Member of the Academic Council of Libertad y Progreso. Degree in Economics from Universidad Católica Argentina. He is an economic consultant and author of the books "Economía para todos" (Themes, 2002) and "El SindromeArgentino" (Ediciones B, 2006). He serves as a columnist in the newspaper La Nación. Previously, he worked the same task for the newspapers La Prensa (1985-1992), El Cronista Comercial (1992-2001) and La Nueva Provincia de Bahía Blanca (1992-1998). He's the host of the cable TV show "The Economic Report." Lecturer in Applied Economics of the Master of Economics and Administration of ESEADE, senior lecturer in Macroeconomic Theory of the Master of Economics and Administration of CEYCE. President of the Center for Economic and Institutional Studies. He was Economic Adviser to the Argentine Chamber of Commerce (1983-2002) and to the Argentine Chamber of Importers (1992-1993).
INFOBAE – The singular expansion of money by the Central Bank will generate tensions on the prices of goods and services and on the exchange rate
During the electoral campaign and by the time it is released from quarantine, the government insists that it will reactivate the economy through consumption. They believe that by increasing consumption, companies will produce more, more people will be hired, and the economy will enter a virtuous circle of economic growth. This formula, rehearsed countless times with disastrous endings, does not seem to take into account that in order to consume, one must first produce. Let’s see the options.
How can I increase my consumption? If we remove the monetary veil that confounds analysis and imagine a barter society, in order for me to consume first I have to produce something that someone else needs and wants to exchange for what he produces. In other words, in order for me to consume, I first have to produce something that generates an income that allows me to buy. If I don’t generate income I can’t consume, which means that if I don’t produce something, I can’t consume.
What other possibility do I have to consume? Someone to support me voluntarily or involuntarily. In a way, the gift culture with millions of social plans and state jobs at the three levels of government are mechanisms for taxpayers to support those who, despite not producing anything, can consume. When I refer to public employees, I am referring to the vast majority, but there are other public jobs that do generate some added value. For example, security forces, armed forces, judges, etc.
This mechanism of tax spoliation of some sectors to finance the consumption of others has been used and continues to be used intensively in Argentina. The effects of these mechanisms are: 1) whoever pays more taxes so that another can consume without producing, can consume less. In other words, the taxpayer consumes less and the one who does not produce consumes. The level of consumption is the same. It does not increase, 2) the one that is tax-stripped has less saving capacity and therefore can finance less investment or credit for consumption, with which, what the non-producer consumes translates into less investment or consumption via credit, again, the level of global demand is the same, 3) the increasing tax pressure to generate more consumption means that those who generate savings end up fleeing their capital to tax havens, because it is always good to remember that there are tax havens because there are tax hells of which People who work honestly escape (and politicians who keep what is not theirs also flee). In this case, the net is less internal consumption and populism ends up making us finance the consumption and investment of the countries from which capitals flee to seek legal security. So on the tax side it is not seen how they can increase consumption. There is no multiplication of the loaves.
Another way to consume without producing is by stealing. I can send someone to steal to bring me the loot and I can consume. Obviously, the one that was stolen can consume less and I can consume more thanks to the fact that I keep the loot of the victim.
How does that work in a society? Following Bastiat in his essay The Law, there is legalized theft. People turn to the state so that with the monopoly of force they can take away someone else’s assets or income so that they can give it to whoever does not belong. Seizing savings from banks or AFJPs is nothing more than legalized theft, the loot of which is used by governments to stimulate consumption. Of course, legalized theft has the same effect as tax spoliation. It contracts the consumption of what is stolen and encourages the flight of savings abroad due to the legal insecurity it creates.
When politicians talk about capital flight, they should talk about defending people against legalized theft. Honest people, who work and produce every day, get tired of being robbed in the name of social solidarity and flee their capital. Thus, with legalized theft, consumption can be artificially stimulated in the short term. But since a stock is stolen, it lasts for a certain time. When the loot of the stolen is finished to consume without producing, you must go out and look for another loot. In Argentina we are so exhausted from these legalized robberies that there are less and less liquid loot left to steal and stimulate consumption.
The last test to stimulate consumption is to issue currency to finance artificial consumption. In these cases, the assumption is that since there is idle capacity that companies do not use, monetary issuance will not cause inflation because, in the face of increased demand, companies will not raise prices but will respond with an increase in supply. An assumption that is too strong without considering what can happen to the demand for currency, particularly in a country like Argentina that lacks a currency in the strict sense of the word.
Table 1
Take Table 1 that shows how the purchasing power of the currency is determined. In case 1, 10,000 pesos have been issued, the demand for currency is 2,000, with which the money that circulates in the market for transactions is $ 8,000. The supply of goods being 800 units, the average price is $ 10.
In the government they suppose that case 2 is going to happen. That is, the amount of pesos in circulation increases, the demand for currency is constant, with which the money circulating for transactions is $ 9,000, but companies increase the supply at 900 units, with which the general price level remains at $ 10. That is, they stimulate demand with monetary issuance without generating inflation because companies react by offering more goods.
What they do not have in mind in the government is case 3, that is, they issue to stimulate consumption, but the demand for currency falls for fear of further price increases, and although the supply of goods increases from 800 to 900 units, the same the price level rises to $ 11.5. Nor does he imagine that case 4 may occur in which the supply of goods does not increase due to the stimulus to consumption and at the same time the demand for currency falls, bringing the price level to $ 12.5, much less imagine that the case can be given. 5 in which it issues, the demand for currency falls and the supply of goods also falls, which is what happened in hyperinflation.
Today the demand for currency does not fall because people, being locked in their houses, cannot go out to buy. There is an increase in the demand for currency forced by the quarantine, added to the bank corral that arises from the bureaucratic restrictions established to withdraw money through the banks’ window, but as soon as the quarantine is lifted, if they continue to issue at this rate of 75 % increase in the monetary base from December 10, 2019 until June 16, the demand for currency will collapse and prices will skyrocket because I doubt that the reaction of the demand for the supply of goods is so immediate. Furthermore, prices could skyrocket because the forced demand stock of already issued currency that can drop brutally, would add the flow of monetary expansion to stimulate consumption artificially. It is the perfect combination to generate mega inflation in an optimistic scenario.
In this context, it would be good for the President to reformulate his political alliance to change the economic course and avoid an economic and social chaos of unsuspected magnitudes, because I can assure the President that in the economy there is no multiplication of the loaves. That happens in the Bible or only Jesus Christ did.
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