The collapse of the peso should be no surprise to anybody who have studied Milton Friedman. Unfortunately Argentina’s central bank governor Mercedes Marcó del Pont hates Milton Friedman, but she loves printing money to finance public spending.

Paradoxically one can say that del Pont at the moment is providing a very good demonstration that monetary policy “works”. First, she is showing that printing a lot of money will eventually lead to inflation and second that expectations are tremendously important in the conduct of monetary policy.

As Argentines know that del Pont has no plan of stopping her “money printing mission” they also know that inflation will accelerate further in the future. That of course is the reason why the are dumping the peso to buying dollars. The consequence of course is a sharp increase in money-velocity. Therefore, Argentine prices now very likely increasing at a much faster rate the the growth of the money supply.

The Argentine government is refusing to recognize the connection between del Pont’s nightmarish monetary policy and the spike in inflation. Instead the Argentine government is fighting inflation in two other ways.

First, the government simply is cheating on the numbers. Nobody thinks that the official Argentine inflation numbers are correct. In fact in a recent highly embarrassing interview with Greek TV Argentina’s economic minister Hernan Lorenzino was completely unable to explain what the level of inflation is in Argentina. Lorenzino called the Argentine inflation statistics “complex”. Well, it might be “complex” to Lorenzino, but understanding the inflation process is extremely simple – when you print more money than is demanded then you get inflation.

Second, the government has introduced draconian price controls. But as Milton Friedman would have explained to del Pont and the Argentine government – price controls cannot curb the inflation pressures, but it is a very effective mechanism to empty the shops for goods to buy and that is of course exactly what is happening in Argentina right now. See more on the rise of price controls in Latin America in this excellent article from Steve Hanke.

I have recently argued that based on the collapse in the blackmarket peso exchange rate inflation might already have surpassed 100%. That might or might not be the case, but the escalation in the sell-off in the peso is a very clear indication of a complete collapse in average Argentine’s trust in the value of the currency. Normally when we see such a collapse of confidence in the currency inflation will spike dramatically. In fact I would argue that if Del Pont continues her misguided monetary policies for much longer then Argentina clearly risks hyperinflation. We don’t have hyperinflation at the moment, but inflation is certainly extremely high and is accelerating very fast.

The only thing to be happy about – from a distance – is that del Pont at the moment is proving to the world that there is no such thing as a liquidity trap. A central bank can always increase inflation by printing more money than is being demanded. In Argentina the demand for pesos has collapsed, while at the same time the supply of pesos is exploding.

If del Pont had bothered studying Milton Friedman she would have known that that will cause a massive rise in inflation. Unfortunately it seems like del Pont never studied monetary theory or monetary history, but she is unfortunately giving every Argentine a horrific lesson in central bank incompetence.