The Argentine monetary system is dynamically explosive

If the total money supply grows more (less) than its demand, the purchasing power of money falls (rises) and there is inflation (deflation) -Reuters-

Since FIAT money does not satisfy any need, it is only demanded to buy goods and services that do have use value. In this way, it is used for transactions and/or for the future (demand for savings reasons).

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Consequently, FIAT money – the word derives from Latin, it means “let it be made”) – only has exchange value; which is nothing other than its purchasing power in terms of goods and services, which is determined in the money market and arises from the interaction between money supply and money demand.

If the total money supply grows more (less) than its demand, the purchasing power of money falls (rises) and there is inflation (deflation). In this framework, and considering that the exchange rate is the purchasing power of the peso in terms of dollars, an excess of demand (supply) of dollars (pesos) in the exchange market causes the exchange rate to rise (depreciation of the peso). . On the contrary, the exchange rate will fall (revaluation of the peso).

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In the long-term average trend, the FIAT monetary system is condemned to be permanently in imbalance and, consequently, to be essentially inflationary and its exchange rate against commodity money (e.g. gold) is to rise.

In the long-term average trend, the FIAT monetary system is condemned to be permanently out of balance.

On the one hand, and with fractional reserves, the policy maker can never control the total monetary supply, because he cannot determine the money multiplier. On the other hand, if you take into account that the demand for money arises from subjective valuations of individuals that are dynamic and permanently changing, it is understood that the monetary authority cannot reliably know the aggregate demand for money either.

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In this framework, if the Central Bank cannot determine supply or know demand, then it follows that monetary equilibrium is not only an extraordinary exception, but if it exists it is by chance and, therefore, can never be permanent. In this context, it is not surprising that inflation has always been the rule under FIAT money. Here and everywhere. The numbers of the world illustrate it.

Source: E2 (Economy & Ethics)

Now, the Argentine peso is an extreme case of FIAT money. In monetary terms there is no other country that can be compared to Argentina, with 88 years of systematic and growing inflation, between 1935 and 2023. In fact, there is only one oasis of 10 years without inflation (1992/2001) and it coincided with a box dollar standard conversion rate.

Before Convertibility, the BCRA cumulatively generated more and more inflation decade after decade: 59% (1935/1944); 472% (1945/1954); 1,344% (1955/1964); 2,809% (1965/1974) and 11,804,435,725,903% (1975/1991).

Upon exit from Convertibility, the BCRA reproduced the same behavior again, but much worse (comparing the first and second decade of each period): 264% (2002/2010) and 1,144% (2010/2019). End to end, between 1935 and 2019 in Argentina six monetary signs were changed, thirteen zeros were removed from the currency, while the rise of the dollar and inflation accumulated 20,745,313,330,128,700% and 299,442,184,124,597,000%, respectively).

Source: E2 (Economy & Ethics)

Assuming an average monthly inflation of 11.3% in August/December 2023, the interannual rate would close at around 173% in December 2023, accumulating an end-to-end inflation of 995.1% in the government of Cristina Fernández de Kirchner, Alberto Fernández and Sergio Massa.

In this way, the accumulated inflation against December 2001 would rise to 61,535. On the other hand, assuming an average dollar of $995 (because $994 is little and $996 is a lot) in December 2023, the rise in the dollar would climb to 99,400% compared to December 2001.

Source: E2 (Economy & Ethics)

The Argentine monetary system is dynamically explosive and has no solution. Because? Because it did not have, does not have, nor will it ever have, a demand for money due to retention or savings, with which its money market is structurally, systematically and recurrently condemned to be in deep imbalance and, consequently, the peso can only experience strong and permanent losses of purchasing power in the long-term trend; that is, rise in the dollar and inflation due to monetary validation.

Systematic saving in dollars implies a recurring drop in the demand for money and, therefore, repeated excess demand in the exchange market (rise in the dollar) and excess supply in the money market (inflationary acceleration).

The absence of demand for money due to savings recurrently collapses the demand for total money, generating repetitively large gaps between supply and demand that make the Argentine monetary system dynamically explosive.

The systematic saving in dollars implies a recurring drop in the demand for money

On the contrary, the necessary (not sufficient) condition to avoid this behavior would be to ensure that from the initial moment and permanently all Argentines save in pesos. Unfortunately, this will never happen.

The lack of reputation of Argentine institutions in general and the BCRA in particular makes any conduct of monetary policy based on credible rules impossible. In other words, the Finn Kydland and Edward Prescott (1977) solution is off the agenda. All monetary policy is doomed to become dynamically inconsistent. Fail and be abandoned. Neither the fixed exchange rate, nor Monetary targeting, nor the policy based on rules of objectives (inflation targeting) have a chance of being credible and consequently successful. There is no reputation and as a result, no credibility.

The lack of reputation of Argentine institutions in general and the BCRA in particular makes any conduct of monetary policy based on credible rules impossible (Bloomberg)

In fact, even a dollar-based currency board ended up being dynamically inconsistent and abandoned to grow public spending and the State.

Again, the Argentine monetary system based on Argentine institutions is dynamically explosive. Now, the Austrian school gives good news in this sense, since it explains that, since it has no use value, more (less) FIAT money is not better (worse). Ergo, there is no optimal amount of money, so the amount of money actually existing becomes indifferent. In turn, the fact that there is no optimal amount of money implies that there is no amount of money that is good, nor another amount of money that is bad.

Ergo, if there is no optimal amount of money, then no one should manage the amount of money, since no one can know what the “fair” amount to have is.

Ultimately, the solution is to take money out of the hands of Argentine political institutions. Money must be chosen freely by consumers. Human beings have always chosen gold. A 100% gold standard could be an alternative. You have to see what the inhabitants of these lands would choose today. In this sense, many signs would indicate that the dollar could be the chosen one and dollarization the way out.

Money must be chosen freely by consumers

Now, current monetary and fiscal fundamentals place either of these two exits a million light years away. Even so, if it could be executed, another big question would remain: Under what laws and institutions would it see the light? It is clear that Argentine institutions and laws have no reputation or credibility; ergo, the most likely thing is that it will end in a new failure.

So there seems to be no solution? Yes, there is. 21st century liberalism (not the author of this note) provides it: all the necessary (not sufficient) structural reforms to have a healthy monetary system would have a chance of being successful outside the current Nation State of Argentina. To a good understander, words are unnecessary.

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