For
Roque Fernández
Former Minister of Economy. Former President of the Central Bank.
In mid-December 2022 the Central Bank’s remunerated debt has reached the record figure of 10 trillion pesos. Although the number is worrying because it is high and because it has grown rapidly, it must be taken into account that the Central Bank’s commitment is to deliver pesos when the debt matures and, in the event that it does not have already issued pesos in its possession, the BCRA can issue new pesos.
What has already been issued by the Central Bank can be summarized as follows:
a) Deferred payment obligations, which are the aforementioned 10 trillion consisting of 2 trillion one-day reverse repurchase terms and 8 trillion cash bonds or Leliq.
b) Five trillion demand bonds or the Monetary Base which is made up of unpaid notes and coins held by the public, plus notes and coins held by commercial banks, also unpaid.
If, upon expiration, for any unforeseen reason creditors will not agree to renew deferred payment obligations, the Central Bank could promptly issue all the money needed to meet its obligations. If everything happened instantly, the Central Bank would have a single type of debt, Base Monetary, for a nominal 15 trillion whose real value would depend, on the one hand, on the public’s demand for Base Monetary, and on the other, on how the government would react to the general price level in such an unforeseen event.
For instance, if there is full price flexibility and base holders wish to keep the same real amount as they had before the full cancellation of interest-bearing obligations, prices would be multiplied by 3. If this situation remained unchanged with a constant monetary base and an economy with no real growth, there would be full price stability and no quasi-fiscal deficits because the central bank should not pay interest on remunerated liabilities.
Instead of the quasi-fiscal deficit, the Central Bank could continue to record an operating surplus to the extent that it maintains assets in its assets that accrue effective income higher than its operating expenses. An example of such income is the interest accrued on deferrals granted to commercial banks and the interest received on the holding of public and private securities.
The mere possibility that the remunerated liabilities are not paid out of real revenue from the Central Bank and become a deferred monetary issue, has generated an academic debate, stimulated by the work of Sargent and Wallace (1981) under the name of nasty monetarist arithmetic. The bad word refers to the fact that a country with chronically high inflation, and unable to increase its debt, if it tries to lower inflation by lowering the rate of issuance of base money and increasing the rate of deferred money issuance, runs the serious risk of increasing inflation instead of reducing it. The essence of the argument is this equilibrium inflation takes inflation expectations into account which are determined both by the current issue and by the expected future monetary issue which increases with the accrual of real interest.
An important assumption to keep for unpleasant monetarist arithmetic is this the country is unable to increase its debt. The origin of this impossibility often derives from the problem generated by what is defined as fiscal dominance, which consists in the difficulty of achieving a sustainable balance of public finances. If the problem of fiscal dominance did not exist, the decrease in the rate of issuance of base money in exchange for an increase in the rate of deferred money issue could be voluntarily accepted by the public without any inflationary impact. The central bank could roll over its old deferred issue with a new deferred issue, causing its real debt to grow at the real interest rate. It is possible that this could happen indefinitely while the real interest rate is negative or lower than the real growth rate of the economy.
The current situation in Argentina is fiscal dominance with a positive real interest rate and higher than the real growth rate of the economy. To illustrate this, I use the official monthly series of consumer price index, base money and bills of exchange plus the central bank’s remunerated notes (here I refer to it as deferred monetary issuance). To facilitate interpretation, from the original series I calculated the trend of the monthly rates of the series using the methodology suggested by Hodrick – Prescott, which are shown in the infographic.
The plotted series range from from October 2007 to October 2022 covering the full term of three presidents plus approximately the first three years of the current president.
The first thing that can be observed is that during the two administrations of Cristina Kirchner the trend of the inflation rate and the trend of the growth rate of the Monetary Base remain very close to each other. During the first period, the monthly averages of both variables are similar and fluctuate around 1.7% per month. In Cristina Kirchner’s second mandate, the average monthly inflation rate was 2.16% while the average growth rate of the Monetary Base was 2.24% per month. In the same period of time, a rapid increase in the growth rate of the Deferred Issue is observed which is unable to drag along the trend of the inflation rate which remains close to the trend of the issue rate of the Monetary Base. This evidence suggests that in In these two periods of Cristina Kirchner the problem of “fiscal dominance” has not been expressed..
In the period of Mauricio Macri, the growth rate trend of Deferred Issuance fluctuates and remains at a monthly average of 2.64%. In this period, the trend of the inflation rate took off, largely exceeding the growth rate of the Monetary Base. This is the period in which the fiscal domination begins to manifest itself which forces the government to resort to the help of the IMF.
Finally, in the period of Alberto Fernández, the unpleasant monetarist arithmetic is manifested in full. The trend of the growth rate in the Deferred Issue rises significantly dragging a growth of the trend of the inflation rate. The average monthly rates for this period are: inflation 3.87%, monetary base 2.93% and deferred issuance 7.04%.
In this context of tax domain the topics are troubling that inflation is a problem caused by unscrupulous economic agents raising prices and that the Secretary of Commerce has a responsibility to maintain a fair price system. It is already a classic of the Argentine economy that, with high inflation, an official story is structured by arguing that price controls are needed to “stabilize” the situation and then undertake the necessary fiscal and monetary policies to achieve long-term stability with social sustainability.
This note confirms the current opinion of numerous economists who follow public finances on a daily basis, expressing their opinion concern about the government’s difficult access to the international debt market due to the lack of legal certainty which manifests itself in a high country risk, and the strong congestion of the local debt market in pesos which forces the Central Bank to issue Base Monetary to buy Treasury debt and then exchange Base Monetary for Deferred Issue . The recurring request by analysts, often expressed by the media, to refer to “there is no plan”, actually refers to the fact that there is a plan agreed with the IMF that does not appear sustainable with deferred monetary issuance growing by 7% per month.
Source: Clarin
