Argentina’s monetary base, measured in pesos, reached a new all-time high in May, which is about to end. According to official data from the Central Bank (BCRA), there are 5,375 trillion pesos (ARS) in circulation. At the market exchange rate (blue dollar) this is equivalent to almost 11,000 million dollars.
As explained by the Social Economic Observatory of the University of Rosario, “the monetary base is made up of all legal money in circulation (that is, bills and coins), added to the reserves of commercial banks in the Central Bank.”
According to an analysis published by Clarín, one of the main newspapers in the South American country, “the objective that the government once had of not issuing to finance the fiscal deficit was forgotten. In the first four months of the year, assistance from the Central Bank to the Treasury explained almost entirely the financing of the fiscal deficit.
Add the aforementioned report that «It is precisely this increase in issuance that allows us to assume that the government will resort to the “little machine” before restructuring any public debt».
Let’s remember that from August to October, elections will be held in Argentina, which will determine who will be the president for the next 4 years. The ruling party, in its desire to retain power, would follow its policy of issuing money to activate consumption. Such a situation would cause a feeling of economic improvement, but it will inevitably cause damage in the coming months.
Issuance, inflation and devaluation go hand in hand
It is important to understand that the increase in the monetary base can lead to the devaluation of the currency and an increase in inflation. The quantity theory of money holds that more money leads to higher prices all other things being equal.
The economist Milton Friedman, a reference to the Chicago School and winner of the Nobel Prize, “coined” a widely known phrase, which summarizes this theory:
Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can only be produced by a more rapid increase in the quantity of money than in production.
Milton Friedman, economist.
When the Argentine government increases the number of pesos in circulation, more money is available to spend. However, the amount of goods and services in the economy is not increasing at the same rate, which means that there is more money chasing the same amount of goods and services. As a result, the prices of goods and services rise. That is, inflation increases..
In addition, this increase in monetary issue diminishes confidence in the peso’s ability to maintain its value, since inflation is expected to erode its purchasing power in the future. This causes higher demand for harder currencies, such as the US dollar. Thus, the dollar increases its value against the peso, resulting in a devaluation of the local currency.
Bitcoin, an example of an anti-inflationary financial system
A counterexample to this is bitcoin (BTC). The digital currency created by Satoshi Nakamoto has, since his birth, a defined and unalterable monetary policy. There will never be more than 21 million BTC and its issuance rate is established in its source code. This means that it is not possible to arbitrarily inflate the supply of bitcoins.
For this reason, in the long term it can be seen, as can be seen in the graph above, that the price of each BTC increases with respect to fiat money (in this case, the US dollar). Despite this, it is also evident that in the short and medium term its volatility is high and its price falls frequently. This is due to the fact that it is a relatively new financial asset and its acceptance as money and store of value is not yet established in a massive and predominant way worldwide.
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