What Milei said about inflation

And that supply contraction... what you guys have to do makes prices higher, and that causes, in the short term, that jump in the price level manifests as greater inflation, leads to higher interest rates from central banks, and that contracts economic activity. That is to say, you are experiencing a negative supply shock. Well, it’s incredible, but I don’t know if they do it out of ignorance or intellectual dishonesty... they keep proposing that we compensate for that negative supply shock with a positive demand shock. That doesn’t even pass the test of an economics 101 course.

That is to say, they want us to ease monetary policy. It’s been almost 12 months since the monetary base converged to the broad monetary base, and, consequently, the money supply doesn’t grow, and we are still purging inflation. Therefore, that would be adding gasoline to the fire, or they want to create fiscal imbalance, just look at the credit conditions in the world if we wanted to seek financing.

But for that signal to work, the price has to be true without any kind of distortions like inflation or price controls. It’s no coincidence that, when these distortions appear, product shortages start happening. This happens because production is disincentivized. The trip is taking its toll on me.

Therefore, the first thing we did was consolidate fiscal balance to stop issuing, we let the price system function correctly and allowed for a proper allocation of resources in our economy. Thus, annual inflation went from being 211% per year—actually, when we arrived it was going at 1.5% daily—to around 30% today. At the same time, this allowed us to lower taxes by four percentage points of GDP. And there always appears someone who says, ‘I want a surplus, but…’

That is to say, the economy has accumulated more than 10% growth, it is at historical peaks. It is interesting because in a context where we have the highest interest rate in the United States in 30 years, where we have an international context with oil prices that have doubled, that situation, which in other times in Argentine history would have led to enormous crises, with GDP falls that could have been around 10% or 15%..., we are discussing that the growth rate has slowed down and that inflation is falling at a slower pace because, of course, if the economy expands less, the demand for money grows less, and then the monetary excess that still underlies is cleaned up with higher inflation rates.

It is true, the economy has slowed down growth. And as a consequence of that slowing growth, it also makes the demand for money not grow as it should be growing, and consequently inflation falls more slowly. Now, I have different types of shocks. I have internal shocks, which are basically politicians wanting to break everything. The best example was what they did last year. Or I can have external shocks.

This also has consequences in electoral politics. There are people who tell me: no, no, we have to relax the fiscal balance, we have to relax monetary policy… Two stupidities the size of a house. That is, first, economics 101: a negative supply shock is not fought with a positive demand shock. What part don’t you understand that doesn’t work? If you have a negative supply shock, what you have to do is lower taxes and deregulate. Well, we deregulated everything we could, and we lowered taxes based on not letting the fiscal result explode.

And today we are discussing whether the growth rate is slowing down and by how much. And of course, obviously, as growth slows down, in a world suffering from a negative supply shock, because the rise in energy constricts the economy's supply, it makes prices higher, causes a transient jump in the inflation rate, and consequently an increase in interest rates, a decline in activity. It’s textbook, we’re not inventing anything. We are discussing that growth is slowing down and that, as a consequence of that, the demand for money grows less and hence the inflation rate decreases more slowly. When in the alternative scenario we would have blown up into the sky.

Now, the only solution they can think of, in the face of a negative supply shock, is for the local geniuses to propose combating it with demand shocks. That is, throwing more gasoline on the fire. In other words, they are not going to achieve any impact on activity and are going to accelerate the inflation rate. That is, I have excess currency and they want me to issue more. That is, it has been more than 10 months since the amount of money has not grown, and they want me to throw more cash into the streets, when there is still inflation.

Additionally, in a context like this, we are not stopping buying dollars in a massive way. That is to say, if we had let the exchange rate fall in this context, if we applied a linear model, the exchange rate would be at 1,000. This is to have a sense of the magnitude of what is happening. Or look, everybody is falling, everyone has problems with inflation. We see that with slower growth and see it with a slower inflation deceleration, but notice that what happens to us in terms of interest rates, this is interesting: we have been rolling the debt all the time, sometimes with clear positive differences, ending up absorbing pesos, without moving the local interest rate. This shows the strength of the program.

Basically eliminating inflation eliminates the distortion of relative prices, extends the planning horizon for the private sector; consequently, no misallocation of resources takes place due to distorted prices, and consequently, that produces a macro reordering and generates more efficient allocations, and there that generates a gain in well-being, which is once and for all because basically the day one has finished with inflation, that gain evaporates.

The first will allow for the continued reduction of Country Risk, hence the rate in dollars; while the second will make it possible for the nominal interest rate in pesos to decrease, while also reducing the distortion of relative prices caused by inflation. Note that this results in a better allocation of resources and an endogenous decrease in the interest rate, which leads to greater capital accumulation, higher productivity, higher wages, and lower levels of poverty and indigence.

Thus, as net worth becomes increasingly negative, a higher price level is needed to liquidate the debts of the Central Bank, so that it adjusts to the real size of its assets. In this sense, as the treasury finances itself by placing worthless securities at the Central Bank, the long-term price level is higher and, with it, the inflation rate in the present is also greater. Put like this, it is very easy to understand why since the exit from convertibility the price of the dollar has multiplied by 1200 times.

Additionally, the fall in inflation has revalued wages and pensions, improving the purchasing power of all our citizens. At the same time, private credit has returned and we have been witnessing a sustained boom in mortgage loans for over a year. Simultaneously, we are already traversing the path of tax reduction, making our private sector more competitive. And as if all this were not enough, we are opening up to the world like never before. In the long term, we will grow even more because our goal is to become the freest country in the world.

This will not happen overnight. Nothing valuable in life works that way, but little by little and with the certainty that both on the internal and external fronts, we have our homework done to mitigate as much as possible any type of volatility. In the medium term, given the fundamentals of the program, inflation has no other destination but to collapse, because it will never see peso issuance without backing again. Inflation will inevitably collapse, despite attempts to generate instability from those who still want to stop the change.

Alongside fiscal discipline, we applied a tourniquet to monetary issuance and thanks to these two anchors we have reduced inflation in an unprecedented manner, even faster than the convertibility itself, which to this day was the most successful stabilization program in our history.

Today, we can proudly state, without a doubt, that our economic program is the most successful to date. Just to exemplify with numbers: the wholesale inflation index when we took office, which annualized at 17,000%, while the same index annualized for the last record was 19% annually. And we achieved this without confiscation like the Bonex Plan, without price controls, without fixing the exchange rate, and with tariff restructuring. Something that has never been done in Argentina.

On the other hand, they impose capital controls to try to retain the scarce dollars that the country generates. As this results in Argentina being without credit in financial markets, they have no better idea than to print money, which, as we already know, generates inflation. Footnote: because inflation is always and everywhere a monetary phenomenon, whether people like it or not.

To combat inflation, they put controls on prices, which we have known for 4000 years do not work, and invent regulations that destroy private property, hinder economic calculation, destroy capital, and consequently increase poverty and indigence. This is the sad Argentine story of what politicians and analysts call economic policy, which has been nothing more than the systematic violation of citizens' property rights in Argentina.

On the other hand, it is necessary to clean the remunerated liabilities of the Central Bank, which are responsible for the 10 points of its deficit. In this way, money issuance would come to an end, and with it, the only empirically certain and theoretically valid cause of inflation. However, since monetary policy acts with a delay that ranges between 18 and 24 months, even if we stop issuing money today, we will continue to pay the costs of the monetary chaos of the outgoing government. Having issued 20 points of GDP as was done in the outgoing administration is not without consequences; we will pay for it with inflation.

Furthermore, the currency controls, another inheritance from this government, not only constitute a social and productive nightmare, because they imply high interest rates, low levels of activity, scant formal employment, and miserable real wages, which drive the increase in poor and indigent people, but also, the surplus of money in the economy is now double that which existed before the “Rodrigazo”.

To have an idea of what that implies, let us remember that the “Rodrigazo” multiplied the inflation rate six times. Therefore, a similar event would mean multiplying the inflation rate by 12 times, and given that it has been traveling at a rate of 300 percent, we could hit an annual rate of 3,600.

Thirdly, and no less importantly, to do gradualism it is necessary to have financing; and unfortunately, I must tell you again, there is no money. Thus, the conclusion is that there is no alternative to adjustment and no alternative to shock. Naturally, this will negatively impact the level of activity, employment, real wages, the number of poor and indigent people. There will be stagflation, it is true, but it is not much different from what has occurred in the last twelve years; let us remember that over the last twelve years, GDP per capita has fallen by 15 percent, in a context where we have accumulated 5,000 percent inflation; therefore, we have been living in stagflation for over a decade, so this is the last bitter pill to start the reconstruction of Argentina.