Paul Krugman Pushes Factually Inaccurate Arguments About Argentina to Support His Discredited Monetarist Ideas


Well, Paul Krugman is out again waving his true colours in the wind while his die hard followers try desperately to look the other way and pretend that he’s not making stuff up. Basically Krugman is saying, following that pundit Yglesias, that Argentina’s inflation problems have to do with their fiscal balance. Here is the quote from Krugman,

Matthew Yglesias says what needs to be said about Argentina: there’s no contradiction at all between saying that Argentina was right to follow heterodox policies in 2002, but it is wrong to be rejecting advice to curb deficits and control inflation now. I know some people find this hard to grasp, but the effects of economic policies, and the appropriate policies to follow, depend on circumstances. (My Emphasis)

Of course, Krugman — instead of engaging in tough guy rhetoric (“doing what needs to be done” etc.) — could have done two quick Google searches to see if Argentina had been running major deficits in the years when it was suffering from inflation. If he had he would have found that for many of the years after the 2001 default Argentina ran substantial fiscal surpluses. The stats are pretty hard to track down in the original (the website is in Spanish) but Trading Economics has pulled them and their statistics are typically accurate.


As we can see, the government ran substantial deficits in 2001-2003. This was at a time when GDP was shrinking at upwards of 6%. But once the economy left that major recession the government budget balance swung back into surplus and remained there until a brief deficit in 2010.

Now, if Krugman’s story were accurate we would expect to see inflation come down between 2004 and 2010, right? Do we? Nope. Not at all.

The following graph is the official inflation rate. Note that even though these statistics are well-known to under-exaggerate inflation they nevertheless track the unofficial measures insofar as their trends go — i.e. while they are not useful to give us a real picture of the rate of inflation they do give us a good picture of when the inflation accelerates and decelerates.


As we can see inflation soared in 2002. This would seem to overlap with the enormous budget deficit of that year. But the correlation is spurious. The inflation soared  that year because the Argentinian peso was devalued to such an extent that it was worth about 25% of what it was worth the previous year. The spike in inflation was due to a sharp, fourfold increase in import prices that were then passed through to the rest of the economy. Something very similar happened in Iceland after the banking crisis there in 2008.

Between 2004 and 2010, however, we see consistent levels of high inflation (the real figures would probably be close to 20-25% a year rather than the government’s 10%) — and this was in a period when the country was running substantial government surpluses. What does this suggest? Simply that the inflation is likely due to the value of the Argentinian peso together with a host of other factors. These other factors are basically a classic wage-price spiral with the unions demanding that their standards of living keep up with rising prices, while firms raise their prices to pass on the cost of higher wages.

Since 2011 the peso has continued to devalue and is today worth about half what it was worth back then. Again, this is probably the root cause driving the inflation in Argentina. But it has very little to do with the government deficit. Rather it has to do with the fact that Argentina has been faced with these inflationary problems since at least as far back as the late-1980s when the country experienced a bout of hyperinflation proper.

During the 1990s the government tried to wring the inflation out of the system with a misguided currency board arrangement that fell apart in 2001. And I don’t think anyone would openly advocate that they try that again.

So, what are the solutions? Unfortunately, there are no easy solutions. In an ideal world the government would allow the burst of inflation that is going to accompany the recent devaluation of the peso to run through the system and then they would step in with well-enforced wage and price controls. Such controls, if history is to be any guide, are often less popular than inflation — with both trade unions and companies feeling their rights being encroached upon.

So, the likely path that Argentina will have to take is to try to keep economic growth buoyant while navigating the inflation. By not allowing incomes to fall too much the government can ensure that people do not experience their loss of purchasing power as an all-out impoverishment. Meanwhile, the government should bring the trade unions and the management of the firms to the table and try to make them gradually see reason. But again, that’s a tough game indeed.

The last thing that Argentina need, however, is the likes of Paul Krugman with his silly Neo-Monetarist models of inflation telling them to cut government spending. Argentina is already extremely unpopular in the financial press because of the bitterness that still surrounds the 2001 default. When so-called ‘friends of the left’ like Krugman jump on the bandwagon as an easy way to outline their primitive theories of inflation it just adds fuel to the fire.

With their silly and discredited money supply-growth ideas — which, of course, are entirely backward (as I argued here inflation typically causes money growth and not vice versa) — they will only encourage the Argentinean public to vote in another bunch of lunatics who will try some idiotic arrangement like they did in the 1990s. Such a regime may temporarily put a lid on inflation but only at the cost of wrecking the economy and causing much suffering.

Yes, the Argentinian financial elite will be pleased that their money is temporarily sound, but it will only be a matter of time before the riots kick into high gear and the whole thing falls to pieces in an ugly and perhaps bloody mise-en-scène orchestrated by economists who think that their doctrines and their little geometric toys fly in some heavenly space above political and social realities.

Update: There has been some push-back on my interpretation of Krugman’s position as ‘monetarist’ in the above post. As I show here it is quite clear that Krugman falls on the monetarist side of the debate over fiscal policy and its affects on inflation.


About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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47 Responses to Paul Krugman Pushes Factually Inaccurate Arguments About Argentina to Support His Discredited Monetarist Ideas

  1. Josh S says:

    Maybe I am one of those people “looking the other way”, but I did not take his post to mean that the inflation problem was only or even primarily caused by fiscal deficits, but rather they have an inflation problem they should address and a budget deficit that they should address given the seemingly supply constrained circumstances. Even saying addressing the latter would help with the former is not the same as saying the inflation was due to solely the deficit, so just showing a lack of pairwise correlation over a short sample doesn’t undermine this point.

    • Krugman advises cutting the deficit, no?

      And his argument is based on a correlation that doesn’t exist, no?

      And he doesn’t give any other argument other than the deficit and some ghostly “money supply growth” to explain the inflation. no?

    • NeilW says:

      “but rather they have an inflation problem they should address ”

      That sort of depends whether it is a problem or not. It’s certainly a problem for money lenders, but what about real people?

      If there is dollarisation going on then having high interest rates is not fixing anything – since it clearly isn’t causing the peso saving that the theory expects to happen amongst ‘rational actors’.

      Unfortunately in Argentina you have a rack of incompatible economic theories all chasing the tail and nobody getting hold of the actual problem in a co-ordinated fashion.

      Dollarisation effectively causes a currency area to shrink, and that ought to be counteracted by increased taxation to increase the demand for pesos – preferably targeted at the dollar transactions.

      The job of the government is to manage out the change in the real terms of trade – rationing where necessary – eliminate excess peso via taxation or spending cuts and get the lending system back under control (it really needs ZIRP and narrow banking).

      Unfortunately it should have done this a few years ago.

      • I disagree Neil. This is not due to excess pesos. This is fundamentally a wage-price spiral. As for the trade issue, the prices have already risen thus limiting imports in price rather than quantity terms.

  2. NeilW says:

    *If* there is dollarisation then you are replacing peso savings with a foreign asset, and that releases the pesos into the spending circuit since nobody appears to want to save them. For me ever higher interest rates seems to cause people to panic and not save in the currency.

    Change in the exchange rate is due to too many pesos for dollar transactions chasing too few dollar for peso transactions. That’s what it is telling you!

    A wage price spiral has to be broken by imposing the implied reduction in standard of living on somebody – assuming you can do nothing about the supply side to increase output to absorb the demand. The excessively high interest rates can’t be helping the supply side.

    That’s what I meant by perhaps rationing certain imports – denying the real import goods/services (say luxury jets) to impose the standard of living reduction on a certain section of the population and relieving the price pressure on other sections of the population.

    • NBL says:

      “That’s what I meant by perhaps rationing certain imports – denying the real import goods/services (say luxury jets) to impose the standard of living reduction on a certain section of the population and relieving the price pressure on other sections of the population.”

      Interestingly this is precisely what Tony Benn and the left-wing of the Labour Party proposed in Britain during a similar spiral in their ‘alternative economic strategy’ during the IMF crisis of 1976. I’d be interest in your thoughts (and yours Phil) on this period and its lessons.

  3. TiPs says:

    I think you are misinterpreting PK on this one. He says money printing and deficits are bad when an economy is supply constrained but fine when the economy is demand constrained. He even shows data for periods when money and prices aren’t correlated. Nothing in that piece is inconsistent with what heterodox economists would say.

    • Oh no… Krugmanbots.

      So, are you saying The Master didn’t suggest that Argentina should cut the deficit to control inflation? Is that what you’re saying?

      • TiPs says:

        Someone disagrees with your interpretation, so must be a krugbot?

        He’s saying you can run big deficits when there is slack in the economy, but when there is not (supply constrained), then deficits contribute to inflationary pressures, assuming the source of inflation is demand-side. You suggested he’s a monetarist, and, In the article linked, I didn’t see any evidence that he believes in monetarism; in fact, just the opposite.

      • Can you read, Krugbot? The Master says that Argentina needs to cut its government deficit to ease inflation which is caused by an increase in the money supply (identical argument to the monetarist proclamations on the PSBR in the UK under Thatcher). But the data suggests that the inflation has nothing to do with the deficit. Do you understand or shall I put on a Krugman mask and repeat?

  4. TiPs says:

    Here’s the relevant quote:
    “I would add that we know what those circumstances are! Running deficits and printing lots of money are inflationary and bad in economies that are constrained by limited supply; they are good things when the problem is persistently inadequate demand. ”

    Running deficits “and” printing lots of money. You interpret him as saying deficits are consistent with printing money; they are not, and I don’t believe he is saying that. If you run deficits, and the CB monetizes those deficits, then they can be inflationary, again assuming inflation pressures are caused by demand forces.

    Your main argument is that he doesn’t understand the source of inflation, and you suggest it’s supply-side. If so, You make a valid argument suggesting his demand-side deficit cutting policy is a bad idea. The problem is you the go on to say he is a (neo)monetarist. A monetarist would never argue that one could deficit spend and print money without inflationary consequences under ANY conditions. It’s clear from his post he’s not a monetarist.

    • Thou does not read thine prophet in good stead, my son. Thus spake Krugman:

      Matthew Yglesias says what needs to be said about Argentina: there’s no contradiction at all between saying that Argentina was right to follow heterodox policies in 2002, but it is wrong to be rejecting advice to curb deficits and control inflation now.

      And He cast down the Kirchner administration for its wanton stubbornness to curb the deficit and cleanse the economy of the inflation scourge.

      And the heretic Pilkington lied and slandered and said that the deficit was not correlated to the rate of inflation.

      And Krugman smited down the heretic with great vengeance and furious anger.

      And all was right once more.

      Thanks me to Krugman. Amen.

      • TiPs says:

        Krugman states he supported deficits and money printing in 2002 when unemployment exceeded 20% in Argentina, and he says that won’t be inflationary!

        Unemployment is now down near 7%. IF the source of inflation is demand-side, then running deficits AND monetizing them will add to inflationary pressures as resources become scarce. That is a Keynesian argument, not monetarist.

        You’ve created a strawKrugman by claiming he says deficits are always inflationary.

      • ***Brrrrzzz… Input = Krugmaster in error… Input not recognised… Brrrzz… Process = Desperately try to read ambiguity into factually inaccurate and lazy statement by Krugmaster… Input = Krugmaster is never wrong… Input recognised… ***

        Haha! Funny if it weren’t so pathetic. Next Christmas ask Santa for a mind of your own, cultist.

      • TiPs says:

        I’ll try one last time…
        Good Phil: PK is wrong about cutting deficits now because inflation is not a demand-side problem, it’s a long-standing wage bargaining issue, and sometimes an exchange rate issue.

        Bad Phil: When PK says deficits can be inflationary (if monetized) when unemployment is low but not when it’s high, then PK always believes deficits are inflationary and is a Monetarist.

        Really Bad Phil: if someone points out I might be wrong about one of my characterizations of PK, they must be cultists, so I’ll just scream and shout until they go away….

      • Looks like you have some reading to do on the monetarist versus Keynesian debate about using the PSBR (UK deficit in the 80s) to control monetary aggregates. Come back when you have a vague clue what you’re talking about, Krugbot.

      • DeusDJ says:


        The confusion here lies with you, a little bit. Philip isn’t saying Krugman believes that deficits are always inflationary…but that anytime inflation exists it must be because of deficits, and not the at least six-seven other reasons one could conceivably come up with. Which is why Philip bothered to show the data. And hence even if it’s some sort of a demand side problem (hypothetical), it’s not coming from (nonexistent) deficits. Hence, making an opportunistic blog post to show himself as a sensible person in finding a reason to say he isn’t always against cutting deficits is dumb, because the problem isn’t from the largely non-existent deficits over the past however many years as shown in the chart!

        Also, Unfortunately, Krugman took it to heart in choir class when they were reciting “inflation is everywhere….AND ALWAYS!!!…A MONETARY PHENOMENA!!!”.

      • Mostly true, DeusDJ, but it goes further than that. What Krugman is implicitly saying in the post is that the deficit should be used to affect or control monetary aggregates (because, as you say, he think inflation is a monetary phenomenon). That is why he first makes groundless claims that the deficit in Argentina needs to be cut because it is causing inflation and then moves onto discussing monetary aggregates — he is implicitly associating the two because this is how he conceives of inflation.

        This is the same case that the monetarists made in the late-1970s and early-1980s in the UK. Thatcher used this as a reason to cut the deficit (then called the Public Sector Borrowing Requirement [PSBR]) and induce a major recession. At the time the Keynesians said that you could not use the PSBR to control monetary aggregates. The data, of course, proved them correct. You can read the whole saga in Kaldor’s The Scourge of Monetarism but you can also find it in the Treasury documents of those years.

        TiPs is confused because, as I keep saying, he’s a Krugbot. He thinks that the argument that Krugman is making is Keynesian but its not, it’s monetarist. TiPs doesn’t understand this because he has no background in the history of ideas or in the debates between the monetarists and Keynesians in the 1970s and 1980s. He believes that what Krugman sells is Keynesianism but its not, its neo-Monetarism.

        TiPs will never believe this though because he’s a Krugbot. That is why I just laugh at him and his lack of proper grounding in these debates. Hopefully he will soon go back to Krugman’s blog where he can learn the hodge-podge garbage that Krugman sells as Keynesianism but which is actually less Keynesian than even Samuelson or Solow.

      • TiPs says:

        Thanks for the civil response Deus.

        First, why would PK post a graph showing the lack of correlation between money and prices if he is everywhere a Monetarist? Second, while I agreed with PP’s criticisms on the sources of inflation in Arg, I still disagree on his (and your) interpretation of what PK “implied.” PK qualifies his argument with the AND–deficit spending AND money printing. A monetarist would say that deficit spending is always inflationary regardless of how deficits are financed (PP cites Kaldor’s book to suggest PK is indeed a monetarist, as if citing that book clarifies what PK “really means”).

        PK is talking about deficits that are monetized–relating it to Bernanke’s QE, not deficits that are “financed” by selling bonds to the public. PP is making the heroic leap that PK “really means” ALL deficits increase the money supply, so all deficits are inflationary. However, PK is only talking about monetized deficits, and he says their impact on inflation “depends on the circumstances” –the underlying REAL economic circumstances. Are there excess resources or not? That is a Keynesian argument, and it’s even a Post Keynesian argument.

        PP, who knows nothing about me, resorts to name-calling when questioned on his interpretation. I’ve scanned some other articles and discussions here, and I noticed he resorts to this petulant behavior when criticized.

        I admire the fact that PK has been one of the few mainstream voices of reason regarding the austerity debates over the past 4-5 years, and it’s certainly ironic that PP accuses him of believing that deficits are always inflationary. Too many people seem to want to make a name for themselves by taking PK down, but there’s no reason to build a straw(krug)man as I said. He is certainly wrong about issues; for example his views on banking, and Steve Keen has taken him to task often on that.

        On a personal note, I am of the Post Keynesian persuasion, and I was reading Kaldor when PP was still in diapers…(20 years ago, not last year… 🙂

      • I never said that Krugman thought all deficits were inflationary. And if you think that’s the monetarist position you obviously have a fairly sophomoric (read: undergraduate level) understanding of monetarism.

        I assume that the reason you don’t understand what I’m saying — which is that Krugman thinks that cutting deficits can be used to stem money supply expansion — is the same reason that you apparently read Kaldor’s book and understood nothing in it.

      • TiPs says:

        Well, it was actually about 25 years ago…but what I recall is that Kaldor argued money is endogenously determined, not exogenously controlled by the CB as monetarist argued. I can’t remember, but I think Kaldor had participated in the Radcliffe Commission’s report which confirmed that point.

        As for this argument, you take his statement that “it is wrong to be rejecting advice to curb deficits and control inflation now” as evidence that he is a monetarist. My interpretation is that PK is making the keynesian argument that monetizing the deficit, when unemployment is low, adds to demand side inflation because it creates additional demands on limited resources. So according to PK, cutting the current deficit will reduce the demand for real resources, reducing demand side price pressure. This view is supported by the rest of PK’s discussion in the article you link to.

        That said, and as you have rightly pointed out in your piece, he is wrong about the source of inflation being strictly demand-side, but that doesn’t make his argument monetarist. This horse is dead.

      • This is rather simple and clear in the piece. Just answer 4 questions.

        (1) Do you think that cutting deficits will, in a real life inflation like Argentina today or the UK or US in the 1970s and 1980s, reduce inflation?

        (2) Do you concede that Krugman advises Argentina to cut the deficit to curb inflation?

        (3) If yes to (2) do you not think that his extended discussion on a money supply expansion outside his version of a liquidity trap in the context of the assertion that deficit cutting is counter-inflationary suggests that deficit cutting will lead to a contraction in the money supply as the latter is the source of inflation (outside of Krugman-liquidity trap)?

        (4) If yes to (3) do you think that cutting a deficit will contract the money supply?

        Come on… catch up. I can’t hold your hand on this. If you can’t see it then I’m sorry, you don’t understand endogenous money theory at all and you can go back to your verticalist money supply curves, thank you!

      • TiPs says:

        A question for your questions: MMTers say that government spending creates money and taxes destroy money, so deficits create net money balances. Are they monetarists as well?

      • MMT has an analytical device called the sectoral balances (SB). The SB was invented by Kaldor and perfected by Godley who both implicitly or explicitly employed it.

        In the SB framework cutting the deficit will NOT lead to a decrease in the money supply if the other sectors expand their lending. This might happen, oh I don’t know, because of a wage-price spiral (try reading Basil Moore’s paper Unpacking the Post-Keynesian Black Box in this regard).

        So if you ask an MMTer: (1) Will cutting the deficit reduce the money supply? They will say: it depends on the other sectors. And (2) Will cutting the deficits reduce inflation? They will say: It depends on other sectors.

        Krugman would answer yes to (1) and (2).

        Anyway, my patience is wearing thin here. I suggest you read the relevant endogenous money literature and bone up on the sectoral balances approach. I’m not here to clarify these matters.

        Alternatively, go back to Krugman’s columns. They’re much easier. He’s the unthinking man’s economist for sure.

      • TiPs says:

        yes, tiring, so my last try (says the junkie)…
        I agree with your argument about PK’s naive policy suggestion which implies he believes inflation in Argentina is a demand side issue.

        I disagree with you making a “leap” to conclude he’s a monetarist. I don’t know any monetarist who would say, “sometimes money and prices are correlated, and sometimes they are NOT.”

        Strictly speaking, if PK adheres to the ISLM framework, deficits (which shift the IS curve) are independent of monetary policy and do not change the money supply. It’s simply borrowing existing funds to spend (whereas MMT would say deficits create money/deposits that allow banks to “fund” any bonds issued). However, for strict ISLMers, if the Fed monetizes any part of the deficit, it increases the money supply (shifts the LM curve). This is why the use of the word “and” is important for PK–“deficits AND money printing” (monetization) together. As a strict ISLMer, PK argues you can monetize until the cows come home when there’s a liquidity trap, but not under “normal circumstances,” or when resources are scarce. As he said, “the circumstances matter” with regard to the impact of a QE type policy.

        To take it a step further, I would say that neokeynesians like PK are now closet horizontalists. If one accepts the Taylor Rule and a Fed reaction function, then they implicitly assume that the Fed will supply all reserves at the target interest rate. I rest my case.

      • I didn’t say that Krugman IS a monetarist. I said that his ARGUMENT is monetarist. It is.

        Krugman is an ISLM Keynesian at the zero-lower bound and a monetarist when inflation breaks out.

        Now go back to his op-ed pages or read up on the monetarist debates or something because this is boring and stupid. You obviously worship the ground the guy walks on and want to vindicate his crap in some way. Do it elsewhere. There’s lot’s of fan pages. You also seem to want to read into his arguments that he’s on your side which is sad. Go away.

      • NeilW says:

        Need to be careful about using the term ‘money supply’ without being clear what you mean.

        There is spending and there is saving.

      • Oliver says:

        I see Krugman as arguing from the point of view that monetary and fiscal policy are the only two policy tools available (in ‘normal’ times, and only the latter in a liquidity trap). If you accept that broad brush – I don’t – and are comfortable with the collateral damage they produce (basically forced bankrupcy and unemployment) if and when they work (the endogeneity disclaimer) it is no contradiction to say that deficits may not be the source of inflation but that reducing them may be the only cure and thus a macroeconomic imperative in the current situation.

  5. DeusDJ says:

    Well, if Philip read too much into what Krugman was saying, it’s because Krugman’s a fucking idiot. You don’t advocate cutting deficits when they’re non-existent and hence not the source of the problem, even if the problem is on the demand side. Krugman the opportunist struck again and fooled us all.

  6. Souvarine says:

    Matias Vernango adresses the question here, among other things.

    Anyway, the question is far more complicated than a simple matter of deficit and inflation. IMO, the problem is that Krugman, as a public figure, seems to think that he can be an expert about anything and everything. In fact, he seems to know very little about Argentina.

  7. Pingback: Philip Pilkington: Paul Krugman Pushes Factually Inaccurate Arguments About Argentina to Support Discredited Monetarist Ideas | naked capitalism

  8. JohnB says:

    Good article – thanks; by the way, the RSS feed seems to be broken in RSSOwl (I use that as my primary reader), and there are a few issues highlighted here, which would likely fix it:

  9. marksadowski says:

    “Of course, Krugman — instead of engaging in tough guy rhetoric (“doing what needs to be done” etc.) — could have done two quick Google searches to see if Argentina had been running major deficits in the years when it was suffering from inflation. If he had he would have found that for many of the years after the 2001 default Argentina ran substantial fiscal surpluses. The stats are pretty hard to track down in the original (the website is in Spanish) but Trading Economics has pulled them and their statistics are typically accurate.”

    First of all, in my opinion, Trading Economics’ data suffers from extraordinary inaccuracies. Second, Trading Economics states that it gets its Argentinian fiscal deficit data from the government of Argentina. And if Argentina’s official consumer price inflation rates are known to be an enormous fiction, what makes you so sure that their fiscal deficit data is any less suspect?

    According the IMF, at least as far back as 1995, Argentina has never run a general government fiscal surplus:

    True, the IMF estimates that Argentina’s general government deficit was less than 0.9% of GDP in calendar year 2008, but it is forecast to reach nearly 4.1% of GDP this year.

    “The last thing that Argentina need, however, is the likes of Paul Krugman with his Neo-Monetarist models of inflation telling them to cut government spending.”

    To be clear, there is no monetarist model which claims that government spending is the primary cause of inflation. On the contrary, monetarism claims that inflation is always and everywhere a monetary phenomenon. So where is this bizarre statement coming from?

    You are evidently drawing from a peculiar rewriting of the history of the Thatcher years, when the UK’s public sector borrowing requirement (PSBR) was targeted for reduction as a means holding down interest rates. No form of monetarism, not even an imaginary special Thatcherian variation, believes that inflation is a fiscal phenomenon.

    However, why in Argentina’s case might fiscal policy be connected to inflation? Well for one thing Argentina has been virtually shut out of the global credit markets since its 2001 default.

    How does a country succeed in running fiscal deficits without borrowing money you might ask? Well one way is to simply print it.

    In March 2012 the Argentine Senate approved a “reform” of the central bank charter, effectively allowing the Argentine Treasury unlimited direct financing by Central Bank of the Argentine Republic.

    So it sounds to me like Krugman is just following the pesos.

    • So Mark, do you have any evidence that inflation and fiscal deficits in Argentina are correlated or are you just engaged in conjecture ala Krugman?

      • Mark A. Sadowski says:

        There are numerous sources, but here’s a working paper by Alex Fuste, the Chief Economist of Andbank. Page 4:

        “1. Government spending has been financed by printing pesos.
        2. Since changes in BCRA charter (March 2012), the scope for
        the central bank to print money and lend it to the Treasury
        has been dramatically expanded (see the chart)
        3. In reality the IOUs (non-negotiable debt instrument)
        issued by the Argentine Treasury in exchange of newlyprinted
        pesos tend to be rolled over indefinitely.
        4. This policy probably put further pressure on inflation and
        Fx in the past, but if policy is relaxed even more (in a
        desperate attempt to pump the economy) then, inflation
        could run wild above the 30% and we could witness a
        disastrous impact on the currency.
        5. Incredibly, low quality, illiquid government securities
        (including non-transferable bills and temporary IOUs) now
        account for 60% of BCRA assets. And the pensions agency
        ANSeS have already been drained of a significant amount
        of its liquid assets. Any other movement in the same
        direction, could be critical.”

        Click to access workingpaper57.argentina-yes,windsofchangeareblowingonthehorizonbut…donotputlongyet_181013_1382107731_71_.pdf

        The graph shows the amount of “temporal advances” dating back to 2002.

        Where is Andbank getting its data? From the BCRA. See pages BAL-BCE-1-2 and BAL-BCR-2-2:

        Click to access boldat201401.pdf

        On the first page you’ll find the transitory advances under the column labeled “adelantos transit.”. The monetary base is on the following page under the column labeled “base monetaria”.

        Transitory advances totaled 20.9 billion peso in 2011, 60.6 billion peso in 2012 and 54.9 billion peso in 2013. According to the IMF Argentina’s nominal GDP was 1,839.9 billion peso in 2011, 2,163.0 billion peso in 2012 and 2,666.0 billion peso in 2013:

        Thus transitory advances totaled 1.1% of GDP in 2011, 2.8% of GDP in 2012 and 2.1% of GDP in 2013. Compare that with the deficit figures from Trading Economics: a surplus of 0.2% of GDP in 2011, a deficit of 1.7% of GDP in 2012 and a deficit of 2.5% of GDP in 2013:

        Thus transitory advances are more than the fiscal deficit figures reported by Trading Economics in 2011 and 2012. According to the IMF the fiscal deficits were 3.5%, 4.5% and 3.6% of GDP in 2011-13 respectively. Assuming the IMF figures are correct transitory advances accounted for about 31%, 62% and 59% of the deficits in 2011-13 respectively.

        Argentina’s monetary base more than tripled from 124.5 billion peso at the end of 2010 to 377.2 billion peso at the end of 2013. Transitory advances accounted for 54.0% of the change in the monetary base during that period.

      • You’re mistaking cause for effect. Central banks that target interest rates will always accommodate a monetary expansion. The more advanced New Consensus Macroeconomists recognise this when they insert a Taylor Rule into their models. David Romer wrote a good paper here:

        Click to access JEP_Spring00.pdf

        Unfortunately most of the profession are WAY out of date in this regard, as you demonstrate here. What they’re picking up here is the advances the Argentinian central bank is making as private sector debt expands. The money supply is expanding due to wage-price increases together with import price shocks. I suggest you do some reading on how modern central bank policy works.

      • “You’re mistaking cause for effect.”

        I’m describing how the Argentinian Treasury is financing its deficit.

        “Central banks that target interest rates will always accommodate a monetary expansion.”

        True, but the BCRA does not have an explicit interest rate target. More importantly, central banks don’t typically purchase non-transferable and non-negotiable debt instruments. And in the final analysis, how could the purchase of non-transferable and non-negotiable debt instruments directly enable the BCRA to hit an explicit interest rate target even if it had one?

        “The more advanced New Consensus Macroeconomists recognise this when they insert a Taylor Rule into their models.”

        “New Consensus Macroeconomics” is a term invented by Philip Arestis. A much more common term for the approach you are attempting to describe is “neo-Wicksellian”. Also, I don’t think the Argentinian monetary policy framework can be described by a Taylor Rule given they don’t have an explicit interest rate target, don’t have an explicit inflation rate target and don’t explicitly target an output gap.

        “David Romer wrote a good paper here:”

        The IS-MP Model is a nice teaching tool mostly because it corresponds to how most central banks operate today. However it is not useful for describing the conduct of monetary policy in Argentina precisely because the BCRA does not have an explicit interest rate target.

        “What they’re picking up here is the advances the Argentinian central bank is making as private sector debt expands.”

        On the contrary, transitory advances represent the direct expansion of Treasury debt.

        “The money supply is expanding due to wage-price increases together with import price shocks.”

        Broad money supply *is* expanding, but I the monetary base is not the same thing as broad money supply. The BCRA’s monetary policy framework is an exchange rate anchor, and the conduct of that policy is being adversely affected by the need to directly finance the Treasury.

      • There’s no difference. The BRCA allows the money supply to “float” and sets short-term target rates. They buy up government debt as required. I think its a good approach.

        If they set an interest rate target the effect would be the same. Any time interest rates rose due to an increase in government borrowing the bank would buy up government debt. This is how the system works under interest rate targeting. The BRCA’s approach is functionally identical.

        The BRCA’s approach does not “hide” government borrowing, however. Debt is still issued and the deficit/surplus is recorded. It’s really identical to the system in most Western countries. All governments in floating exchange rate regimes with interest rate targeting (outside of the Eurozone) have their deficits financed by the so-called printing press as government debt is soaked up to hit interest rate targets.

        Crucially, the expansion in the monetary base that you cite is caused by the inflation. It is not the cause of the inflation. The inflation is causing higher money demand and the increase in the monetary base is just the BRCA accommodating this increase. It is the correct policy. If they want to address the inflation they have to attack the cause of the increased money demand.

    • NeilW says:

      “How does a country succeed in running fiscal deficits without borrowing money you might ask?”

      No country runs fiscal deficits by borrowing. You know that.

      It runs fiscal deficits because people are saving in peso rather than spending them to destruction. If they stop saving in pesos, then it turns up as taxation via real transactions. They can’t go anywhere else.

      Inflation would suggest that the taxation and spending structure is not appropriate given the structure of the supply side.

      Which I think is what Phil is getting at with the wage-price spiral. The fight over real production and available imports is not being resolved correctly by the monetary distribution system.

      Difficult to see what is wrong because the data is so disputed. I wouldn’t trust the IMF data either.

      • Be careful of this guy Neil. Sometimes — very rarely — he makes valid and clear points. But the majority of the time he engages in obfuscation.

        Take the IMF data, for example. The data doesn’t correlate with inflation at all. From 1995 to 1999 there was barely any inflation in Argentina and the average fiscal deficit recorded by the IMF was 2.7% of GDP.

        Between 2003 and 2010 there was substantial inflation and the average fiscal deficit recorded by the IMF was 2.2% of GDP. So, even by the IMF stats the deficit in the high inflation years was lower than in the low inflation years — thus indicating, if anything, a negative correlation.

        As you can see: no correlation even by Mark’s stats. Why did he include them? Because I think he’s engaged in some misdirection here. He’s playing the agnotologist.

        This is again reflected in his groundless assertions that Argentina are not recording their fiscal deficits and instead are printing money and spending it directly into the economy. He has no evidence of this at all. But he’s saying it anyway. Why? As I said, he engages in more than a bit of agnotology. I’ve had to deal with this before.

        Generally when you point out the holes in his argument he will change the subject. He’s a bit like Ramanan in this regard. Be careful with this one.

      • NeilW says:

        In human society the only game is politics. It’s all about gathering support for beliefs.

        Trying to get some science done in this area is very hard going.

      • Mark A. Sadowski says:

        I don’t believe that fiscal deficits are a primary cause of inflation, and even you acknowledge that the official Argentinian consumer inflation figures substantially understate the true extent of inflation, so why would the existence or nonexistence of such a correlation prove anything?

        Provided we could find a more reasonable proxy for Argentinian inflation (the GDP implicit price deflator perhaps?) and assuming the BCRA’s money supply figures are reasonably accurate, I would expect that we might find a robust correlation between inflation and money supply, much as Krugman implied with the graph of Zimbabwean data in his post.

  10. MatiasR says:

    Sorry if i repeat something said up in the comments. pilkingtonphil i don’t know if you can speak Spanish but you should read local newspapers before stating like that about a country that is not yours, and you do not know.

    I will just say something that does not contradict what Krugman said: Argentina’s new primary fiscal deficit is mainly due to subsidies to public companies and households consumption. This gap is entirely covered by money issue and not other sources. This, plus the lack of confidence to the local currency produces the respective devaluation of the peso. Both reinforce inflation.

    • The fiscal deficit is not correlated to inflation in Argentina; therefore we conclude that it is not causing it as Krugman says.

      As for your newspapers… well maybe you shouldn’t trust what your newspapers are saying because they’re as clueless as Krugman. Maybe.

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