Argentina may have entered a doom loop as inflation gets out of control while the central bank implements another emergency hike.

Interest rates have risen by more than 20% in a month from under 80% to 97% with another 6% added on Monday.

“The feeling is that the government is completely losing it against inflation,” said Miguel Kiguel, a financial adviser and former deputy manager at the Central Bank of Argentina.

Inflation spiked further to 108%, close to double the 60% a year ago, and yet despite these hugely punitive rates the money supply keeps increasing.

While the M1 and M2 money supply has stayed static or has fallen, the M3 money supply has increased and the central bank balance sheet is up by about 10%.

Argentina central bank balance sheet, May 2023

That’s a significant increase in such a fairly short period, and therefore the Argentinian ARS has fallen further against both the blue dollar in the black market, and the official Dollar Banco Nacional (Dólar BNA).

One USD was 218 last month at the central bank, now it is 230. For the blue dollar, that’s up by about 5 to 488 from 483 ARS last month according to the Argentinian financial paper Ambito.

Bitcoin there trades at the dollar blue rate in Argentinian crypto exchanges like Ripio and Buenbit, while in the official rate it has a circa US$35,000 premium.

The two exchanges have millions of users, but their trading volumes are not public. We asked, but a Buenbit representative told Trustnodes:

“We regret to inform you that the data you have requested is currently unavailable.”

Still, five million users for just Ripio is about 10% of Argentina’s population which began adopting digital currencies in 2018 when inflation first started picking up.

The government has been friendly to crypto, even as it imposes capital controlls and restricts access to usd at the official exchange rate.

Inflation moreover was stabilizing between late 2019 to 2021 as the central bank moved to cut rates from a punitive 80% when inflation was 60%.

This time it has played catch up, with interest rates still below the inflation rate by about 10%. That means if you borrow in ARS at 97%, you’ll still get a circa 10% dividend of sorts if inflation remains at 108%, or if it increases further.

That comes with all sorts of risks, including that inflation might be gotten under control, but the balance sheet of commercial banks in Argentina was spiking in the previous months with that balance sheet now not as easily available.

As long as that keeps increasing, or the central bank balance sheet keeps increasing, or the money supply, then the value of ARS will fall against other currencies and so inflation will increase too.

The central bank could instead try the 2019 approach again, hike rates 40% above inflation, and go through another steep fall in GDP by 5%-7%, and still cross fingers that it would solve the matter more sustainably than in 2019.

Otherwise they might need to consider ditching the currency completely, operate on the dollar for a bit or maybe euros and then re-introduce their own national fiat.

This is what Zimbabwe had to do to finally get their hyperinflation under control. Now they’re issuing what the central bank claims are gold backed tokens to satisfy the desire to store value in non Zimbabwean central bank issued fiat, though why should their gold reserves be trusted any more than their fiat is not quite addressed.

Presumably because blockchain, but we asked them to reveal their public blockchain address and have received no response. Not that it would change much anyway because the blockchain can’t verify gold reserves, so they’d need to issue a fixed supply bearer token, or an algorithmically controlled supply rate like in eth, while facing the question as to why their citizens shouldn’t just buy bitcoin or eth.

Venezuela doesn’t have the luxury of operating on USD as the two governments don’t quite get along, so hyperinflation there continues now nearly a decade on.

They too tried issuing an oil backed Petro token, but it was on a niche blockchain that has now dropped off the rankings, and the US sanctioned it.

Argentina has normal relations and they have a decent economy too outside of galloping inflation at about half a trillion, but the country selectively defaulted on their debt in 2014 so that has now led to a currency confidence crisis.

Whether it can be brought down at these 100% rates is not clear because the government debt to GDP is at 80%.

So the government has to borrow at 100% too which can potentially increase inflation in itself, contrary to what textbooks say as at these levels it is more a matter of confidence in the national fiat.

That confidence has fallen off the cliff, and that can become an existential problem for ARS because if people get rid of it like a hot potato, then ARS is no longer quite a currency because it would not meet the means of exchange part of the definition.

When central banks or politicians therefore say the United States or any other country can not go bankrupt, they are technically right in as far as the president won’t go to a bankruptcy court, but practically they are wrong because a currency can become a non currency if confidence collapses in it.

And unfortunately the collapse of confidence in new national fiat money is globally becoming a lot less rare as governments have borrowed for decades without restraint.

From Lebanon to Sri Lanka, Turkey to Argentina, the collapse of national fiat money due to geopolitical or internal events seems to affect a new country almost every other year.

In all of these countries, bitcoin provides a bit of a respite, both for commerce and for households. It tends to be tolerated too because having a valve out can help the economy, and regardless its digital nature makes it almost undetectable.

That allows prominent cryptos like bitcoin or eth to perform the function of a store of value, with the USDc and USDt stablecoins nowadays also used, especially if bank eurodollars or paper eurodollars are in short supply.