Tuesday, April 3, 2012

The Economist and Argentina


Central Bank Independence is the rallying cry of the Economist againts Argentina's new law regulating the functioning central bank. Argentina will use the central bank as a piggy bank for the government, and that will lead to inflation. This is a bit ironic since it comes after the worse crisis in capitalism since the Great Depression and during the worst European Crisis after the launching of the euro, which threatens the very existence of the currency, and both should at least lead to some revision of central bank practices. Also, one should note the independence of the European Central Bank is part of the problem in the case of Europe, since if the ECB bought small amounts of Greek debt the draconian adjustment would be unnecessary.

The only thing worth about the piece is the brief objective description of what the central bank' new charter does, namely:
"It can now be required to transfer to the treasury cash equal to 20% of government revenues plus 12% of the money supply; to use its reserves (of $47 billion) at will to pay government debts; and to play a more active role in regulating banks and in steering credit to favored industries."
They mock the president of the bank, for suggesting that the bank will not print more money than needed. Mind you that is an old idea, going back to the anti-bullionists, the Banking School, the Radcliffe Committee, and many post-Keynesian authors that defended endogenous money (what is now referred to as MMT). Also, something accepted by any central bank that follows an interest rate rule, since they lend any amount at that rate of interest.

Bernanke would probably reply that the incredible increase in the monetary base, from around US$ 850 billion to around US$ 2.5 trillion in the 2007-2011 period, was what the market needed. The Economist obviously believes that hyperinflation is around the corner in the US too.

The use of reserves, which continues a policy already in place, just with more flexibility, is a way of reducing the need for borrowing in international financial markets. And since the current account is near balance, the only other alternative would be to borrow. Note that borrowing in international markets in foreign currency, has no connection with printing money and financing domestic spending in domestic currency, other than the fact that imports increase with the level of activity. By the way, the government is reducing spending and cutting subsidies, and, hence, promoting a fiscal adjustment and as one should expect the economy seems to be decelerating, so it is very unlikely that there will be overissue, whatever that is.

By the way, historically that is what central banks did. The Bank of England entire initial capital was lent to the government. And one thing that is generally agreed is that the ability to borrow money at relatively cheap rates was essential to explain the British rise to power in the XVIII century, and for the eventual defeat of the French hegemonic pretensions. Inflation, when it occurred was caused by changes in costs of production, and as Thomas Tooke, an often neglected author, suggested, in his monumental History of Prices, that bank issue responded to the needs of trade.

But given the ironic tone of The Economist, let me ironically finish by quoting Milton Friedman, who also opposed Central Bank Independence, albeit for different reasons than I do: ‘to paraphrase Clemenceau, money is too serious a matter to be left to the Central Bankers.’

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