By Marcos Falcone ESP
As Javier Milei rose to power in December of last year, Argentina suffered from an annual inflation rate of over 211 percent, only behind Venezuela and Lebanon. Having risen consistently for over two decades, a combination of perpetually unbalanced budgets and investors’ distrust made money creation (and thus inflation) almost unavoidable.
In that context, Javier Milei’s first promise inhis inaugural addresswas to avoid hyperinflation. In order to do that, his highest priority was to balance the budget so as to stop monetizing the deficit. And indeed, after just one month, the government announced in January that Argentina achieved its first financial surplus in 16 years. In successive months, the budget has been kept balanced.
Quick action seems to be causing quick effects. Indeed, inflation has plunged from 25 percent in December to an expected 4 percent in July. This is happening in a context of price readjustments, withprices like rent going down(after the government repealed rent control laws) and energy and transport prices going up (as the government is cutting subsidies). Even the IMF hasadmittedthat inflation is falling faster than expected. In fact, inflation is coming down so fast that banks havestartedoffering mortgages for the first time in seven years. This signals that the market expects inflation to stay down.
Milei told Argentines that the process of defeating inflation would hurt—and it has. The downside of the government’s economic plan is that the country has entered arecessionwhich is likely to last until at least the end of the year. Amid some layoffs, the country’s industrial output isdecreasing. Thespending cutsthat allowed the country to balance the budget have resulted in less income for provinces and specific groups like retirees.
In a way, it seems like Argentina is following the final part of the trajectory of inflationary economiesdescribedby Milton Friedman in the 1970s:
Inflation is very closely analogous to the drinking of alcohol. When you go on a binge, the good effects come first, the bad effects come the next morning, when you have a hangover. It’s the same with inflation. When a country starts off on an inflationary binge it looks as if everyone is doing well. You’re pouring out money, demand for your products is going up, the effect is increased output and employment.
But as people catch on to what’s going on, as prices start to rise, the hangover comes. In the process of curing yourself of alcoholism the situation is reversed: the bad effects come first and the good effects come later. It is precisely the same with inflation. If you slow down the rate of growth in the quantity of money, the initial effect is to slow down the rate of growth of the economy, which leads to unemployment. Only when the effect of your measures works itself through the economy will prices start to slow down, inflation eases off and output grows in a healthy, non-inflationary fashion.
For many, then, the painful effects of this strategy for ending inflation come as no surprise. But is the process sustainable? Some doubt that the budget can be kept balanced as the negative effects of spending cuts spread and as the government starts to face increased public pressure to spend more. Others are worried that the country’s currency is appreciating too much, which could hurt many industries. Until now, Milei’s popularityhas not decreasedeven as recession has struck.
So is this it? What happened to dollarization? The current strategy to curb inflation seems to come at the expense of this campaign promise by Milei. Though some members of the Milei administration, including theMinister of Economyhimself, occasionally signal that dollarization is still the end goal, others like theChief of Cabinetsay it is not. The president himself seems doubtful about dollarization and now talks of“currency competition”as his end goal. Supporters of dollarization like Emilio Ocampo argue that eliminating the peso could prevent the negative consequences of taming inflation through recessionary means.In any case, the fight against inflation in Argentina is not over.Recognizedas the worst tax by Milei himself because it is “hidden” government income and because it affects the lower class the most, he seems determined to curb it. So far, he is winning. But nobody wants to claim victory too soon.
