Printing money does not avoid the costs of isolation

Argentina adopted very early the most extreme strategy in the prevention of coronavirus: the mandatory isolation. It prohibited people from going out into the street, except to buy food and medicines, and implemented harsh legal repression measures against people who circulate in the streets without well-founded and essential reasons. The measure had strong support among the population and mass media, which deployed a monolithic campaign in favor of the confinement of people.

According to official information, the number of reported cases is about 3,800 who contracted the disease, of which 190 died, 1,100 recovered, and 144 are in critical condition. Surely these figures underestimate the extent of the contagion since Argentina stands out for having few tests. But the goal of keeping the health system from collapsing is being achieved. Furthermore, both public and private hospitals are practically empty. An unoccupied health system has other adverse side effects, such as neglecting other illnesses and putting under strong financial strains to private medical providers due to the fall in their revenue.

The other negative aspect is the fall in income of those restrained from going to work. The government is trying to alleviate their financial stress by printing more money. According to the information published by the Central Bank, it is observed that:

• Between November 2019 and March 2020, the money supply (cash, checks, and saving accounts) increased by AR$193 billion per month.
• In April 2020 alone, the money supply expanded by another AR$464 billion.
• The Central Bank’s dollar reserves remained at U$S 44 billion.

These data show that money printing was increasing significantly before the isolation. With people confined and economic activity halted, the pace of money printing more than doubled. Most of this massive issuance comes not from increased dollar reserves (which remain constant) but to cover the fiscal deficit. The money supply expansion led to the implicit value of the dollar –this is to say, assuming that all the available pesos are allocated to purchase dollars– to AR$110. This value is the reference took by financial traders to induce the rise of the dollar to almost $120 in the black market.

From the infection point of view, the isolation has been successful. From healthcare, economic, and social perspective, it is a complete failure. On the one hand, it is causing the aggravation of many existing diseases that are neglected and new diseases created as a result of physical inactivity and mental distress. On the other hand, economic paralysis has very negative social impacts.

The government tries to ensure that confinement does not impact people’s incomes by printing money to pay public wages, pensions, welfare, and subsidies to companies to maintain private wages. This policy looks attractive from a political point of view but, unfortunately, is inconsistent. Money creation does not generate more goods and services. Therefore, if monetary expansion sustains income levels, but the supply of goods and services falls, inflation will rise even more than it is doing. The rise of the dollar in the black market forewarns what may happen with the rest of the prices. In the end, if there is less production of goods and services, someone has to make the equivalent effort to reduce the aggregate demand at a level consistent with the lower aggregate supply.

More honest would have been to make explicit that society has to make a sacrifice equivalent to the loss of production due to the isolation. Either the middle- and high-income sectors make the sacrifice accepting lower wages during the isolation, or lower-income families will pay the bulk of the sacrifice through higher inflation. In other words, poorer families will pay a double sacrifice with the confinement: the loss of income from not being able to go to work and the loss in the real value of the meager income they have left because of higher inflation.