Argentina "fiscal dominance": where the central bank buys government debt

Throughout history, governments have been tempted to spend more than they collected in taxes. Coins were debased by alloying gold and silver with base metals. Paper money was printed. In the modern world of electronic fiat money, central banks can create book notations denoting money out of thin air. These actions are often followed by inflation.

The Federal Reserve created an immense amount of money by buying Treasury and mortgage debt during the 2008 and Covid financial crises. (Quantitative Easing or QE.) This money caused asset price inflation rather than consumer price inflation because the vast majority did not end up in consumer hands. The Fed is currently gradually allowing its bloated book to roll off but it is still far above historical levels, maintaining artificially high asset prices.

Argentina Is a Textbook Case of ‘Fiscal Dominance’

Some wonder whether U.S. deficits could similarly fuel inflation; it all depends on the Fed

By Greg Ip, The Wall Street Journal, Nov. 22, 2023

Argentina’s problems are rooted in a combination of government borrowing, lax monetary policy and inflation, all of which other countries, including the U.S., have experienced to some degree in recent years.

What sets Argentina apart isn’t so much economic as political: its central bank is completely subordinated to the treasury, a combination economists call “fiscal dominance.”…

Argentina’s budget deficit, which JPMorgan projects at around 5% of GDP this year, is actually smaller as a share of GDP than the U.S.’s. The problem is that years of economic mismanagement have left it with no access to the capital markets. Therefore the central bank finances the deficit by purchasing government debt in the open market and lending directly to the treasury…

Iván Werning, an Argentine-born economist at the Massachusetts Institute of Technology, said the math is simple: to print enough money to finance a deficit of 5% of GDP requires expanding the monetary base (such as currency) by a like amount, which of course devalues the money the public already holds, yielding an inflation “tax.” Argentina’s inflation hit 142% in October…[end quote]

Could this happen in the U.S.?

M3, the broad money supply, spiked in 2020-2021 due to Covid-related stimulus which went directly to consumers. This caused inflation. M3 has been declining since 3Q22.

As long as the Fed maintains its independence from political influence and Treasury debt is financed by the bond market rather than the Fed, hyperinflation in the U.S. will be unlikely. But the CBO forecasts hugely increasing deficits. The bond market will eventually force interest rates higher. The Fed will be under pressure to buy Treasury debt to keep interest rates low. Will the Fed buckle under fiscal dominance?

This is a Macroeconomic trend that we will need to watch closely.


The issue in recent years is reduced taxation and increased spending.
The United States has got to get a handle on Military Spending. Currently, military spending is above the level when the United States was involved in two wars (Afghanistan and Iraq). U.S. military spending has often been dramatically increased in conjunction with large tax cuts. As can be seen by the chart, when military spending increases as a more significant percentage of the GDP, often deficit spending increases, and often dramatically a percentage increase from the years before. Also, when military spending levels off and drops as a percentage of GDP, the United States deficit spending most often drops; when you see military spending at a low in one case, there is No deficit spending.


Over the last 40 years, one Shiny faction is focused on giving more money to the “JCs”. The other faction is focused on making life a bit more comfortable for the people who rolled snake eyes in life. So, the “compromise” has been to do both.

Meanwhile, the “fix” advocated by each faction, is to undo what the other faction has done.



Powell already caved to political pressure, back in December 2018. He tried to raise rates back then, but TFG threw a temper tantrum and Powell backed down. He never should have.

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