Argentine Inflation and How America Avoids It

13.02.2017 • Emerging Markets

By Selva Freigedo – Port Phillip Insider Extra (Australia) –

During the 2017 Agora Economics Roundtable meeting I recently attended in Baltimore, one of my international colleagues, Ivan Carrino, voiced a question. This was something that had been on my mind for a while as well. Here is what he said:

‘You know you have a gold standard, it’s like having a fixed exchange rate. So if you just expand a lot then you would have a balance of payment crisis and that’s it. Then you had to adjust again. When you don’t have that system, then the problem you have is you go on an expansionary policy, and your exchange rate goes down.

‘We know that in Argentina, the government spends a lot of money and if you have a flexible exchange rate, the peso goes down and inflation goes up. My question is, where is inflation in America? You have been doing huge deficit spending and… the balance sheet has been expanded, and there’s no inflation. Do you see it coming?’

That is, the US Federal Reserve has been pumping money into the economy through ‘money printing’ and fiscal spending for many years now. So, why has there been no inflation — or hyperinflation for that matter?

This is textbook macroeconomics. You increase the money flowing around the economy and prices are bound to go up.

Ivan is from Argentina, just like your analyst.

Argentina is no stranger to expanding the money supply and using fiscal stimulus to create growth. It has been doing this for decades. As a consequence, the country has also been struggling with inflation and hyperinflation for decades. You see, once inflation shows, it is hard to stop.

Argentineans know this process well — it is imprinted in our DNA.

So you can understand how Ivan — and I — are mystified. How are so many central banks expanding their balance sheets while struggling to create inflation?

What’s the trick? And, if so, can Argentina have the recipe?

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