5/18/2023 - Economy and Finance

Why do we inflate?

By Federico Delaloye

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Since February this year, Argentina has again broken the barrier of the three-digit homologous inflation, a border that has not crossed for more than 30 years, when in October 1991 it marked 102.4%. The Argentines responded that this is their main concern, even above hard themes such as insecurity and corruption. The loss of purchasing power is more and more in the pocket of families and at the beginning of what will be months full of electoral campaigns that will focus on this subject it is important to understand what is the background problem that generates inflation.

What is inflation?

Perhaps a little by comfort or misinformation we understand that inflation is something that happens at prices, particularly we believe it is the price rise of a basket of products sustainably in time. In this way it is spoken in the media and it is the way people understand it more easily.But it's a wrong concept. Inflation it is not a price phenomenon, but of money. It is the money that loses value before goods that, in real terms, do not significantly vary their cost. That is, if we keep an economy without money and without changes on goods, a certain amount of good A should buy the same amount of good B over time.Speaking of Creole, in a change economy there is no inflation. And as the amount of money increases faster than the amount of goods, we will continue to have inflation.

Sickness or symptom?

Now that we know that inflation is a monetary phenomenon we pass to the next step: is inflation a root problem or is it the manifestation of another problem?We realize that inflation is because there is more and more money to buy the goods of the economy that grow at a lower pace. The question to answer is why more and more money is worth less and less.The answer is in Budget deficit. A state obtains its income from the taxes it charges, and then allocates its resources to state salaries, infrastructure works, social programs, etc., what we call tax spending. When tax revenue is higher for expenditure, that is, the State spends less than what is paid to it, we have tax surpluses. When tax expenditure exceeds revenue, we have a fiscal deficit. The 22-year-old Argentina that takes all this century had a deficit in 17. It means In 3 out of 4 years of this century Argentina spent more than it entered.We will put it in terms of a house: if in a family enter 100 dollars, but expenses are always close to $105 or $110 every month, while we do not go down expenses and stop going out to eat outside, order delivery or buy clothes we do not always need to be carrying or borrowing from some relative or friend to continue keeping that level of life.States, in addition to being able to take debt, have the power to print money. That is, when the summary of the card comes with $110 expenses, but our salary was 100 dollars, the state can print 10 dollars to pay the card and not be due. Now that the state has printed new money, are we doomed to have inflation?

Print is not always wrong

We say that a country grows when in a year it produces more goods and services than in the previous year. And a country grows creating value: the sum of the price of flour, eggs, sugar and chocolate that can take a recipe is smaller than what a cake is worth. And this is because a cake added value using your skills and your time.When a country grows more and more goods and services to consume, then the money in the economy has to grow to keep up with this real growth. The role of the State which, through monetary policy (such as printing money or modifying interest rates), increases the amount of money in the economy. However, the problem is when you use your power to create money to cover stickers like those mentioned when you had more expenses than recipes. This money was not accompanied by real growth of the economy so it is money that remains.As we now have more money than goods on the street, then it should rise the price level, because if prices do not rise then in front of so much silver people would realize that things are too cheap and would run to buy them, generating scarcity.

The frankness in the search for economic solutions for Argentina

In view of all the proposals that we will begin to hear from so many politicians, let us look for those who speak frankly. There are no magical solutions, Argentina must eliminate its fiscal deficit, and then there you can start thinking how to reduce inflation. That you only look for how to lower inflation will then be like putting a heal on a bullet wound.

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federico delaloye

Federico Delaloye

Hello! I am Federico Delaloye and I am a Bachelor of Business Economics, financial analyst for Accenture and entrepreneur. I am very interested in business and the world of entrepreneurship, as well as finance and the economy.
I want to build through these articles a place of "Finances suitable for all audiences": I believe that maintaining healthy finances is fundamental to the difficulties of the economy, inflation and the fluctuations that we live day by day, and that's why I write to help improve these aspects in which most find a problem. These will not be articles plagued by technicalities and details, they will be a refuge for anyone who wants to get inside about these issues in a comfortable and colloquial language.

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