In a video posted in April 2025 on his YouTube channel, the renowned Spanish economist Juan Ramón Rallo praised the president of Argentina, Javier Milei, and took the opportunity to discuss how central banks operate and how a government is financed. Rallo stated that Milei gave a master class on the subject. According to the video, Rallo’s economic theory goes as follows:
Central Banking
A government’s central bank is an economic agent like any other, whose financial position is represented as the sum of its assets and liabilities. The difference between the value of its assets and liabilities is its net worth. The central bank commits to stabilizing the value of the liabilities it issues. The less it fulfills this commitment, the less those liabilities will be worth. This can only be fulfilled by managing the assets well, and the commitment to stabilize the value of the currency issued by the central bank by using these assets turns the government’s currency into a liability.
Taking Argentina’s central bank (BCRA) as an example, its assets consist of dollar reserves and government debt securities, which build up the BCRA’s entitlement to receive Argentine pesos from the government’s Treasury on future dates. This way, the Treasury must return to the BCRA a portion of the pesos collected through taxes, which is one way for the BCRA to reabsorb a portion of the pesos it has issued. The BCRA’s liabilities consist of the monetary base—that is, pesos in circulation and commercial banks’ reserve requirements—and the interest-bearing liabilities, which are debt securities issued by the BCRA and paid for through monetary issuance.
If the government debt securities purchased by the BCRA with new pesos have no value or are worth less than what the BCRA pays for them, then—since the BCRA increases its liabilities at a faster rate than its assets—its net worth declines and the BCRA reports losses. This also occurs when liabilities rise due to interest accrual on interest-bearing liabilities. Furthermore, if the BCRA pays interest on its interest-bearing liabilities by creating pesos above the return it earns on its assets, its net worth also decreases. This is similar to when a private company’s financial income is less than its financial expenses. However, if the BCRA issues new pesos (liabilities) to purchase dollars (assets), the ratio of assets to liabilities does not deteriorate.
As net worth declines, the likelihood that the BCRA will meet its obligations also diminishes, causing the value of its liabilities to fall. Consequently, the value of the peso declines along with the BCRA’s net worth. And this decline in the value of the peso is equivalent to inflation.
Government Funding
Rallo acknowledges that the Federal Reserve (FED) and the European Central Bank (ECB) suffered historic losses in the last few years, which, according to his theory, should have triggered massive inflation. But since that did not occur, Rallo puts forward a theory regarding government solvency to explain the apparent contradiction. The central bank’s assets and its ability to meet its liabilities are backed by the government’s Treasury, which commits to bailing out or recapitalizing the central bank if necessary. So, as long as the government remains solvent and capable of recapitalizing its central bank, it does not matter if the central bank incurs losses. That was not the case in Argentina, where the government was insolvent and lacked the capacity to recapitalize its central bank. On this account, the more undercapitalized the central bank is, the less capacity it has to stabilize the value of its liabilities. Similarly, the Argentine Treasury was heavily financed by selling debt to its central bank. But how was the Treasury supposed to recapitalize the only entity willing to finance it? This demonstrates the government’s insolvency.
Argentina’s political class had drawn massive dollar reserves from the BCRA in recent decades, withdrawing assets and replacing them with nothing—or at least nothing of particular value. In other words, fewer dollars, fewer assets, but many more pesos to finance the Treasury—and thereby many more liabilities. Amid the BCRA’s structural and growing insolvency, compounded by the Treasury’s insolvency, this resulted in a massive loss of value in the BCRA’s primary liability: the peso. And this loss is the runaway inflation that Argentinians have endured for decades.
The Argentine government—including the BCRA—will achieve full financial recovery when it can pay off the new debts it has incurred using its future budget surpluses. To do so, the Treasury must strengthen its solvency, which means increasing both its current and future budget surpluses, and decisive steps have been taken toward such recovery thanks to Milei’s leadership.
So goes Rallo’s theory and its application to the Argentine case.
Austrian Economics Versus Rallo’s Economics
Unlike Rallo, in Austrian theory any increase in the money supply is referred to as “inflation.” And while for Rallo inflation is the loss of money’s purchasing power, Austrian economists would refer to the general rise in prices as price inflation, which is equivalent to that loss of purchasing power. Though this is a matter of terminology, an increase in the money supply is not a problem for Rallo as long as it is backed by the central bank’s assets, which, in turn, must be backed by the Treasury. Yet, unlike private entities, which must sell something in exchange for money, governments obtain money either through taxes or through newly printed money from their central bank without any real backing. In fact, governments’ abandonment of commodity money—such as gold—served to remove backing limits on financing, and the currencies of today are a general medium of exchange imposed on the population that has acquired the status of money through legal tender laws.
The problem is that the increase in the money supply driven by central banks creates economic distortions and impoverishes society as a whole. The new money enters the economy through various channels, affecting prices and the structure of capital at odds with productive exchange, which generates wealth in the increase of producer and consumer goods. While the latter is economically beneficial to all involved without affecting others’ money, the former redistributes wealth, enriching some people at the expense of others. In this context, Rallo believes that increases in the money supply should not concern us beyond the limits established in his theory.
Nor is a central bank an economic agent like any other, as Rallo claims, but rather a government agency with extraordinary powers that no other economic agent possesses. The central bank helps finance the government, while all citizens are compelled to use the same currency and pay the government’s debts. Thus, a central bank’s balance sheet is always the result of the expropriation of private wealth (taxes) and its redistribution through increases in the money supply (inflation).
Besides, even though Rallo compares central banking with private enterprise, they are fundamentally different types of activities. Private companies are subject to voluntary financing and competition, which limits the revenue that can be generated and forces each company to operate at the lowest possible costs for remaining profitable. While only voluntary financing sustains the size of companies, the size of governments and their operations are not determined by demand and competition in the same way. The government’s services are consumed because it has imposed a lack of competition or the obligation to obtain them through it. This rules out the possibility that a government, as such, has any genuine demand. That is, a government grows independently of demand or in contradiction to it. This does not mean that the government’s size is unlimited; it means that its constraints differ from those of private enterprise, since the government passes its costs onto taxpayers and holders of its currency.
Rallo also believes that a government’s currency is a financial asset. Yet this view is not even compatible with the conception of money as a general medium of exchange and private property. If financial assets grant the buyer the right to receive future income from a business, a person, or whatever else, money—any money—cannot be a financial asset, since receiving it cannot confer any rights beyond the rights of ownership over the money itself. For example, when someone purchases money with the production of a particular good, they are not buying any right to receive anything else in the future but are merely exchanging one good for another. A quantity of the (present) most readily marketable good (money) has been sold for something else, and this thing may generate future goods, as in the case of real financial assets that yield monetary returns.
Likewise, a government’s currency cannot be a liability of its central bank either, since it does not entitle anyone to demand anything from the central bank in exchange for the currency issued. Indeed, to whom does the BCRA owe the pesos in circulation if the pesos are owned by their rightful holders? One reason to view the currency as a liability is the central bank’s flawed attempt to emulate double-entry bookkeeping while keeping track of the currency that has been issued. At most, the central bank’s assets—in this case, the BCRA’s dollar reserves—can serve as an important tool for monetary policy and the fulfillment of public debt obligations.
As Austrian economist Kristoffer Hansen indicates, the population has no better access to assets on a central bank’s balance sheet than it does to the market where such assets are traded. The connection between the currency and these assets is only historical—the currency entered circulation initially through the central bank’s purchase of its current assets. But as Hansen says, there is no way for people to turn their money into these assets except by buying them. If that is backing, then money is backed by anything offered in exchange, implying that its value is not backed by the social expectations of its purchasing power, which is contradictory to the very use of money as a medium of exchange. In fact, if Rallo were correct, the BCRA should be able to stabilize the value of the peso (its “primary liability”) simply by buying dollar reserves (assets). But this is not possible either, because the BCRA’s purchase of dollars with new pesos affects the exchange rate by reducing the value of the peso itself. Hence, it is the Argentine government’s own constant demand for dollars that runs counter to the goal of preventing a rapid loss of the peso’s purchasing power. Ultimately, the reason the Argentine government has wasted huge amounts of dollars over the years—including during Milei’s term—is due to a combination of policies, such as:
- Intervening in the foreign exchange market and stopping the peso-dollar exchange rate from fluctuating freely.
- Taking on large amounts of dollar-denominated debt.
- Making the government the primary manager and purchaser of dollars in the economy through various intervention and expropriation measures.
- Creating opportunities through monetary and public debt policies that encourage financial investors to adopt strategies aimed at generating final profits in dollars.
- Attempting to make government securities—both in pesos and dollars—attractive, especially when real demand for pesos has been so low.
The costs of these policies are spread across society, and the government assumes the constant need of accumulating dollar reserves in the BCRA. In this sense, the loss of confidence in the peso has led Argentinians to prefer the dollar for savings for decades, while they continue to demand as many dollars as they can because of the value they place on their future (expected) purchasing power. Contra Rallo, the cause of the peso’s devaluation is not a shortage of assets held by the BCRA or their lack of value, nor is it the Treasury’s inability to back its central bank, but rather the lack of genuine demand for the peso. Monetary expansion, whether through money printing or credit expansion, combined with the public’s perceptions and expectations, are the decisive factors affecting a currency’s purchasing power. It is not the status of a central bank’s balance sheet as such, which can even fluctuate enormously over the course of time without any matching change in price inflation or people’s demand for money, as has also been the case in the Milei era.
Monetary Policy Versus Fiscal Policy
A budget surplus occurs when government revenue exceeds the budgetary expenditures over a period of time. But since surpluses are limited, they do not always prevent financial deficits, which occur when the government needs more funding to meet its debt obligations. In that case, the government may borrow new money from the central bank to pay public creditors, thus causing an expansion in the central bank’s balance sheet. Therefore, the only insolvency a government can experience is rooted in its foreign-currency commitments. Otherwise, since governments finance themselves through taxes and money creation, they simply cannot become insolvent.
The ability of the FED and the ECB to meet their obligations is also backed by both money printing and taxes, just like that of the BCRA. Similarly, government deficits are also common in Europe and the United States, and yet price inflation in these countries remains well below that of Argentina. It is the much higher demand for the euro and the dollar that makes the difference. And it does matter what the governments and their central banks have done in the past, since all the so-called losses incurred by central banks have affected the purchasing power of people’s money. This goes far beyond the figures for budget deficits and surpluses, because all the new money that a central bank ever printed for its government has already been paid for by the population through the loss of their money’s purchasing power. Nonetheless, if surpluses are used to pay off debts and the government intends to maintain them indefinitely without ever stopping the issuance of new debt, it becomes clear that the government is serving financial interests. So, instead of recommending sustained surpluses for the repayment of debts and worrying about Argentina’s country risk index, what Rallo should be recommending—if he really cares about Argentinians’ pockets—is debt repudiation and the abolition of the government securities market.
The Milei administration has demonstrated that monetary policy and fiscal policy are not two sides of the same coin—for instance, that budget deficits are not necessary for an inflationist administration. And budget surpluses that do not prevent massive money and debt issuance—such as those of Milei—are even less worthy of praise. Despite such surpluses, by the time of Rallo’s video, the monetary base increased by 246.5% since Milei’s inauguration. The real inflation generated by a government is the increase in the monetary base, of which its central bank is the sole producer. A secondary aspect is the fractional reserve ratio and the manipulation of interest rates dictated by the central bank—an area in which Milei’s BCRA has also distinguished itself.
Although Milei has relaxed the inherited monetary regulations, he has firmly maintained monetary intervention overall, setting or influencing the peso-dollar exchange rate throughout this period. This has led to frequent open-market operations by the BCRA, and dollar purchases have reached historic levels. Many pesos issued for this are never withdrawn from circulation, and just as with budgetary spending, the money created to finance extra-budgetary activities also redistributes wealth. However, even withdrawing pesos entails additional costs, such as the use of borrowed dollars. Meanwhile, Milei’s monetary policy has provided the financial class with cheaper dollars through the so-called carry trade at the expense of those who do not participate in it.
Contrary to popular belief, official price inflation figures are not particularly useful for an accurate economic analysis. From a scientific standpoint, it is more reliable to use only the nominal figures of monetary aggregates and their variations to assess how the government influences price inflation itself. Assuming there is no government manipulation, the best the Consumer Price Index (CPI) can do is provide an estimate of a set of prices that have risen faster or slower over a given period. But it cannot provide any real measure of the change in the purchasing power of money.
Instead of relying on CPI, as Rallo usually does, the proper analysis should focus on the policies that give rise to the variations of the monetary aggregates. In this regard, the increase in the monetary base is the government-made price inflation figure in its purest. And whereas Rallo has come to use declines in CPI to praise Milei, the quadrupling of the monetary base in less than two years has been actually Milei’s monetary policy in motion, serving specific government purposes.
Conclusion
Rallo’s theoretical and empirical explanations are riddled with errors that only a proper understanding of money, central banking, and public finance can adequately reveal. This is true even though he was a student of the world’s most decorated Austrian economist in the Spanish-speaking world, Jesús Huerta de Soto, who, surprisingly, also mistakenly lauds Milei. In contrast, Rallo’s mistakes are unlikely to surprise those who have read the work of another Austrian economist, the German Philipp Bagus, who wrote a book criticizing Rallo. In a curious twist, Bagus has also failed to account for the true colors of Mileism. But it is foreseeable that Rallo holds Milei’s economic ideas in such high regard, since Milei is also a staunch adherent of Rallonomics.
