Monetary Policies

DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle

How Money Printing Wrecks Countries

Argentina is inflating its currency to pay for wasteful state spending

The most dangerous words in monetary policy and economics are “this time is different.” The big mistake of politicians in Argentina is to believe that the country’s inflation is multi-causal and that everything can be solved with increasing doses of interventionism.

The consumer price index in Argentina experienced a year-on-year rise of 58 percent in April 2022, which means 2.9 percentage points above the variation registered in March—a real catastrophe.

No, inflation in Argentina isn’t multi-causal; it only has one cause: an extractive and confiscatory monetary policy—printing pesos without control and without demand. Argentina is ballooning its monetary base to finance excessive, inflated, and destructive public spending.

So far this year, the monetary base has increased by 43.83 percent, which is utter madness. Inflation is at 58.2 percent.

In the past 10 years, the Argentine peso has lost 99 percent of its value against the dollar. It’s expropriating the country’s wealth by printing useless pesos.

Many Argentine Peronists say that the United States also massively increases its money supply and has no inflation, but the argument doesn’t hold. The monetary base of the United States grows at a rate of 9.9 percent, six times less than that of Argentina, and the United States is also suffering from inflation of 8.5 percent.

In aggregate terms, money supply, including all the currency in circulation, has shot up in Argentina by 2,328 percent in 10 years, while in the United States, it has doubled.

Confidence in the U.S. dollar isn’t falling yet; it’s rising, and that’s why it’s strengthening relative to most major currencies globally. The main reason for this relative strength is that the Federal Reserve monitors global U.S. dollar demand and is seen as taking decisive action against inflation. However, the often-repeated fallacy that massive money printing doesn’t cause inflation ended abruptly with the disaster committed in 2020. The United States, euro area, and most global economies decided to address a supply shock with massive demand-side policies, financing the unprecedented increase in government spending with newly created money, and inflation soared vigorously.

On the one hand, politicians in the United States are increasingly defending pursuing even more aggressive monetary policies to finance an unaffordable and rising government budget. On the other hand, some nations are starting to look for alternatives to the U.S. dollar to sell commodities. These are still distant threats, but they shouldn’t be ignored.

The reader may think Argentina is a crazy example to compare with the United States, but the exaggeration is deliberate. Just look at the history of governments pushing the incentive to massively increase the budget financed by an increasingly less-demanded currency, and the risks for the euro or the dollar become more apparent.

The reader may say that the citizens of developed economies would never allow such a thing to happen in their nations, but Argentina also had a rich and prosperous economy decades ago. It was one of the richest and largest economies in the world at the start of the 20th century. A combination of protectionism, populist interventionist policies, and insane monetary decisions destroyed the economy to a place where it never recovered.

All the above-mentioned insane decisions of the Argentine governments are now championed by politicians all over the United States and Europe, often saying, “It won’t happen to us,” and “This time is different.”

It isn’t different.

Empires always fall because they start destroying the purchasing power of their currency, and their position in the world collapses as protectionism and interventionism erode confidence in the government and its institutions. Once the destruction starts, it’s only a matter of time before citizens start to save in gold or other real reserves of value. There’s a lesson for all those who defend constantly pushing the limits of monetary policy and isolationist measures. Once pushed too far, there’s no turning back.

JP Morgan used to say gold is money and everything else is credit. Credit is confidence. Once confidence is lost, the currency dissolves. This is a lesson for everyone.

Empires always fall because they start destroying the purchasing power of their currency.