Inflation visualized

Before leaving for Argentina a few weeks ago, I arranged with Western Union to pick up $2000 worth of Argentine pesos at the "blue" rate of 300 pesos to the dollar.

I knew in advance that I was getting a great exchange rate and that things would be very cheap in Argentina, and I wasn't wrong. What I didn't know was that the largest bill in circulation is a 1000 peso note. Which meant that my $2000 would become 600,000 pesos, in the form of 600 1000-peso notes. It took the cashier at a local Western Union kiosk about 10 minutes to organize and count the bills. The photo says it all: 6 bundles of 100 notes, each bundle worth $333.33; each note worth $3.33. I needed a bag to carry all that money back to our hotel.

It took one of these bundles of peso cash to pay for a dinner for 24 family members at a great restaurant in Tucumán called Di Vino. We tried a dozen different wines, and everyone was served empanadas, salad and a traditional Argentine BBQ (parrillada). The final cost with a tip thrown in (most Argentines tip very little or nothing at restaurants), was 92,000 pesos, or about $12.80 per person. Our huge suite at a local hotel was $75 a night. A 20 minute taxi ride cost less than $5. We took some friends to an estancia in Tafi del Valle; the bill for 3 rooms for 2 nights (including breakfast) was 126,000 pesos ($420).

You can find good wine for 2000 pesos, empanadas for 250 pesos, steaks for 1,700 pesos. Expensive wines run about 8,000 pesos (the cheapest wine in a trendy US restaurant these days starts at $40). Yesterday we had lunch at Fervor, one of my favorite restaurants in Buenos Aires. There were four of us and we ordered one Parrillada de Pescado y Mariscos—a huge selection of grilled fish, shrimp, squid, and calamari. We couldn't finish it all and it only cost 10,000 pesos ($33). We enjoyed two bottles of my favorite Argentine white wine, MariFlor Sauvignon Blanc, for 8,000 each.

A brief history of the peso: Today, a dollar gets you 300 pesos; a year ago a dollar was worth 200 pesos; two years ago 150; three years ago 70; four years ago 37; and ten years ago about 5. Why has the peso lost so much of its purchasing power? The answer is simple: the government pays most of its bills with the printing press. The M2 money supply has grown from 400 billion pesos 10 years ago to now over 10 trillion pesos. That works out to an annualized growth rate of about 40% per year. M2 has increased about 70% in the past year alone. Not surprisingly, Argentine inflation this year will exceed 100%.

Argentina has actually been suffering from bad monetary policy forever. When I lived there in 1975-79, inflation averaged about 125% per year. If Argentina had not changed its currency by lopping off zeros and renaming it 5 times since 1916 (when a dollar was worth 2 of the original pesos), the exchange rate today would be 3,000,000,000,000,000 pesos per dollar.

As Milton Friedman taught us, inflation is a monetary phenomenon which occurs when the supply of money exceeds the demand for it. Argentina has proved that countless times over the past century. It's no mystery, but nearly everyone—especially the Fed—completely ignores the fact that our inflation problem today started with a huge expansion of our money supply in 2020 and 2021. Most people seem to think that the inflation is up because the economy is "running hot," and that to get inflation down the Fed needs to cause a recession. Not so: the Fed simply needs to slow the growth of the money supply and boost interest rates by enough to restore a balance between money supply and demand. As I explained in my last post, it looks like they have done enough already. 

You can read more about this in my posts over the past two years. This is a good place to start. Also see this. Last June I stopped worrying so much about inflation, and this explains why.

UPDATE (10/12/22): Below is a chart of Argentina's dual exchange rates. The current "market rate" is also known as the "Blue" rate. Note that over the course of almost 17 years, the peso has dropped from 3 to the dollar to now over 300, for a loss of 99%. Cry for Argentina.