Argentina Prints to Pay the Bills, Inflates Money Supply to New Record

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The highest denomination banknote, 100 pesos, has had an increase in circulation of 1,411 percent in 12 years. (Taringa)

Espa√ĪolThe Central Bank of Argentina released¬†record-setting figures this month: the monetary base is now at AR$510.5 billion, swelling 10 percent since the start of the year.¬†The central government has used this¬†substantial expansion ‚ÄĒ comprised¬†of banknotes in circulation, cash in financial entities, and demand deposits in checking accounts ‚ÄĒ to finance its large fiscal deficit.

President Cristina Kirchner’s administration has monetized the debts with new currency channeled through the National Treasury, on top of raiding the social-security¬†system (Anses). Naturally, this has generated inflationary pressure, with the latest reported year-on-year price-level rise at 28.76 percent, as measured by the National Congress and private consultants for May 2015.

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In the wake of the July 3 data, Argentinean economist Javier Milei says the government must accept responsibility for the inflation. “As Friedman¬†said: consumers may be wasteful; entrepreneurs may¬†be greedy; trade unionists may be greedy with pay; the Arab sheiks may¬†raise oil prices; it may be that weather conditions are unfavorable; but the government¬†is the only one able¬†to print those colored pieces of paper that we have in our¬†pockets today.”

Although Argentina has yet to arrive at hyperinflation, she is no stranger to it. Residents suffered through months of it in the 1970s and 1980s, with prices exploding at rates of up to 70 percent per month.

“These days¬†Argentina’s inflation rate is 40 times higher than the rest of the world’s,” says Milei, “yet the discussion regarding [the out of control monetary base] is as outdated as in¬†the 1960s.”

“This country should have a US$30,000 per capita GDP, yet¬†what we have is US$11,000. That is a catastrophe in terms of¬†growth. This comes from uncertainty over how much capital is available; physical capital but also¬†human, institutional, and social capital.”

With restrictions on the purchase of foreign currencies, the free (or black-market) “blue” dollar¬†is now at¬†AR$13.9 per US dollar. That means Argentina’s strongest bill, the ARS$100, is now worth just US$7.19. Even after double-digit inflation for several years now and Argentinean wallets overflowing, the government has remained steadfast against a new design or the issuing of higher-denomination bills.

To put the situation into perspective, in 2003 when Nestor Kirchner took office, there were 188.2 million AR$100 notes in circulation. Eleven years later, in November 2014, this figure had risen to 2.84 billion. An increase of 1,411 percent, according to data reported in La Nación.

Moreover, in late 2003 the aforementioned bills represented only 34.1 percent of total circulating currency; in November last year they rose to 65 percent of the total.

Another local economist, Luis Secco, affirms that¬†‚Äúinflation and dollar shortages come from¬†an¬†abundance of pesos, which is¬†generated by the growth of the Central Bank‚Äôs liabilities. This is the result of financing the fiscal deficit.‚ÄĚ

The price instability could be worse, though. Guido Sandleris, dean of the business school at Torcuato di Tella University, says the Central Bank has been increasing its liabilities by eagerly issuing promissory notes (bonds) to avoid printing more pesos to finance the Treasury.

“In this way, [the Central Bank] tries to reduce¬†the inflationary costs of monetizing the fiscal deficit. This strategy has allowed inflation to stabilize, albeit at a high level.”

Translated by Vanessa Arita.

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