Javier Milei’s risky bet on a potent peso : Financial Times

[ben]

Good article in the Financial Times

 

[lemonade]

My view is that Milei actually did achieve his goal in one sense. He managed to stop the kind of inflation that was caused by the government spending way too much money.

But here’s the problem: a lot of that excessive government spending was in the form of subsidies and social programs. These programs put money into people’s pockets. Because of this, companies could pay lower wages and still keep their profits steady.

When Milei took away those subsidies and programs, he stopped one type of inflation, but accidentally created another. Now there’s a wage-price spiral, where prices keep rising because wages are too low, and people need more money to keep up.

In my opinion, if the government had been spending its deficits on things like a space program, vaccines, or offshore oil projects instead of putting money directly into people’s pockets, inflation might have ended a while ago.

Milei keeps making the mistake of trying to cut government spending even further so he can save up dollars from the fiscal surplus. But this will probably just make the peso stronger and lead to more dollars flowing out of the country.

Ironically, I think Milei should learn from the Kirchners (the “Ks”) and use the surplus to help boost wages indirectly. That could lower production costs and help control the wage-price spiral. It might upset his supporters and clash with his pure libertarian ideas, but it would probably give him broader support and better results overall.

He could also try lowering taxes. But with about 40% of the economy operating off the books (“en negro”), I’m not sure how much that would really help.