Record Currency Issue: Another Hyperinflation In Sight?

Photo Agustin Etchebarne
Agustín Etchebarne
General director en Libertad y Progreso

Economist specialized in Economic Development, Strategic Marketing and International Markets. Professor at the University of Belgrano. Member of the Liberal Network of Latin America (RELIAL) and Member of the Institute of Ethics and Political Economy of the National Academy of Moral and Political Sciences.

LA NACIÓN – In the last two months, monetary issuance has become the greatest financial aid of the Alberto Fernández government, and it is estimated that transfers from the Central Bank to the National Treasury could even exceed this year’s reduced tax collection. However, economists and national authorities do not agree on whether or not this record level of monetary expansion will lead to a hyperinflation scenario.

During the first four months of 2020, Central Bank transfers to the Treasury exceeded 600,000 million pesos. And only so far in May they are around 345,000 million, so when the end of this month the contribution of the monetary entity could be close to one trillion pesos from the beginning of the year, adding profits and transitory advances. A record level.

Faced with the voices of alarm that different economists have launched due to the danger that such a mountain of monetary issuance will accelerate the probabilities of a hyperinflationary explosion, the national government has boasted that inflation in April (1.5%, according to the Indec ) was the lowest in the last 31 months, despite a 42% expansion in the monetary base.

Endorsing government optimism, the economist Emmanuel Alvarez Agis, in a recent article published on Page 12, argued that in Argentina “a theory of inflation is still being discussed, which is no longer taught or applied in any relevant economy in the world.”

Alvarez Agis, who was deputy minister of Axel Kicillof when he led the economic portfolio in the government of Cristina Kirchner, considered that “it is okay to issue to mitigate the effects of the Covid-19” and that future inflation will only take place “if the financial front of our economy ».

On the other side, the economist Agustín Monteverde interpreted that “the inflationary stampede will come when the fear subsides” caused by the coronavirus. He explained that “as long as we dance to the rhythm of the pandemic, as long as restrictions on circulation continue, along with a kind of bank corral, price controls and a freezing of public service tariffs, it may seem to us that inflation is under control.” But he predicted that “when it returns to a certain normality, Argentina will march towards a scenario of very high inflation and an even greater devaluation of the peso against the dollar.”

Another economist with a liberal ideology, such as Agustín Etchebarne, director of the Fundación Libertad y Progreso, anticipated that he expects “an acceleration of inflation” in the latter part of the year, in a process that “can double or triple the current monthly values” and that, in his opinion, “could provoke strong political tensions, because poverty will continue to rise”.

Etchebarne recognized that the level of monetary issuance is and will continue to be very high, because it is necessary to consider not only the increase in the monetary base, but also that of the total monetary liabilities of the Central Bank, which could be transformed into future issuance. “With a fiscal deficit that we estimate to be well above 5% of GDP for this year and a fall in the level of activity that will average between 10% and 15% of GDP in the year, we expect that currency will continue to be issued,” he added. .

The alternative proposed by this economist is “to cut all public salaries, except those of employees in health and security forces, so that they share the enormous impact on income that the private sector is suffering”. However, he clarified that he does not see the Government acting in this way.

From his heterodox vision, on the other hand, Alvarez Agis insists that affirming that the emission generates inflation is part of the common sense of the Argentine, but it does not have a correlate in reality. He cited as an example that, during the Mauricio Macri government, between September 2018 and September 2019, the monetary base grew by just 0.8% in nominal terms and inflation in the same period increased by 50%.

However, Alvarez Agis warned that, at times, the dollarization culture that stands out among Argentines could jeopardize their forecasts. He explained that if, instead of buying different goods, Argentines buy dollars in a context where the Central Bank is increasing the issue, a devaluation may ensue and, when this happens, “it will be true that an issue will have generated inflation.” Hence, its solution is for the government to “try to keep all dollars at bay”, a policy that the national authorities and the Central Bank are trying to strengthen in recent days with an extreme increase in restrictions on the acquisition of foreign currency from through the official exchange market and the channels offered by the operations of buying and selling bonds in the Stock Market.

Al margen del debate acerca de si el elevado nivel de expansión monetaria nos llevará a una inflación mucho mayor, el criterio que prevalece entre los agentes del mercado financiero es que, para evitar un descalabro mayúsculo, la Argentina debería llegar a un acuerdo con sus acreedores en la renegociación de la deuda pública y, simultáneamente, ofrecer un plan fiscal y monetario creíble para cuando el país salga de lo peor de la pandemia.

Por: Fernando Laborda