Inflation erodes the purchasing power of money and its acceleration implies a faster loss of it.

A schematic description of the phenomenon can be made assuming an annual inflation rate of 100%. The purchasing power in products that a $1,000 bill had, at the beginning of that year, would be reduced by half at the end of the period, it would be the equivalent of what $500 would have bought at the beginning of the year. That is, whoever kept the money in hand lost $500.

In Argentina today there are $5.5 billion printed. Continuing with the example of an annual inflation of 100%, all those bills in circulation, after one year will be able to buy half of what they buy today. If individuals adjusted their money holdings to buy the same goods as at the beginning of the year, they would have twice as many bills in their possession: $11 trillion.

The main source of financing for the State is the taxes collected by the different levels of government. When they are not enough to cover the expense, borrowing is used. The national government has an additional tool, its ability to issue currency through the monetary authority. When the BCRA issues currency to finance the Treasury, it is in the presence of the “seigniorage” which is the real income that the government obtains from monetary expansion.

Excessive issuance generates inflation and it causes money held by the public and banks, when it is not invested, to lose purchasing power. That loss of real value can be assimilated to a tax since it has elements in common with taxes: there is a tax base and a tax rate. From here comes the term “inflation tax”.

Although they are not equivalent, the concept of “inflation tax” It is often used as a synonym for “seigniorage”. This kind of non-legislated tax is basically generated when the issuance to finance the treasury is not supported by the growth of the economy that increases the real demand for money. That is, it is spurious and generates inflation.

Currently, the Argentine Government uses the monetary issue to finance various policies and part of its deficit that, given the context of high informality and growing distrust, cannot be solved with tax collection or debt.

The State, owner of the monopoly of monetary issue, has the power to expand or contract the Monetary Base.