How Milei Defused Argentina's Hyperinflation Bomb |
Inflation
How Milei Defused Argentina's Hyperinflation Bomb
Argentina's president restored the solvency of a bankrupt Treasury and a broken central bank.
Juan Ramón Rallo | From the December 2026 issue
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The December 2026 issue of Reason explores Argentine President Javier Milei's accomplishments and what is yet to be done.
ReasonArgentina was approaching monetary detonation. Its Treasury could not finance its deficits voluntarily, its central bank was effectively insolvent, and monthly inflation was accelerating above 12 percent.
That was just three years ago. Today, monthly inflation has fallen below 2 percent, sovereign spreads touched eight-year lows in July, and the central bank's gross reserves reached their highest level since 2019 in September. This is one of the most remarkable disinflations of the modern era to have occurred without dollarization, a currency board, or a new currency. Javier Milei did not merely slow the rate at which prices were rising; he dismantled the fiscal and monetary mechanism that was driving Argentina toward hyperinflation.
But as the events of late 2025 showed, that achievement remains vulnerable. A stabilization can be economically coherent and still be politically mortal. Argentina has restored a substantial degree of public sector solvency, but it has not yet made that solvency independent of the next election.
Deficits Without Creditors
Deficits themselves do not make Argentina unique. What distinguished Argentina was how those deficits had to be financed. In a country with functioning capital markets and a credible government, the state sells bonds to domestic and foreign savers; it obtains command over present resources, while creditors receive claims on future tax revenues. Public borrowing may be undesirable or objectionable on other grounds, but so long as the government remains solvent in the long run, it is a financial operation that can be sustained over time without debt restructurings or bouts of high inflation.
Argentina had largely exhausted that option. After repeated inflationary crises and serial debt repudiations—nine sovereign defaults, most recently in 2020—investors would lend to the Treasury only at prohibitive rates. Borrowing at those rates would itself make the debt trajectory unsustainable, so creditors expected either another restructuring of dollar-denominated bonds or an inflationary liquidation of peso-denominated liabilities. Those expectations raised borrowing costs further, making the anticipated outcome more likely. The Argentine state had trapped itself in a doom loop.
So the government relied on the one creditor that couldn't refuse it: the central bank. Fiscal deficits were financed, directly or indirectly, by issuing pesos. But that brought it up against a second constraint. The inflationary effect of money creation depends not only on the quantity of money supplied but on the quantity people are willing to hold. And after decades of monetary abuse, Argentines wanted as few pesos as possible.
Every newly issued peso became a hot potato to be exchanged for goods, dollars, or inflation-protected assets. As the demand for real peso balances contracted, the government had to print ever larger quantities to extract the same real resources, which pushed prices up faster, which further reduced the willingness to hold pesos, which required still more issuance. That's the feedback loop of an economy approaching hyperinflation.
Rather than stop the process, the government tried to repress its visible symptoms—a task for which the country has a well-worn tool kit. Its most familiar instrument is the cepo cambiario, a web of capital and exchange controls with which the state prevents its citizens from freely satisfying their demand for dollars and hides the peso's depreciation behind an artificially strong official exchange rate. President Cristina Fernández de Kirchner imposed it in 2011; Mauricio Macri lifted it on taking the presidency, only to reinstate it amid the currency run of 2019; the leaders who followed tightened it further. Under the cepo, exchange rates multiplied. Exporters were forced to surrender their dollars below market value, while politically privileged importers bought them cheaply from the central bank. That arrangement punished exports, subsidized favored imports, invited corruption, and bled reserves.
The second instrument operated through the central bank's own balance sheet: extremely high nominal interest rates paid on short-term liabilities held mainly by commercial banks. These so-called remunerated liabilities were a standing bribe to the financial system to sit on its pesos rather than convert them into dollars or goods. Since those interest payments were........