The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.
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 inflation is multicausal and that everything is solved with increasing doses of interventionism.
The consumer price index in Argentina experienced a year-on-year rise of 58% in April 2022, which means 2.9 percentage points above the variation registered last March. A real catastrophe.
Inflation in Argentina is more than six times higher than that of Uruguay, five times higher than that of Chile, four times higher than that of Brazil or Paraguay, neighboring countries exposed to the same global problems.
No, inflation in Argentina is not multi-causal, it only has one cause: an extractive and confiscatory monetary policy. Printing pesos without control and without demand. Argentina balloons its monetary base to finance excessive, inflated, and destructive public spending.
So far this year, the monetary base has increased by 43.83%, which is utter madness. Inflation is 58.2%.
In the last three years the monetary base has increased by 179.73% and in 10 years more than 1,543.8%. That is an economic aberration, not “inclusive monetary policy” as Axel Kicillof, governor of Buenos Aires, called it.
In the last ten years the Argentine peso has lost 99% of its value against the dollar. It is 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. The argument does not hold. The monetary base of the United States grows at a rate of 9.9%, six times less than that of Argentina and, in addition, the United States also suffers from an inflation of 8.5%.
At the peak of the US money glut, the monetary base grew by 26.9%. In that same period, that of Argentina grew threefold, and with decreasing demand for pesos, while the global and local demand for US dollars grew.
In aggregate terms, money supply including all the currency in circulation has shot up in Argentina by 2,328.09% in ten years, while in the United States it has doubled.
In other words, the aggregate money supply in Argentina in the last decade has increased at more than eleven times the rate of that of the United States. Only Venezuela has conducted such madness.
It is not just foreigners who do not demand pesos or accept them in international transactions, which is a reality. The citizens of Argentina do not accept their own currency as a reserve of value, unit of measure and method of payment most of the time.
The saddest thing is that in Argentina many say that it has already been dollarized before and it did not work. In Argentina there was no dollarization, a deception was made that was to say that one peso was equal to one dollar.
Like the stable coins crashing in the market today, it was simply a fallacy, and when it burst, policymakers went on to further destroy the currency’s purchasing power.
The United States does not have this problem… yet. Confidence in the US dollar is not falling yet, it is rising and that is why it is strengthening relative to most major currencies globally.
The main reason for this relative strength is that the Federal Reserve monitors global US dollar demand and is seen as taking decisive action against inflation. However, the often-repeated fallacy that stated that massive money printing does not cause inflation ended abruptly with the disaster committed in 2020.
The U.S., 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.
The U.S. Dollar is not suffering because the alternatives are worse, either because they print currency even more aggressively or because they also have capital controls and lack of investor and legal security in their nations. However, the Federal Reserve should not rest in its laurels.
Confidence in a currency as a reserve of value, unit of measure and means of payment can disappear quicker than policymakers would imagine. The current system of checks and balances in the U.S. economy and its open financial system keep the US dollar alive as a world reserve currency, but clouds are gathering.
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 should not be ignored. The reader may think that 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 the developed economies would never allow such a thing to happen in their nations, but Argentina was also 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 will not happen to us” and “this time is different.” It is not 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 the confidence in the government and its institutions. Once the destruction starts it is only a matter of time before citizens start to save in gold or other real reserves of value.
There is a lesson for all those that defend constantly pushing the limits of monetary policy and isolationist measures. Once you pushed too far, there is 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.
This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial Markets, The Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.