Argentina, Central Banks, Inflation, and Your Own Currency

Let’s discuss why you should keep your own currency and how central banks can be done away with, but not for the reasons you think (ZeroHedge and Balaji will be displeased). There are 3 short essays consolidated into one blog post here. They’re succinct, promise.

On what Argentina is foregoing and accepting by dollarizing:

Argentina is swapping being a monetary sovereign (meaning issuing your own currency and collecting taxes in it) for being a serf of US fiscal policy. You now have to borrow/acquire USD to spend it, whereas before you were the currency issuer. The peso’s implicit tax of inflation is now a more explicit one of USD and eurodollar interest rates (and USD inflation). You have placed yourself into a straighjacket because you can’t be trusted to not self-harm.

You could just cut spending, be fiscal adults, and keep your own currency. Maintain a tool a truly sovereign nation has. They could fix the inflation themselves if they understood why they have it (government spending NOT their central bank) and showed a modicum of restraint. But no, you forego your own sovereignty to be beholden to US fiscal whims? Based?

You're conceding "We can't be adults about this. Please US, manage our financial decisions for us".

Giving up your currency sovereignty is almost tantamount to giving up your defense sovereignty. A nation that can't wage war, or make its own financial decisions, is not truly sovereign.

I do not find this to be based. I think you're castrating yourself because you are obsessed with hating the wrong thing: central banks. You can dump your central bank and still keep your currency! But instead you're chucking the baby out with the bathwater.

I think you will end up regretting this loss of this autonomy at the worst possible times....

On why you do not need a central bank to issue or “manage” your own currency:

Currencies existed well before central banks. The peso, USD, etc. were spent just fine without a Fed. They're created by the government when it spends. You can create demand for it by requiring taxes be paid in that currency. The ancient world understood this.

You don't need to manage anything besides your spending and tax collection. That's it. If you have a productive economy and collect taxes, you now have a credible fiat resource you've willed into existence that represents a claim on the productive output and resources of your country (you need the currency to buy goods from the issuing country).

If you have a strong economy, this claim will have intrinsic value. Are Amazon gift cards just valueless "fiat currency" from Bezos? Or do they represent a claim on the output of Amazon and that's why they have value? You don't need your currency to be backed by yellow rocks for it to have intrinsic value: the claim on resources (resources are real, concrete things) is the value.

You need to simply budget responsibly to 'manage' your currency. All a central bank effectively does is play with interest on reserves and very ostentatious swap games to toy with reserves in the system to keep an overnight lending rate in range (all that QE, QT, and open market operations do). You just.... don't need to do that. Get rid of them. No interest paid on reserve balances. Repo markets will be just fine without you. And the rest of the yield curve didn’t listen to you anyways. Done.

The currency is now in circulation when the government spends and that's that. You pump too much into the world, you get inflation. Despite histrionics to the contrary, the Fed/CBs do not do this. Fiscal policy is and always has been the loaded weapon. Dump the central bank, but not for some “end the Fed it’s responsible for all the world’s woes” idealogical Austrian obsession that still thinks the gold standard is real, but because it’s impotent and a distraction.

Central banks are not needed for currency management or fiscal sovereignty. You should retain the right to manage your own financial decisions and wage war by keeping your own currency, something fiscal policy is responsible for. A country who cannot do this is de facto dependent on other nations for its defense (probably the US, gross). You should not want that.

On why only fiscal policy is responsible for inflation, and monetary policy is a ruse:

One of the core points of my The Fed series is fiscal policy is what creates inflation. I’ll approach it from a logician's standpoint:

Inflation is not when prices fluctuate up or down, that's markets allocating resources. For example: if GPU production gets hit and prices spike: that's a natural market correction to supply dynamics. This is neither fiscal nor monetary policies doing.

Inflation is a persistent, generalized increase in costs in nominal terms across most consumption. More dollars chasing the same resources. Supply shocks, like the GPU example, will be transitory and limited to the affected resource and its externalities. The price of milk, nail polish, and roller skates won't go up because because of this.

What we've experienced these last couple years is inflation both functionally and technically. Don’t forget what the fiscal deficit (spending) did just before it happened. You want to credit this to the Fed and QE? You should go back to 2008 when they started doing QE and look at an inflation chart. And then go look at Japan's inflation and the giga-massive QE the BoJ’s been doing since 2001. Europe has been doing QE often too over the last decade too. Little to no inflation for any of these places. The evidence is clear, this claim is wrong.

Friedman was right that inflation is a monetary phenomenon (insofar as ‘monetary’ means more money in circulation, not monetary policy). I'd modify this so it’s more correct to a 'fiscal and credit creation phenomenon'.

The Fed does not create new dollars into economic existence, or new assets at all for that matter. My breakdowns in The Fed Part 1 - 3 demonstrate this clearly and mechanically. All the Fed can broadly do is some variation of QE or QT: meaning the program gets a different name and justification, but it's all the same swap games at the end of the day. One thing is exchanged for another, no new assets are introduced into the world. The Fed’s balance sheet is a graveyard.

If you're versed enough to cite Section 13(3) Exigent Circumstances clause as a rebuke, then yes, I agree that's an exception. But that's extraordinary stuff and it's no longer monetary policy at that point; that's the Treasury/Congress acting using the Fed as a tool. It just demonstrates Congress will do what it wants, when it wants. And the decision is still coming from Congress, that is fiscal policy.

Who does create new dollars? The government (fiscal spending) and its agents (banks). Fiscal can print money, and banks can print money (credit creation). Banks can print money through loans that exist in the real economic world, the government can print money by just making it and injecting into the *real world*.

What do I mean by real world? I mean into the checking account of a business who then spends it on payroll. I mean into the accounts of your mom and dad for social security, who then spend it in the real economy that consumes resources. Fiscal policy creates dollars that consume resources, monetary policy cannot. The Fed can only manipulate bank balance sheets to psychological effect that never exists in economic reality; the concrete downstream effects of this are somewhere between grossly overstated and nonexistent. M2 subterfuge games.

So I'd make a small qualifier to my claim: banks could also create inflation if they started lending (credit creation) a lot persistently. Though they would only do it if economically beneficial and within the constraints of leverage ratios, they can’t just do it frivolously like the government can.

Thus fiscal spending is the only avenue through which inflation occurs. Because it is the only avenue through which more dollars can be thrust into economic reality that results in more currency chasing the same resources.

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