Milton Friedman’s ghost revives: inflation and amount of money rise by almost 170% in 3 years

Milton Friedman appears to have his moment in Argentina.

It is that the 1976 Nobel Prize in Economics once declared it inflation is always and everywhere a monetary phenomenon. And the increases in the money supply and inflation in Argentina legitimize many of his followers “Did you see, I expected it”. Almost like those who quoted economist Carlos Díaz Alejandro, who wrote about external restrictions, when Mauricio Macri’s government hit the balance of payments crisis in 2018.

While it is true that the quantity of money is not a great predictor of the evolution of inflation in Argentina, economists such as Roberto Frenkel have found that the behavior of prices at the local level can be explained more by wages rise above productivity and jump in the exchange rate-, it seems that in Argentina and in the world the phenomenal issue to fight the pandemic has had a full impact on prices.

Former Economy Minister Nicolás Dujovne shows the following calculation to illustrate the point.

– The monetary base (this is the liquidity held by the public plus bank reserves) has remained constant between 8% and 9% of GDP from December 2019 to today (average for the period 8.3%).

– The Central Bank, for its part, has overturned about 12 points of GDP to the money supply in recent years to finance the Treasury deficit. It is estimated that this year will be 1% as agreed with the IMF.

– Therefore, the expansion of the money supply from 8% to 21% represents an increase of 163% (according to Dujovne it is 170% because he estimates that eventually the monetary financing will be 14%).

– The accumulated inflation between December 2019 and May was very similar: 175%.

It seems that much of the increase in the rate of price increase is due to issuance.

Although not all of them.

The Central Bank has taken steps to withdraw this liquidity. It’s called sterilization when it issues Leliq bonds – which it gives to banks in exchange for pesos and then absorbs or withdraws money. The stock of Leliqs is equivalent to almost 10% of the GDP, about 7 billion dollars.

But why, if the Central Bank has sterilized inflation, hasn’t it produced more?

Because the interest paid by the Leliqs is another channel of issuancewhat economists call endogenous emission (self-generated by the monetary authority itself) and which therefore acts as a self-inflicted damage.

Monetarism stems from a centuries-old theory called “quantitative money”. Emphasize that the price level is linked to the growth of the money supply. The American economist Irving Fischer expressed this through an equation with which he explains that the value of what an economy produces is equal to the amount of money and the speed at which it circulates. Friedman brought him to world fame when he advised central banks that they could lower inflation by targeting the amount of money, which is not easy in practice.

For example, economist Tomas Sargent wrote an article in 1981 in which he argues that monetary policy is insufficient to lower inflation. if fiscal deficits and monetary financing to the Treasury persist. “To this we must add that monetary policy itself could be insufficient if the deficit is not resolved,” said Federico Furiase, economist and professor.

Last Thursday, in an article on The Wall Street newspaper, Sargent himself stressed that monetary policy should act as a preventive remedy when credit and government spending expand demand. Otherwise, you risk arriving late “due to the amnesia of the monetary authority”. Could it be that Argentina had Friedman’s amnesia? Jeffrey Sachs, a heterodox US economist sympathetic to the government, also said in Buenos Aires this year: “Friedman was right on the issue of emissions and inflation.”