Inflation from the government and the banking system is usually aided unconsciously by the people, who generally believe that some moderate periodic rise in prices is normal. If prices could decrease due to economic growth (price deflation as an outcome of increased productivity), people would be able to keep more of their income to plan further ahead and save more without having to worry about decreases in its value. And if the social demand for money increases, any increase in prices could be proportionally less than the increase in the quantity of money. However, in Argentina, as the government was constantly and significantly spending more than it collects in taxes, and printing money to finance the overspending, inflation beyond the “normal” became the new normal.
Yet, as Ludwig von Mises wrote, “The inflation can continue only so long as the conviction persists that it will one day cease. Once people are persuaded that the inflation will not stop, they turn from the use of this money.” Therefore, there is a limit on inflation, though a wide one, when inflation ruins the currency that people depend upon to make their economic decisions—this limit is the phenomenon of hyperinflation. The Argentine government reached this limit so many times that Argentinians have long preferred to plan, save, and calculate in another currency—the dollar. Then, the peso is only kept alive by the government, but it is really dead under market standards, because the Argentine market has long rejected the peso and runs on dollars ever since.
The CEPO and the beneficiaries of the peso
The government would not leave the people alone. Legal tender laws prevail. In the meantime, the confiscation effect of inflation gets lower than the government expects—a lower demand for pesos allows fewer resources to be extracted by the government, for the rise in prices means a reduced purchasing power of the peso. Besides, as the social demand for pesos falls, and the social demand for dollars increases, the dollar price rises in terms of pesos. With the dollar guiding the market, the government can still obtain resources. And as the price of the dollar is too high for the governmental authorities, they decide to put obstacles in front of its price in pesos by hindering its free exchange—they impose various exchange rates to take more money from the people, picking relative losers and winners along the way. Thus, the government imposes price control and other regulations on the dollar through the peso. (These currency controls are known as the CEPO.) Since many transactions must be made in pesos, which have become more expensive due to the CEPO, there is less of an incentive to invest with the dollar. Even exports are discouraged, because people are forced to lose dollars in their profits. To make matters worse, the government puts obstacles in the way of investors who want to take their dollars abroad, further disincentivizing investments. The CEPO generates excess demand and a shortage of dollars. And as getting dollars to buy abroad becomes more difficult, imports are also discouraged.
With all this, the entire economy is impoverished, and the productive sector is the one with the least incentive to use pesos. By contrast, the public sector, also aware of the rapid loss of purchasing power of the peso, sees their salaries increase more constantly than others. And since prices do not rise at the same time and at the same rate, as the peso supply increases, first holders (and others) benefit in relation to the later ones—to the extent that they use their pesos as soon as possible and do not have to sell anything to obtain them. Thus, net-tax consumers and artificial creditors are not disadvantaged as the ones who must sell something to finance their activities.
This is the Argentina that Javier Milei encountered when he assumed the presidency.
The never-ending hyperinflation
The topic of hyperinflation has frequently appeared in the Argentine media through decades of chronic inflation. It is safe to say that Argentinians are used to a hyperinflationary currency. Not surprisingly, right after taking office, Milei declared the priority of avoiding hyperinflation. But as hyperinflation was already in place, that is, as inflation was too high and people were changing their pesos as much as possible, he could only mean a peak of hyperinflation.
In the peak, as the government prints huge amounts of pesos, the demand and the value of the peso approach zero, rapidly causing prices to rise exorbitantly and the flight from pesos to intensify. The consequences for the economy would be disastrous if Argentinians did not have dollars. Yet they have dollars and their economy runs on them. Capital, savings, and balances are valued in dollars. And since virtually no one is storing value in pesos, social wealth would remain virtually unchanged with the peak. Hence, any peak in Argentina is much less harmful than it would be in any other country not used to a similar situation. But to make Argentinians believe that avoiding this peak and trying to stabilize the peso is the right thing to do is to make them believe that the right thing to do is not to escape chronic inflation the right way, that is, by letting the peso die.
The official death of the peso
It is always good to have a less inflationary currency, but here, the recipe for economic prosperity and justice is not to avoid the peak and reverse the trend through State power, but let the economy in general, and the peso in particular, bottom out, and let the market be as free as possible. This bottoming out is not equal for all, and the official death of the peso is permissible. Therefore, if the government gets out of the way and lets the market run the economy—at best, by repudiating the entire public debt, or, at least, by paying debts and bonds with the sell or hand over of government assets—the demand for pesos will eventually fall so low that the peso will become worthless, and Argentinians will rid themselves of its inflation burden. This is the only legitimate route through which the government could adopt a commodity money freely exchanged, the dollar, or a new currency (that can only be established unless it can be exchanged for a previous existing money).
The most affected by this route will be those who benefit the most from government exploitation schemes through the peso. And to the objection that the incomes of private people in pesos will also be destroyed: first, no one has the right to have the peso kept alive by force, just as no one has the right to have his business kept alive by force to avoid bankruptcy; and second, Argentinians have dollars, and economic incentives will not disappear. Then, if the government allows free use of currencies, Argentinians will swiftly go to coordinate themselves without the peso being forced into them.
The fight against inflation
After an initial devaluation, and although the Milei administration never stopped printing pesos, monthly price inflation numbers indicate a constant drop since Milei took office. The government has generated more debt to avoid printing, for example, by issuing Treasury Bills reimbursable during the year. And the central bank has stopped financing the Treasury and has dedicated itself, among other things, to increasing its dollar reserves.
Certainly, an administration committed to paying government debts and bonds could hardly choose the correct route. A good part of these debts and bonds are in dollars, so the government still needs to buy dollars to “honor” debts and respect “contracts and property rights,” as Milei—contrary to any real commitment to private property and contracts—promised when talking about his plans about the International Monetary Fund before the elections.
If it was not enough that the budget surpluses under Milei are not a cause for further cutting government revenue (he cut spending but also raised taxes) and deflating the money supply, the fight against inflation under Milei is carried out against market signals and libertarian principles, with the CEPO and by keeping and feeding the peso in the interest of the State and its most beloved friends: bankers. And as the price of the peso has risen artificially in terms of dollars, productivity has stagnated, and the cost of living has increased, people have been selling dollars to make ends meet—and savings and investments have been hit too. In short, Milei’s fight has favored State agents, welfare recipients and the banking class comparatively more. That is, his fight has been bad for the economy and productive classes, and good for the exploiting and unproductive classes.
Putting aside the question of how fiat money came into existence, as to any fiat paper money, either the peso or the dollar, they have no intrinsic use-value, or this value is inconsequential compared to the exchange-value. Herein, the value attached to the dollar is due to its future purchasing power—something in which the peso has comparatively failed miserably for decades.
Ultimately, as Argentinians continue to exchange their pesos for goods or dollars as they can, the peso remains in a constant state of hyperinflation. The intolerable indeterminacy of prices and rapid loss of purchasing power make cost-benefit accounting and saving through the peso impossible. And if the government were not constantly trying to keep people from rejecting the peso, they would use it increasingly less. In consequence, Milei’s performance on this issue cannot be defended on the basis of any real commitment to private property and freedom of choice.
And yet, neither a long cessation of peso printing that could turn off the tap and decelerate the inflationary expectations, nor an end to monetary inflation, will stabilize the peso until Argentinians choose pesos as voluntary as they choose dollars without any government policy forcing its use. Not only that, other factors related to the quality of money, such as Argentina’s monetary history, make it difficult for productive people to trust the government and foresee a near future without considering the peso as a thorn in their side, regardless of the quantity of pesos. But to let go of the peso in the right way, the Milei administration must go against statist and banking interests—in Argentina and abroad.
