The President of the Argentine Republic, Javier Milei, has stated that he is going to present a legislative proposal to declare it an imprescriptible crime for the state and the central bank to monetize the public deficit and create inflation. Consequently, heads of state and of the government, ministers, central bank officials, and representatives who, in one way or another, decide, promote, or participate in the creation of money and the inflationary financing of the public deficit will be tried and sentenced as criminals.
Moreover, these acts will be declared imprescriptible offenses, and thus, even if—due to possible political changes in the future—this legislation were to be repealed, its subsequent restoration would, ipso facto, mean the prosecution and conviction of those persons involved in inflationary policies. In short, the intention is to discourage, in advance, the action of any authority, public official, or politician who might, in the future, decide to resort to inflation to finance and achieve political, economic, social, or any other goals.
The ratio legis of this new legislation is clear: it is grounded in the extremely severe damage done by inflationary policies in general. In the particular case of Argentina, such policies have been on the verge of causing raging hyperinflation, which only the efforts of the new President, Javier Milei, and the sacrifices borne by the Argentine nation since the fall of the former Peronist government have made it possible to roll back. This former government and those that preceded it are primarily responsible for the severe prostration, poverty, and economic and social crisis which today have placed Argentina—once one of the richest countries in the world—among the relatively poorer and less prosperous nations, despite its enormous potential in terms of human and natural resources.
Below, we will take a look at the enormous damage done by money creation and inflationary financing of the public deficit. This harm very clearly justifies the criminalization and harsh punishment of all who, whether directly or indirectly, become promoters of, collaborators on, or the main participants in inflationary measures.
We will consider—from least to most dramatic—the effects of public-deficit monetization. First, it constitutes a direct attack on the very foundations of the democratic system. Indeed, the essence of democracy rests on democratic control, with complete transparency, of both the expenditure budget and the different sources of public revenue, which must be known and voted on by citizens. Monetization—financing via the mere issuance of any amount of new money—of public expenditure is profoundly antidemocratic. It breaks the necessary link between transparent public expenditure and revenue, by—in a concealed and diluted way—placing the cost of the portion of public expenditure not financed with taxes on the shoulders of the mass of holders of monetary units.
Gradually, and without noticing it at first, or knowing its cause, these people are affected as their money balances undergo a drastic relative drop in purchasing power. This phenomenon occurs both when the deficit is monetized directly—as has, de facto, been happening for years in Argentina—and when at least, to keep up appearances, the deficit is financed with new public debt that the bank of issue immediately purchases on a massive scale in the secondary market with newly-created money. The European Central Bank, the Federal Reserve, and other central banks—under the false pretext and “legal umbrella” of carrying out just another monetary policy—have been proceeding in this way and have acquired up to one-third of all public debt issued so far by the different governments.
Second, monetization of the public deficit clearly equates to removing the essential restraint placed on politicians by transparent, democratic control of the budget and its implementation. Indeed, if any public spending can be financed with inflation practically “on the sly” and in an apparently painless (at least in the short term) way, political incentives will obviously and inevitably be biased toward wastefulness and populism in a “binge of public spending” and brazen, indiscriminate vote-buying that destroys the very foundations of democracy and thoroughly demoralizes and corrupts the electorate and the citizenry.
Argentina is a prime example of this very perverse phenomenon. The Federal Reserve and European Central Bank have adopted policies of de facto monetization of the public deficit that have given rise to the phenomenon as well (though on a smaller scale). For instance, the moment the ECB launched its ultra-lax “monetary” policies of “quantitative easing” and lowering the interest rate to zero, the different governments of the Eurozone immediately halted the necessary austerity measures and reforms they had implemented. No government is willing to bear the political cost of adopting policies as painful as they are necessary if the usual deficit that derives from avoiding them will cost nothing, take no toll on those in power, and even be financed, directly or indirectly, by money newly issued by the central bank, and at practically non-existent interest rates.
Third and furthermore, we must point out that the new money never reaches all citizens equally. Instead, it is injected, in the best of cases, to pay invoices for public spending, and hence, the relative prices of the first goods and services thus financed rise. The first recipients of the money come out ahead, at the expense of all other citizens. In the worst of cases, which are, moreover, the most common, central banks disguise their direct monetization of the public deficit under the seemingly more orthodox cloak of purchasing, on a massive scale, public-debt securities (and even other, fixed- and variable-income securities) in the secondary (stock and bond) markets. In this case, the redistribution of income in favor of a few is even greater. It can even reach the obscene extreme of greatly enriching the holders of the corresponding financial assets, either because they sell their portfolio securities to the central bank at an artificially exorbitant price or because the widespread drop in interest rates (to zero or even less than zero, low levels to which the Federal Reserve and European Central Bank indeed forced rates) makes the market value of fixed-income securities, other assets, and capital goods skyrocket.
That is not to mention the tremendous, negative impact which such drastic and crude manipulation of the interest rate exerts on the real productive structure. The interest rate is the most important price in any free market and, when it is manipulated in this way, it ceases to function efficiently as an essential guide to entrepreneurial decisions on the intertemporal allocation between the production of consumer and capital goods.
Central banks typically use two processes to create and inject money into the economy: 1) credit expansion, generated by the fractional-reserve banking system under central bank direction; and, 2) “open market operations” or monetization of the public deficit. In both cases, a manipulated and artificially-low interest rate sparks waves of erroneous and unsustainable investments that give rise to deep economic cycles and crises of financial instability. The fact is the manipulation and lowering of interest rates gives the appearance of profitability to investment processes which are really unsustainable, because they do not correspond to the true desires of citizens, as consumers and savers.
Fourth and finally, once the effects described above have run their course, every inflationary process ultimately and inevitably results in the gradual, masked decline in purchasing power of the monetary units all economic agents use. This decrease in purchasing power amounts to an odious (inflation) tax that hurts everyone, particularly the most vulnerable and needy, and thus, all inflation invariably becomes an especially odious and regressive tax.
In conclusion, the monetization of the public deficit causes very grave harm which actually far exceeds, both quantitatively and qualitatively, that done by currency counterfeiters, whose activity is considered a crime in every penal code in the world. (In Spain, for instance, it is punishable by eight to twelve years’ imprisonment in articles 386 to 389 of the Spanish penal code.) Therefore, full justification exists for President Javier Milei’s historic proposal to criminalize and even place no statute of limitations on the monetization of the public deficit and to punish it with imprisonment and even higher monetary fines for all the heads of state and of the government, finance ministers, members of parliament, and governors and members of central bank governing boards who—by act or omission—are responsible for the corresponding money creation. And, once again, the reason for this is the very grave harm—on both an individual and social level—which such money creation always causes.
Therefore, we hope President Javier Milei can push through and complete this momentous change in the law as soon as possible. Above all, we hope that his example—along with the popular awareness of the perverse effects and severe damage that result from public-deficit monetization—will spread throughout the world, and will especially reach economic areas which, like that of North America and, particularly, the Eurozone, have inflicted upon their citizens a devaluation of their monetary units that—though it does not even come close to Argentina’s near hyperinflation—has expropriated from them. For instance, in a very few years, 20 percent of the purchasing power of all their money has been expropriated. We hope this will be the case and that—in a not-so-distant future—it will also be possible to criminally prosecute and hold personally accountable the governors of central banks (the ECB, the Federal Reserve, etc.) and the members of their corresponding boards of directors for failing to achieve their objectives and for the severe social and economic harm they have inflicted on the citizenry.
