts the monetary front will have to do with negotiations with different sectors and agents, a matter of buying time until an index of credible prices. The final results, within six months.