The most dangerous words in monetary policy and economics are “this time is different.” The big mistake of politicians in Argentina is to believe that inflation is multicausal and that everything is solved with increasing doses of interventionism.
The consumer price index in Argentina experienced a year-on-year rise of 58% in April 2022, which means 2.9 percentage points above the variation registered last March. A real catastrophe. Inflation in Argentina is more than six times higher than that of Uruguay, five times higher than that of Chile, four times higher than that of Brazil or Paraguay, neighbouring countries exposed to the same global problems.
After more than a decade of chained stimulus packages and extremely low rates, with trillions of dollars of monetary stimulus fuelling elevated asset valuations and incentivising an enormous leveraged bet on risk, the idea of a controlled explosion or a “soft landing” is impossible.
In an interview with Marketplace, Federal Reserve chairman admitted that “a soft landing is really just getting back to 2% inflation while keeping the labor market strong. And it’s quite challenging to accomplish that right now”. He went on to say that “nonetheless, we think there are pathways … for us to get there.”
In an interview with The Wall Street Journal, Treasury Secretary Janet Yellen admitted that the chain of stimulus plans implemented by the U.S. administration helped create the problem of inflation. “Inflation is a matter of demand and supply, and the spending that was undertaken in the American Rescue Plan did feed demand”, Yellen admitted. Of course, Yellen went on to say that the spending was appropriate due to the collapse of the economy as governments were trying to prevent a recession.
April 2022 will go down in history as a milestone that has only been seen on three previous occasions since 1973. A month in which the S&P500 Index and US Treasuries have fallen at the same time, 5% and 2% respectively. Additionally, the US dollar has appreciated against the main currencies with which it trades and reaches a new year high.
Years of monetary laughing gas have not diminished the strength of the US dollar as world reserve currency, rather the opposite. Now we witness the vacuum effect. Inflows into the US dollar in a period of risk aversion.