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If you were to ask me what is the one economic idea that everyone should understand, I would tell you—without hesitating—inflation. It is not a complicated concept, but somehow most people, including professors and the mainstream media, have no idea what it is; let alone understand why it is so harmful.
A common confusion
Colloquially, inflation is understood as the generalized increase in prices in an economy. The problem is that this is one of the symptoms of the disease, not the disease itself, which opens the door for people to call any price increase “inflation” and thus believe that inflation is a complex phenomenon with multiple causes.
Before going on, let us be clear about two things: one, inflation is the increase in the money supply above its demand, which makes money, being more abundant, to be less valuable; and two, the increase in prices happens because of the consequent loss of the value of money.
To say that the increase in prices is inflation is, I insist, to confuse a symptom with the disease. A cough can happen from many diseases such as tuberculosis or gastritis, but no one would say that gastritis and tuberculosis are forms of cough, unless they were trying to package cough as a complex phenomenon with multiple causes to cover a tuberculosis epidemic.
The 1970s nightmare
The new century found Mexico with an autonomous Central Bank and controlled inflation, and the last three decades of the last century have slowly been forgotten.
The ’70s were marked by the dominance of the economic ideas of the structuralist school, Mexico believed the ECLAC story and bet on import substitution and the creation of more national companies.
And with the excuse of oil abundance, irresponsible spending and uncontrolled money issuance which, according to the structuralists, would not have any negative effect on the economy, finally, it did: it took 20 years for the country to get back on track and become a more or less healthy economy.
The structuralists’ argument to drive inflation out of control in Latin America has been the actions of the Federal Reserve (FED): the United States prints money massively, but prices do not increase as much — they tell us — so we can issue money just as they do and its value will not collapse. The mistake is again in the definition: inflation is raising the money supply above its demand and dollars, even though they are abundant, are in demand, but there is not a soul who wants bolivars, Argentinean pesos or Mexican pesos. Noyola and Sunkel, theorists of structuralism, got it wrong and took Latin America between their legs.
The uncomfortable autonomy
Andrés Manuel López Obrador (AMLO) is a faithful believer of that model of autarky and high inflation that failed in the 1970s. Banxico’s autonomy is uncomfortable for him. On more than one occasion he has shown his dissatisfaction with it and his desire for the Central Bank not only to defend the purchasing power of the currency, but also to help boost growth… whistling and sticking out his tongue at the same time.
Banxico’s governing board, despite already having 4 out of 5 members appointed by AMLO, seems to understand that monetary policy is not a game, and even with internal dissent, they have continued the tradition of more or less sensible management. This has been a surprise to everyone, including the president who has accused his own appointees of being “ultra-technocrats.”
The year 2021 began with the largest price increase in Mexico in 20 years. This rise was well explained by the president at the beginning of the year as: “an external phenomenon… more money circulating and less supply,” he said. Of course he was talking about the uncontrolled issuance that the Federal Reserve carried out in the last two years, but it was also necessary to look inward; there is no way to compare Banxico with the FED, but 2020 was a year of monetary expansion for Mexico as well.
The Mexican president has an open war against all autonomous agencies. Banxico is no exception, although it has so far emerged unscathed. Even the recent appointment of Victoria Rodriguez as governor of the bank, which for many was a warning sign, has shown to be innocuous so far. There are several levees to break down before going over Banxico, but the president has made no secret of his intentions to one day be able to control monetary policy.
We have already had a taste of the destructive force of Lopez Obrador’s irresponsible whims and fancies, but it is little compared to the irreparable damage he could do with the Bank of Mexico under his control.
José Torra is an economist, Research Coordinator at Caminos de la Libertad, co-author of the Fraser Institute's Economic Freedom of North America Index, and co-host of the podcast Libertad Aquí y Ahora // José Torra es economista, Coordinador de investigación en Caminos de la Libertad, coautor del índice Economic Freedom of Northamerica del Fraser Institute, y co-conductor del podcast Libertad Aquí y Ahora