The current anarcho-libertarian government tries to install the idea that Inflation in Argentina originates exclusively from the monetary issue of pesos to finance the fiscal deficit. The logical corollary of this statement, little or not at all refuted in general, is that the dollarization definitive of the economy, eliminating the sovereign currency, would lead to price stability, without taking into account that in the last three years there has been inflation in dollars of more than 20 percent annually.
It is advisable to begin by verifying the initial statement, analyzing How has the evolution of the monetary issue in pesos been? in relation to the increase in consumer prices, as a measure of inflation, taking the period from the beginning of 2021, ending the pandemic, to the first quarter of 2024.
For this comparison, two monetary aggregates will be taken in pesos: M0, or monetary base issued by the Central Bank, and M3, which also includes demand deposits, savings accounts and fixed-term deposits from both individuals and organizations and companies. public.
Monetary aggregates
The monetary base (BM) is what is called primary emissionwhich is in charge of the Central Bank (BCRA) and is made up of the physical money in circulation (the misnamed “little machine”) and the deposits of commercial banks in the BCRA, which can be transformed at any time into monetary circulation.
Instead, M3 It also depends on the commercial, public and private banking systemwhich generates what is called “secondary emission”through the credits that banks grant above the money they receive in deposits.
As the topic of secondary emission is not well known in general, it is worth clarifying what it is about. Banks are not required to keep 100 percent of the money deposited in cash in their coffers and so They can lend more money into their accounts than they receive. Thus, if they are forced to keep at least 20 percent of their clients’ daily withdrawal cash deposits (in general very little is withdrawn) They could give credits up to 4 times what they receive, but always as balances in their clients’ accounts. If they receive 100 pesos they can give credits for 400 pesos since balances of 500 pesos would have a cash backing of 20 percent.
To have a more concrete idea of the relationship between primary and secondary money issuance, it is interesting to note that the relationship between M3 and the WB, which at the beginning of 2021 was 3.25 times, in 2024 is more than 5 times, with which can be said that For every peso that the BCRA issues, commercial banks create more than 4 additional pesos.
Inflation and emission
Returning to the question of the relationship between inflation and monetary issuance and comparing the annual increase (previous 12 months) of retail prices (CPI) with that of the monetary base and M3, from the beginning of 2021 to the first months of 2024 the increases of the B.M. They were markedly below the price increases almost every month.
In particular, from July 2022 onwards the variation of the BM was around 30 percent below the retail inflation rate every month. As, Wasn’t it that inflation is a consequence of little machine from the BCRA? The hard data seems to refute that light claim.
But since, as said before, secondary emission grew so much, it is important to also analyze what happened between the increase of M3 and that of retail prices in that same period. Except in the first five months and the end of 2021, the variation in M3, which we can consider as the total money supply of the economy, in all other months as well increased less than the inflation rate, highlighting that since November 2023 this variation has been lower by more than 20 percent and up to 35 percent, in the midst of the libertarian inflationary peak. In other words, using an economic term, Not even with secondary issuance can a direct correlation be established between money supply and inflation.
In more detail, the BM (primary issuance of the BCRA) grew 425 percent and the M3 aggregate grew by 765 percent from January 2021 to March 2024, but retail inflation grew 1,231 percent in that same period. Again, Is the monetary issue in pesos the main cause of inflation?
However, a clarification is in order. The impact of the money supply on the economy depends not only on its volume but also on the speed of circulation of money, that is, the number of times each monetary unit turns over in economic transactions.
Therefore, even if the money supply was constant, if the speed of circulation of money increases it is as if the money supply had increased. And it is clear that If people perceive that the purchasing power of the peso is deteriorating then they will try to get rid of it as soon as possible by making transactions, thereby increasing its speed of circulation.
Inflation in dollars
However, in In Argentina, the flight from the peso does not necessarily end in the purchase of goods and services but in the other refuge of the popular imagination: the dollar. So it is worth asking to what extent the refuge in the dollar keeps the economy safe from inflation, which is only measured in pesos. For this reason, it is interesting to analyze the evolution of inflation in comparison with increases in the exchange rate, that is, the price of the dollar in pesos.
Taking the official dollar as a reference and comparing its annual increase with that of retail prices, it is verified that, except after the devaluations of August and December 2023, domestic prices increased more than the dollarmeaning there was inflation in dollars of up to 30 percent annually in the first quarter of 2023.
As it is evident that very few people could access the official dollar, the comparison between the CPI and the relatively free stock dollar (MEP)which results in the fact that there was also inflation in dollars between July 2021 and February 2023, in some months higher than 20 percent annually, with the culmination of the libertarian explosion starting in December 2023 that led to the inflation in dollars MEP from March 2024 to more than 50 percent annually.
As in the case of monetary aggregates in pesos, between January 2021 and March 2024, retail inflation far exceeded the increase in the price of dollarssince the MEP dollar grew 587 percent and the official exchange rate increased by 873 percent, against the aforementioned 1,231 percent of the CPI, which results in an inflation of 37 percent in official dollars and 94 percent in stock market dollars in those 38 months, equivalent to 10.4 percent and 23.2 percent annually respectively.
Three conclusions
Three conclusions are derived from this statistical analysis. The first is that In the last three years there is no evidence that inflation has been a consequence of permanent excesses in the monetary issue in pesos, much less in the primary of the Central Bank, but not in the secondary in charge of commercial banks. The only possible suspicion is increase in the speed of circulation of weightswhich does not depend on the monetary authority, but which for the most part ends in the acquisition of dollars by the public.
The second, derived from the previous suspicion, is that There is also no evidence that legal and complete dollarization of the economy can achieve stabilization of internal prices. since the consumer price index (CPI) has increased much more than the price of the dollar, especially the financial stock market, giving rise to inflation in dollars of more than 20 percent annually in that period.
And the third is that the fight against inflation, a necessary but not sufficient condition to achieve the true objectives of economic policy (full employment, growth, social equity and environmental sustainability) must attack the underlying causes of this scourge, where the most important is the distributive bid, not between prices and wages, but between price makers in uncompetitive markets (almost all of them)with a monetary policy that continues to accompany the evolution of prices “from behind” without generating excess liquidity but also without monetary illiquidity with a recessionary tendency.
Professor at the Arturo Jauretche National University, Coordinator of the Bachelor’s Degree in Economics – @novak_daniel
