Milei explained the measures announced in a national broadcast with a column in OPRA

President Javier Milei published an extensive column on X (formerly Twitter) in which he develops his vision on inflation, the role of money, and the relationship between the exchange rate and prices. There, he rejects the notion of "passthrough"—the idea that a rise in the dollar is automatically transferred to inflation—and argues that the inflationary phenomenon is, in all cases, exclusively monetary in nature.

In his analysis, Milei covers everything from the historical origin of money and its function in the economy to the Hume-Cantillon effect and Carl Menger's subjective theory of value. He also explains why monetary policy operates with lags of up to two years and sets mid-2026 as the horizon for reducing inflation to minimum levels. With a strong theoretical emphasis, he seeks to support the Central Bank's decisions and respond to the criticisms of local economists.

President Milei's column

ESSENTIAL ASPECTS OF MONETARY ANALYSIS

By President Javier Gerardo Milei.

1. Introduction

Since mid-April, when the foreign exchange market was liberalized, the monetary debate in Argentina has been based on what the behavior of the dollar should be and the passthrough to prices in the event that the currency rises. Although most analysts have been very wrong in their forecasts except for a handful of them (and the economic team), what is surprising is the persistence in the same analytical errors that keep these professionals in a negative streak, even from before the change of government. The endogamous behavior is understandable, especially if there are no costs for being wrong when everyone failed, particularly when the logic of the Oracle of Delphi prevails, which gave advice but did not make decisions.

In summary, what I want to point out is that even when everyone talks about the passthrough to prices from the movement in the dollar price (passthrough), that statement, although it supposedly could have some "empirical support," is false and implies a deep lack of knowledge in monetary theory.

2. Origin and Nature of Money

To understand the nature of money, we must first internalize what an economy without money would be like, that is, a barter economy. In a pure exchange economy, individuals satisfy their needs by making transactions with their peers in which, in exchange for the goods they are willing to offer, they receive as payment the good offered by another individual. Although it seems like a simple operation, the implementation of this process immediately encounters two realities.

On the one hand, there is the problem of double coincidence, that is, it is necessary to find a pair of individuals with reciprocal needs, meaning that the one who needs a certain good not only needs to find someone to sell it to him, but also needs that individual to be the same one who accepts in exchange the good that the first is trying to sell. On the other hand, there is the problem of indivisibility, where, once the not insignificant problem of double coincidence is solved, the goods involved can't be divided into the necessary proportions for the transaction to take place (I may want to eat bread and the baker may want to listen to one of my economics lectures, but the minutes and content I am willing to exchange for a kilogram (2.2 pounds) of bread will not be useful to the baker for making decisions).

Faced with this adversity, man did not cry or wait for someone to come and solve his problems. Thus, he observed that some goods were exchanged more than others and therefore discovered indirect exchange. That is, a good that is not bought for consumption purposes but to make exchanges. Ultimately, in this search for a solution, he found commodity money. Hence, the first forms of money were cattle, linen, salt, tobacco, coffee, and not so long ago, cigarettes in prisons.

Meanwhile, although these goods met two basic conditions that money must have to be considered as such, that is, to serve as a unit of account and a generalized medium of exchange, they failed in their condition as a store of value. Basically, since these goods are perishable, storing them presents a negative interest rate, meaning that over time they would be worth less and less. Thus, humans arrived at metallic money. However, this was not free of inconveniences, since to the problem of portability was added the risks of moving with large amounts of precious metals. Needless to say, faced with this difficulty, man developed deposit certificates to be able to move without so much weight. Naturally, cheaters always appear, which happened when deposit houses began to issue certificates in their favor without backing. Faced with the resulting disorder, the State appeared, which, instead of restoring order, considered that it could not have competition in scamming people (via taxes) and decided to keep the monopoly on money issuance, in addition to imposing legal tender and thus perfecting the robbery. The rest is well-known history.

3. The Monetary Nature of Inflation

In light of the previous point, it should be clear that money is nothing more than a good for indirect exchange and that it only serves to carry out transactions, whether present (transactional demand) and/or future (hoarding). Therefore, if we understand this, the demand for money is a derived demand from the total demand for goods and services in the economy or, put more simply, it is a mirror demand.

In this sense, the demand for money would be determined by the consumption vector over time (intertemporal), and its functional relationship would be given by the parameters that determine the consumption vector. Thus, just like consumption, the demand for money would be determined by the intertemporal price vector, which, in terms of general equilibrium, shows the error of many economists when formulating money demand as a function of income (which arises from the sale of leisure in the labor market plus participation in the profits of companies in which one has some kind of stake) and the interest rate (which is implicit in the intertemporal price vector, since it is the relative price of present goods with respect to future prices). Finally, to solve the equilibrium price vector, what Robert Lucas Jr. called deep parameters are required: (i) preferences; (ii) technology; and (iii) endowments. In turn, if money exists, the monetary base must be added. In addition, the institutional structure regarding property rights should also be considered, although this would be the subject of another debate, so we simplify the point by assuming a private property economy.

Note that, if the demand for money is determined by the consumption path and this ultimately depends on prices, which in turn are given by the deep parameters, the real demand for money, under normal conditions, would be a granite function and in equilibrium should be equal to the real supply of money (money = monetary base, divided by the price level). Thus, we arrive at the statement that inflation is always and everywhere a monetary phenomenon, caused by an excess supply of money, either because the supply increased and/or the demand fell, which leads to a loss of the purchasing power of money, that is, all prices expressed in monetary units rise.

4. Hume-Cantillon Effect: Empirical Mirage of the Passthrough Fallacy

Although the result is forceful and essential for the design of a serious monetary policy that seeks to end inflation, it also requires patience. Specifically, the action of monetary policy is not instantaneous, since it operates with lags. In Argentina's case, that lag ranges from 18 to 24 months, meaning that even if one turns off the money printing machine on the first day, one must go through the purgatory of inflation for at least a year and a half. Therefore, given the first phase of the Central Bank's balance sheet reconstruction, which took six months until the money printing machine was turned off, we expect that by mid-2026 inflation will be just a bad memory in the lives of Argentines.

At the same time, the purgatory of inflation may require additional time and/or higher inflation rates if there is a monetary overhang. These types of phenomena usually occur in the case of price controls and capital controls. In the first case, its symptom is shortages, while in the second it manifests as an exchange rate gap and loss of Central Bank reserves. Moreover, in the case of capital controls, it generates an artificial increase in money demand that implies an increase in the tax base of the inflation tax, thus exacerbating the scam at the hands of the State.

Meanwhile, as the months pass after the initial injection of money, the Hume-Cantillon effect takes place, which originally showed the distributive effects depending on the entry of money into the economy. Thus, those who receive and spend it first (politicians) are making transactions with today's money and yesterday's prices, which harms those who receive the money in the various transactions as time goes by. The flip side of this is that not all prices rise simultaneously; some do so first and others later.

In line with this, and incredibly for the case of passthrough essentialists, the most popular model for open economies with money is Rudiger Dornbusch's model, better known as the overshooting model. In that model, in the face of an excess supply of money, this translates into a jump in the exchange rate that is more than proportional to the rate of devaluation implied by the rate of monetary expansion consistent with purchasing power parity (PPP). This way, once the adjustment in the goods market takes place and exportable balances increase, the exchange rate falls to the PPP level. What is interesting is to see economists repeat these terms as part of the superfamily of the order Psittaciformes and not realize that behind it is the Hume-Cantillon effect, which occurs as a consequence of the fact that while the goods market adjusts slowly, the financial market does so instantly. Thus, once the excess supply of money is caused, individuals rush to the financial market to seek foreign currency, while the generation of foreign currency is slow, which is why the exchange rate jumps much more than proportionally until the markets balance out. In other words, it makes no sense to talk about passthrough, since inexorably the price level will converge toward PPP.

Following the same logic, when an excess supply is caused in the money market and this manifests itself in an excess demand in the foreign exchange market, then, since the dollar is a financial asset, it will rise first, then the price of tradable goods will follow, then wholesale prices, then retail prices, and finally wages will rise (which is why devaluation is so unpopular). Ultimately, the causal relationship continues to be from the quantity of money to prices, and this story can also account for the empirical evidence on which the idea of passthrough is based. However, talking about passthrough is synonymous with very poor quality economic theory, since assuming a causal relationship from the exchange rate to the price level implies working with an objective theory of value. Therefore, whether they like it or not, they are wrong, since that way of thinking about economic analysis was surpassed in 1871 with Carl Menger's work, who developed the subjective theory of value in parallel with William Stanley Jevons and Léon Walras.

Naturally, it may be that your heart is not anchored in a classical economist and that the basis of your error dates back to 1936, when John Maynard Keynes decided to destroy the entire Wicksellian analytical framework (which is why the profession was discussing nonsense until 1972) and decided ad hoc to return to the objective theory of value.

If you do not like the Hume-Cantillon argument, nor the one based on the theory of value, now I propose a general equilibrium one. If we develop the complete microfoundations of a general equilibrium model, the excess demand functions of each of the "n" goods in the economy depend on the "n" prices in the economy. In turn, if the money market is added according to the description made in the first part of the note, this implies that we have a system of "n+1" homogeneous equations of degree zero (that is, they depend on relative prices). On the other hand, taking money as the numeraire (the unit of account), by Walras's Law we know that if "n" markets are in equilibrium, the remaining one will also be in equilibrium and it will be possible to determine "n" relative prices and, since they are in terms of money, the prices in question are monetary prices. In turn, this system can be said to have as exogenous variables: preferences, technology, endowments, and the quantity of money. Note that the idea of passthrough has a serious problem, since the price of foreign currency in the general equilibrium system is endogenous, while according to the view of many local economists, the price of foreign currency is exogenous and that determines the rest of the prices. That is, if it is true that they use general equilibrium models as they boast, passthrough doesn't exist, since it implies that the price of foreign currency is both an endogenous and exogenous variable. Logical inconsistency detected. End of debate.

5. Final Reflections: Menger Watches

Throughout the different sections, a set of aspects related to monetary theory that are of vital importance in analyzing and correctly understanding the policy carried out by the BCRA have been demonstrated. First, we have derived the basis of money demand as a demand derived from the goods market. Based on this result, we have demonstrated the monetary nature of inflation and, associated with this result, we have demonstrated the theoretical invalidity of passthrough, while making it clear that its empirical strength is nothing more than a statistical mirage that is solved within the framework of the monetary theory of inflation when the Hume-Cantillon effect is included in the analysis.

Finally, and in light of the subjective theory of value, there is an additional reflection based on Menger's principle of imputation. In this theory, unlike the objective one where costs determine prices, the principle of imputation states that prices determine costs, while prices are given by preferences, scarcity (technology and endowments), place, and time.

Based on all the above, suppose we have two goods A and B. Now, for some reason, there is an increase in the demand for good A to the detriment of good B. Consequently, the relative price of A with respect to B must rise, that is, the price of A will rise and the price of B will fall. Thus, spending on good A will increase and therefore spending on B will fall, which will push the price of B down. Now, if the Central Bank appears and considers that the price of B will not fall and that this will generate a drop in the level of activity, what it will do is issue money so that the price of B doesn't fall, although this will cause the price of A to rise more than proportionally until it reaches the relative price of the new equilibrium. Therefore, for inflation to occur, monetary validation by the Central Bank is necessary.

Put in other terms, if there is no monetary validation, the price level will not change and everything is a matter of relative prices. Moreover, suppose that, faced with the rise in the price of A, the sellers of good B want to raise the price, let me tell you that around the corner Menger is waiting to tell them that by the principle of imputation they will not be able to sell their products and will be left with warehouses full of merchandise, reducing asset turnover and destroying its return. Sooner or later, unless they are masochists, they will learn. Now call good A the dollar and good B the rest of the goods. The story tells itself: in the face of changes in relative prices without monetary validation, inflation is not caused.

Why, then, do individuals continue to believe that a rise in the dollar causes prices to rise? Basically because for 90 years they have been right. Except during the period of the Convertibility Law, every time the dollar rose, prices then rose. Moreover, during Convertibility, when the exchange rate was fixed, there was no inflation. Therefore, someone untrained in monetary economics may suffer the sensory effects of spurious correlation, just as one may come to believe that when many people put on swimsuits, summer will come. However, it would be expected that a person who has spent at least four or five years studying economics and even with one or more postgraduate, doctoral, and postdoctoral studies, in addition to many years of experience in the professional business, should not fall into this type of amateur error, which is easily corrected if the variation in the quantity of money is included in the analysis. If we consider the Argentine case and its addiction to fiscal deficit by the political caste, it will not only be possible to explain the cascade of defaults, tax increases, and monetary issuance, which in the latter case caused an inflationary disaster, whose other side of the coin is having destroyed five monetary signs and removed thirteen zeros from the currency. For the good of Argentines, I hope they learn the lesson.

May G''D bless Argentines.

May the Forces of Heaven accompany us.

TMAP