Serial currency destroyer Argentina is hoping to break its now 30% annual rate of inflation by mandating a two month freeze on the price of supermarket products. The Commerce Ministry has gone so far as to set up a hotline so that consumers can join the fight by reporting any illegal price increases. Unfortunately this will not work, as one has nothing to do with the other. Price controls are the classic tactic used by economically illiterate politicians who seek to blame others for the effects of their profligacy. Store operators pay the price through lost earnings. Consumers suffer from the inevitable shortages that result when it is no longer profitable to restock the shelves.
In the past 35 years, Argentina has managed not one, but two hyperinflationary episodes. Price inflation has gotten so bad in Argentina that it has now surpassed Venezuela as the worst in Latin America. All the while, government numbers report the official CPI at only 10%, a number so farcical that the IMF has formally reprimanded the government for releasing inaccurate economic data.
By definition, inflation is an increase in the supply of money and credit. Rising prices are merely a symptom of this devaluation. With this in mind, the real question is: how does Ben Bernanke stack up against a world class money printer? Let’s take a look.
The M0 money supply is the measure liquid assets held by a central bank and the amount of physical currency in circulation. This is the number that is directly impacted by Mr. Bernanke’s Quantitative Easing. Since the beginning of 2008, Argentina’s M0 money supply has increased 303% while the United States is up 237%. Clearly, Helicopter Ben is up to the challenge.
And while the US has followed in Argentina’s footsteps of under reporting the official CPI, it’s still nowhere near 30%. Why not? The broader M3 money supply numbers, which include fractional reserve banking credit, show the difference. For Argentina the M3 numbers are up 173% since the beginning of 2008 while the M3 money supply has only increased 21% in the US. So even though Mr. Bernanke has done his part, the banks have not followed through with the creation of new credit… yet. This disconnect between the M0 and M3 numbers will not last forever, just as our creditors around the world will not continue to warehouse excess dollars forever. There will come a day of economic reckoning when Americans too will have to deal with 30% CPI numbers, price controls and product shortages.