For decades, Argentina’s currency has failed remarkably in its future purchasing power compared to other currencies. This includes recurring devaluations, hyperinflations and periods of systematic rejection by Argentinians, who prefer the dollar to save and calculate. So much so that when Javier Milei became their president in December 2023, he found a currency—the peso—kept alive by legal tender laws and anti-dollar regulations. There was basically only exchange demand for pesos, but no or very little demand for reserve purchasing power.
In September 2024, economists Philipp Bagus and Bernardo Ferrero (B&F) defended Milei from criticism and argued as follows:
What Grau ignores is that price inflation was tamed as a result of two, interlocking phenomena: the slow but steady decrease in the avenues of monetary emission and the increase in the quality of the monetary regime.
Here, Milei’s defenders will be put to the test.
Quantity of Money
B&F discussed the monetary base expansion in Alberto Fernández’s four years (Milei’s predecessor), and highlighted the expansion of his last year. However, Milei had already surpassed Fernández’s expansion by September 2024. The official monetary base (M0) had increased 133.1%, and looking back at Milei’s first year, the increase was 209.1%, which is much more than Fernández’s last year (84.8%). Therefore, beyond ceasing Treasury financing, there was no “steady decrease.”
Nevertheless, according to B&F, by achieving fiscal surplus and declaring the elimination of deficits non-negotiable, Milei established a “firm” monetary anchor. And although inflationary expectations were significantly reduced, this anchor is linked only to ceasing the monetization of deficits via peso printing. And yet, they also argued that the austerity measures anchored the future money supply and swiftly boosted money demand.
True, ceasing Treasury financing with new pesos eliminated one of the means for the new money to quickly enter the market through government spending and thus affect prices. And the overall spending reduction helped in this regard as well. But leaving aside the fact that price inflation figures are elaborated from an arbitrary selection of items chosen by a government agency, B&F did not take into account several crucial factors that explain how price inflation could slow down while money printing and money demand increased at the same time:
a) With the initial 54% devaluation and the removal of transport and energy subsidies and various price controls, money demand (peso demand) was bound to increase due to legal tender laws and the need to cope with the rising cost of living. The number of people selling their saved dollars for pesos to make ends meet increased dramatically.
b) Besides tax payments in pesos, exchange and capital controls—which hinder dollar demand—favored peso demand even further, because people continued to demand money anyway.
c) The inflow of new dollars into the banking system with the amnesty program helped the central bank (BCRA) to cope with dollar demand in the exchange market. For half of these deposits go to the BCRA, thus helping to control the dollar price.
d) The new pesos going to commercial banks, such as those coming from the BCRA’s operations, would not always go right to the purchase of goods and services and quickly affect prices. But they undoubtedly helped credit expansion.
e) The argument that exchange controls could not be a significant causal factor because they already existed when Milei arrived is flawed. As private credit was virtually dead and financial strategies were unattractive before Milei, exchange controls became a significant factor for money demand once inflationary expectations went down, private credit revived and the role of fractional reserve banking returned to the stage. This, together with credit expansion, made investment opportunities in the peso interest rate and the official dollar price very favorable for certain groups, since they assumed that the exchange rate would remain stable and the peso interest rate would exceed the peso devaluation rate (set by the BCRA). Hence, a great demand for pesos for financial strategies eased by monetary policy followed, including an upturn in the government securities market, while the BCRA continued to meet dollar demand. This ensures that large amounts of pesos remain within the financial system for quite a while without entering the market for goods and services.
Quality of Money
B&F indicated that the quality of the monetary regime was improved by restructuring the BCRA’s balance sheet, with a larger part of the monetary base backed with dollar reserves. Yet, this hardly matters for most people’s demand for pesos, while it matters most to public creditors and financial investors, especially because the BCRA is the largest supplier of dollars and government securities are also issued in dollars. But to say that these and the other measures were responsible for reducing both price inflation and interest rates is to ignore the factors above, as well as the fact that the lower interest rates induced by central banking are first set to encourage credit expansion and thus money demand. And indeed, five of the six interest rate cuts until September 2024 took place in just two months between March and May.
Also, B&F echoed something that ended up being yet another myth for government propaganda, when they reported that the monetary base would not be allowed to grow anymore, thus further “improving” the quality of the monetary regime. Of course, this did not happen, and Milei himself recognized later that they had not been withdrawing all the pesos issued for the purchase of dollars.
On the other hand, digging into Bagus’ academic article on the quality of money, it is important how the quantity of money is expected to change—so ceasing Treasury financing increased the quality of the peso. However, if the institutional setting of a central bank is relevant, that of the BCRA had essentially not changed. Additionally, since the institutional setting of the currency determines the quality of money, the effects of specific measures on the currency and its use are also relevant. In Argentina, some measures improve the quality of the peso for certain individuals by offering them very special advantages from its use. Thus, the government can also drive different valuations over the quality of money among people. Accordingly, the less monetary regulations and arbitrariness there are, the more people will benefit from measures that increase the quality of money. And if a formally “independent” central bank improves the quality of the currency, this is neither the BCRA’s case, given that Milei himself has claimed to be directly involved in setting the initial devaluation.
Likewise, Bagus argues that the central bank’s statutes can limit to a certain extent the potential increase in the money supply, and that its mandates play a role in the way the quantity of money is expected to increase, thus affecting the quality of money. Yet, as things stood, especially before the reduction in exchange and capital controls implemented in April 2025, the BCRA’s mandates failed to ensure any limits or clear expectations for the potential increase in the money supply. The BCRA intervened in the exchange market, buying and selling dollars regularly. But since borrowing and surpluses are limited, it became impossible to stop printing new pesos entirely for dollar purchases—because of the need to balance the exchange market in accordance with the government’s commitments and exchange rate objectives. Meanwhile, the official exchange rates overvalued the peso, and importers and exporters were forced to exchange their money with the BCRA. And as the government wanted to balance dollar supply in the broad exchange market, exporters, for example, were forced to sell 20% of their dollars in the parallel market.
Bagus also notes that the ideology of the central bank’s president and its staff influences the quality of money. But with an economic team of people from previous administrations, including those responsible for the problems Milei inherited, how can one expect big improvements in monetary policy? In the past, Milei himself accused his current finance minister of irresponsibly spending US$15 billion of reserves and thus causing a disaster at the BCRA in 2017.
Furthermore, shortly before the elections, Milei advised not to put time deposits in pesos, and said that the peso could not be worth even excrement, since it was printed by politicians who, in Milei’s words, were not even good as fertilizers. In fact, many Argentinians expected a swift dollarization, and it is safe to say that Milei himself induced a currency run and a rise in the dollar price in the informal market close to his inauguration. So, if comments by politicians can immediately alter the quality of money, unless the quality of Argentina’s politicians has changed much by September 2024, something that even Milei’s own cabinet cannot prove, it is unwarranted that the quality of the monetary regime has improved greatly. Much less so when the man who became the president of the country contributed to worsening the quality of the peso before he won the election.
Public Debt and Central Banking
Central banking and public debt explain why Milei’s surpluses have not prevented the issuance of pesos and government securities. For one, a central bank’s open market operations are off-budget transactions that affect the money supply. For another, short of debt repudiation, the accumulated public debt does not disappear with a new government administration, and government securities do not require current deficits to continue. And on top of everything else, banking and political elites have incentives to continue both central banking and public debt.
But it is also true that surpluses are not necessarily better than deficits, since both total government spending and total government revenues must be considered while determining the impact of fiscal affairs on the economy. And the surpluses used for paying debts held by commercial banks will not lead to a credit contraction and the correction of misalignments caused by credit inflation, but to more credit inflation and misalignments.
Conclusion
Monetary inflation does not immediately determine price inflation, but it intrinsically leads to it, because prices will be higher than they would have been without the increase in the money supply. Indeed, price inflation never ceased under Milei, even though it went down. However, something more important than the impact of monetary inflation on price increases is the damage caused to the wealth generation process. For it triggers an exchange of nothing for something and distorts the structure of prices and production, thus diverting wealth from wealth generators to non-wealth generators. And while the increase in money demand partially offset the effects of monetary and credit inflation on price inflation, the new money—whether in fiduciary media or not—was not distributed equally among all, but went to certain people. Consequently, there were major net beneficiaries of Milei’s monetary policy at the expense of many more people.
While B&F devoted considerable space to discussing the problems caused by the government administrations that preceded Milei, the fact that a previous administration was responsible for implementing certain policies does not absolve Milei of the blame for maintaining them for so long. Otherwise, the past may become an eternal excuse to defend any administration or, worse, to be part of a propaganda effort in the intellectual cover-up of political power. Nonetheless, although it has improved recently, Milei’s monetary policy has been an example of a remarkable centrally planned monetary policy. Whether on exchange rate, money supply or public debt, the policies pursued so far have virtually nothing to do with the free and sound money postulates of the Austrian School of Economics—from which B&F’s ideological convictions and academic experience derive.
Therefore, one would have expected B&F to see through government propaganda and not make so many mistakes in assessing Milei’s monetary policy—especially in the case of a monetary specialist like Bagus. But both empirically and theoretically, B&F failed to provide a correct explanation of Argentina’s monetary affairs. And in light of Bagus’ own academic work, the improvement in the quality of the monetary regime was clearly less significant than argued by Milei’s defenders.
This article was originally published on The Unz Review.
