"Rising Poverty" in Milei's Argentina, Where the Annual Inflation Rate is Down 98%

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5 MIN READ - An Argentina inflation and poverty dispatch from the Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff).

Monthly inflation rate down 91% this year, annualized down 98%

As Cautious Rockers who have been following Argentina may have noticed Javier Milei is the first libertarian president of a major country in history. In his first year in office he’s closed thirteen government agencies, slashed federal spending, achieved Argentina’s first monthly balanced budget in over a decade, and is on track to post the first annual balanced budget in a century.

INFLATION

All these deep government spending cuts haven't been carried out for the sake of itself. Prior to his election the central government was running annual deficits exceeding 15% of GDP and ordering the central bank simply create monetary reserves to fill the gap and credit them to the federal government’s account (ie. print the money).

By comparison the Biden administration’s FY2024 deficit of $1.8 trillion is running at 6.2% of GDP, itself considered alarming, and America’s central bank—the Federal Reserve—is not allowed to simply create $1.8 trillion in new reserves and credit them to the Treasury’s General Account no matter how many Modern Monetary Theory devotees say so. In the United States the difference has to be borrowed using existing dollars. 

Furthermore, as the Argentine central government spent the newly created money, the reserves entered the banking system where they multiplied to even larger M1 and M2 balances via the commonplace process of fractional reserve lending which occurs in every country.

The endgame of 15% of GDP in new reserves for the government alone—multiplied over and over via commercial lending—was a 170% rise in Argentina’s money supply in the year before Milei’s election (as measured by M2).

It’s hard to compare the numbers to the USA where the Fed switched to a “plentiful reserves” floor operating system in 2008—something very different from Argentina—but we can go back to before 2008 for a more relevant comparison.

In December 2007 the U.S. monetary base (reserves plus currency) was $837 billion supporting an M2 of $7.484 trillion and GDP of $14.7 trillion. If the federal government ran a deficit of 15% of GDP ($2.21 trillion) and, like Buenos Aires, could command the Fed to credit $2.21 trillion in reserves to the Treasury General Account, the monetary base would increase 295% to $2.96 trillion. Assuming the same fractional reserve money multiplier, M2 would roughly quadruple the money supply in a single year whereas M2 in America normally tends to rise on average by 4%-6%.

Incidentally, decades of large fiscal deficits combined with an accommodating central bank explains why long-term prices in Argentina have risen 1,640,000,000,000,000,000% (1.64 quintillion percent) since 1960 compared to 977% in the United States.

The result of large, neverending deficits and money creation, along with the expectation that more inflation was still ahead prompting Argentinians to spend their money faster and faster (ie. rising monetary velocity), was the rampant inflation that preceded Milei.

But now that the budget is balanced and there is no longer need for the central bank to provide the government with new money, inflation has fallen sharply from (depending on what source you use) anywhere from 211% to 3,700% annually last year to 2.4% monthly today, itself a decline from 2.7% a month ago.

(The Argentina National Institute of Statistics and Census reports monthly inflation was 25.5% in December 2023 when Milei took office. Compounded over 12 months that translates to an annual inflation rate of 1,427%)

2.4% monthly inflation compounded over twelve months is 32.9% per year. So since taking office Milei has reduced the annual inflation rate from—according to official sources—1,427% per year to 32.9% and falling.

“RISING POVERTY”

Milei’s achievements after just one year aren’t going unnoticed domestically, and even the left-wing international press has been forced to admit his rapid progress in lowering inflation.

However he still has plenty of critics, mostly those ideologically disposed to socialism who will castigate Milei no matter what he does.

Milei, his critics say, has raised the poverty rate from 42% to 53% since taking office.

”Argentina records sharp rise in poverty,” –BBC

”Poverty in Argentina soars to over 50% as Milei’s austerity measures hit hard. Far-right president has been battling inflation by imposing steep cuts in spending, resulting in widespread poverty,” –UK Guardian

“Argentina’s poverty rate spikes in first 6 months of President Milei’s shock therapy,” -AP

“A year into Javier Milei’s presidency, Argentina’s poverty hits a new high,” -Al Jazeera

While the Economics Correspondent freely and gleefully admits a small number of the newly impoverished are now-unemployed government bureaucrats and employees who previously “worked” for the likes of the Ministry of Culture, Ministry of Social Development, and Ministry of Women, Genders, and Diversity, the reality is the poverty rate has not actually increased and more likely has come down. Milei’s policies have simply revealed the true poverty rate from the artificially lowered levels reported under previous administrations.

The reasons have to do with the poverty rate being counted based on income. As the central bank printed money that the central government gave away to the public, more recipients’ “income” rose above the official poverty line.

But with the massive inflation and price controls imposed by the government, most citizens couldn’t buy many basic necessities with their “income” due to price ceiling-imposed shortages. The inability to buy goods and services with “above poverty” income was not factored into calculating the official poverty rate—by design.

It’s not unlike saying Venezuela, with its shortages of milk, butter, meat, water, electricity, toilet paper, etc… is “lowering poverty” because the government is printing more money and handing it out to citizens.

For this point, the Economics Correspondent will defer to a most excellent comment he read online. Although Milei himself explained this phenomenon in a recent podcast interview, it’s hard for even him to beat the succinctness of this online commenter named J.J. Parson:

”The official poverty numbers went up when Milei removed price controls. But that wasn’t an increase in poverty—it simply revealed the actual poverty level which is masked by price controls.”

”When there was [a] price control on eggs, for example, nobody was allowed to sell eggs above that price. The result was they stopped selling eggs. You could not buy them. But government poverty statistics would say—based on the price of eggs and your income—you fall above the poverty line (those were fake statistics because of the price controls—they hugely undercounted the number of people under the poverty line).”

Kudos to J.J Parson, whoever you are.

The same phenomenon was recently reported with Milei’s repeal of rent control—also a price control/price ceiling. Back when rents were capped by the government more incomes were officially “above” the poverty line, but many people couldn’t find housing to rent with that money. One in seven apartments in Buenos Aires was being withheld from the market.

Not one in seven vacant apartments; one in seven of all apartments.

When Milei repealed rent control the supply of available housing tripled within months, meaning a huge portion of the capital’s available housing had previously been taken off the market. 

Those citizens who now have a roof over their heads likely don’t feel more “impoverished,” and the same calculus applies to tens of millions of Argentinians who previously may have had more money, but who were watching their money rapidly depreciate, who couldn’t buy many basic goods and services with that money, and who were perversely being classified as “above the poverty line” by the previous government.