Washington Propping Up the Yen Won't Fix Japan's Monetary Woes

In response to the weakening yen, the U.S. Treasury decided on July 31 to commit up to $10 billion to prop up the yen. The yen initially strengthened upon the news. But it begs the question as to why America came to the rescue. It's not like Japan is some weak, unstable country. Japan is a sovereign and developed nation with one of the world's largest economies. Plus, it's not like Washington doesn't have enormous deficits, a national debt that has exceeded $40 trillion, and the U.S. Treasury has its own problems. 

Neither is this an isolated incident. Last year, the U.S. Treasury allocated $20 billion for a currency swap with Argentina. I know a currency swap is different, but it makes me wonder if Washington should be the currency backstop of every country that shows the slightest hint of struggle.

From a look at the data, it looks like currency intervention does something, at least in the short-term. A study from the International Monetary Fund (IMF) examining 26 countries shows that intervention can affect exchange rates positively in the short-run. Plus, the IMF points out that Japan intervened twice to prop up the yen in the 1990s. Guess what happened? Those gains were reversed within two weeks. 

Granted, that doesn't tell us what will happen this time. But if past economic history is any indication, the effects are likely to be temporary and should not substitute for macroeconomic adjustment. So if intervention simply buys time without fixing the underlying problem, what happens when it wears off? 

Japan can either allow the yen to return where market forces push it, or it can intervene again. If it chooses the latter, we could end up with a cycle of "yen falls, governments intervene, yen rises, intervention wears off, yen falls again." Sounds like a blast, doesn't it? 

This isn't theoretical. The yen is already showing signs of weakening. As of August 12, it was trading at around ¥159 per dollar, after briefly being at ¥155 per dollar at the beginning of the intervention. That doesn't automatically mean Japan will run out of money or that the intervention was necessarily unjustifiable, but it makes me wonder how many times governments will intervene in response. 

What began as a one-time rescue can turn into dependency, and that is where moral hazard enters the scene. The basic problem is one I discussed when Washington was deciding whether to bail out Silicon Valley Bank in 2023. The problem with rescuing people from the consequences from their decisions is the incentive created for the next decision.  

If Japan can count on the U.S. to help support the yen whenever it comes under serious pressure, some of the consequences of Japan's economic policies are de facto being insured by Washington. That could reduce the pressure on Japanese policymakers to make difficult choices. The IMF is similarly concerned about moral hazard because investors may become less inclined to protect themselves against currency losses. The IMF also recommends against using currency intervention as a way to avoid monetary or fiscal adjustments. 

Speaking of which, Japan is avoiding its own adjustments. As for what those are, they are not mysterious. The American Enterprise Institute points to Japan's massive debt and low interest rates as major culprits. The Brookings Institution takes it one step further by arguing that Japan has capped long-term government bond yields, which transfers those bad fiscal dynamics into the yen further. 

So what happens after the U.S. spends its $10 billion? Japan will still have a ton of debt. It will still face its interest-rate dilemma. And investors will still be staring at the same fundamentals as they were before the intervention. 

In short, the U.S. government will have spent billions trying to fight market forces, but it cannot fight the economic reality that Japan's underlying fiscal and monetary problems won't disappear simply because Washington decides to buy yen. At best, it will buy Japan some time. But that will only do a smidgen of good if Tokyo addresses its fiscal and monetary woes. Otherwise, the yen will come under pressure again, and Washington will be doing the same song and dance. 

At some point, the U.S. has to recognize that Japan's currency is Japan's problem and that the U.S. shouldn't become the world's currency backstop, especially when Washington is incapable of managing its own finances. 

Elon Musk, the First Trillionaire: A Capitalist Success Story with Some Caveats

Just when you thought Elon Musk could not have gotten any richer, he announced the initial public offering (IPO) of SpaceX, an aerospace manufacturing company. The SpaceX shares combined with Tesla made Musk the world's first trillionaire. 

There were those, particularly on the Left, flipping out. The Institute for Policy Studies called it a dark day for democracy. Senator Elizabeth Warren decried it while making a call for a wealth tax, which is a bad idea. Senator Bernie Sanders thought it was absurd and pitched the idea of removing the cap on taxable income for Social Security. It is certainly a reminder that the income inequality debate is not dead, and neither is envy for success or rich people. 

Forget what I think about his missed opportunity to reduce government largesse with DOGE, the man's accomplishments are remarkable. He helped the foundations for PayPal, built Tesla into a transformative company, and founded SpaceX. If he is successful in making routine space travel possible, it would rank among one of the biggest entrepreneurial achievements in human history. 

More importantly, Musk is creating value. And that brings us to a point often lost in this discussion. Elon Musk is not sitting on a trillion dollars in cash. A net worth is not a bank account. It is largely an estimate of the value of investments, businesses, and other assets. 

Nor is he hoarding wealth. The economy is not a fixed pie in which one person's gain necessarily comes at another person's expense. Wealth is created through innovation, investment, and productivity. Musk's fortune reflects the belief of millions of investors that the companies he built have generated enormous value and may generate even more in the future. 

His rise to trillionaire status is a reminder of what can be accomplished through ideas, perseverance, risk-taking, and a market economy that allows individuals to create wealth on a massive scale. That being said, I would say that there are two important caveats. 

The first has to do with monetary policy. The Federal Reserve spend decades expanding the money supply and eroding the purchasing power of the dollar. One consequences has been rising asset prices, which in turn have produced ever-larger fortunes on paper. Musk unquestionably created wealth, but the emergence of the world's first trillionaire is less shocking given how much the dollar has devalued. 

The second has to do with the government subsidies, contracts, or regulatory breaks received by Musk's companies as evidence of unfair advantage. This argument often misses the broader institutional point. When the government has the authority to subsidize industries, grant tax advantages, and regulate entry into markets, it inevitably creates incentives for rent-seeking.

Musk's success is best understood not as the product of government intervention, but it cannot be understood as something that happened in a purely free market either. His success and value creation took place in a system in which markets remain the dominant engine of value creation, but also where political discretion occasionally distorted outcomes at the margins. 

Musk's story is one that took place in an economy with considerable rent-seeking and monetary expansion.  The story is less about whether anyone should be a trillionaire and more about the fact that propserity depends on sound money, competitive markets, and limits on political favoritism. 

Milei's Monetary Tightrope: Argentina Is Caught Between a Crawling Band and Whatever Comes Next

Last Sunday, I left Buenos Aires after spending 40 days. It suffices to say Argentina has been on my mind a lot. I have mostly examined Argentina through an academic public policy lens, but it was intriguing to see firsthand how it is to live there for a bit and to talk with Argentineans about life in Argentina. I knew that Argentina had its problems. It went from being one of the world's most powerful economies to succumbing to a populist and protectionist stranglehold of high taxes, tariffs, corruption, profligate government spending, capital controls, and currency controls. No other country in history went from being an economic powerhouse to a middle-income economy the way Argentina did. 

The Challenge Ahead for Milei

I knew that whoever would try to clean up this mess would have their work cut out for them, especially given that President Javier Milei inherited one of the least free economies on the planet. It is not simply a matter of considerable political opposition that has gotten in the way. It is trying to untangle the quagmire of decades of poor economic and monetary policy choices that make it difficult. Bridging the gap between economic theory and implementing policies in practice can be quite tricky, as Milei has found. I realized this was especially the case for Milei's monetary policy. 

Understanding the Crawling Band versus the Fixed Peg

When I was in Argentina, I noticed considerable exchange rate fluctuation. I had to check daily how many pesos a dollar could purchase because it did change that drastically. As I discovered during my time in Buenos Aires, Milei has been implementing what is called a crawling band. A crawling band is an exchange rate system where a currency can fluctuate within a set range (a "band") that shifts gradually over time according to predefined rules or market conditions. The band currently is maintained between 1,000 and 1,400 Argentinean pesos (ARS) to the dollar. The premise is that it combines short-term stability with long-term flexibility. This is supposed to help avoid the shocks of a full float and issues that come with the rigidity of a fixed peg. 

Argentina had implemented a fixed peg prior to this latest crawling band. That fixed peg was unsustainable. The capital controls drained the foreign exchange reserves and incentivized importers and exporters to manipulate invoices, thereby undermining confidence in the system. A crawling band was more aligned to the market, allowed for greater transparency, and increased price signaling.  

Why a Floating Currency Is Ideal

While a crawling band is an improvement over a fixed peg, what bothers me in part is that Milei is a minarchist, which is someone who wants government only to perform the most basic of services. He studied Austrian economics and is quite skeptical of government intervention, especially when it comes to central banks. That is why it is so peculiar that he would go along with a crawling band, which is a form of government interventionism. It makes me wonder if he is abandoning his economic training or he is dealing with a clash of his ideals versus the reality of Argentina's situation. 

Ideally, Argentina would have a free floating peso. After all, a free floating currency is a good metric of a mature, stable economy. A free-floating currency allows market forces to determine the currency's value, providing a transparent signal of economic fundamentals and reducing the distortions caused by artificial pegs or interventions. It also encourages fiscal and monetary discipline, as policymakers cannot rely on fixed exchange rates to mask underlying economic weaknesses.

The problem is that Argentina's economy is neither mature nor stable. Argentina's current economic conditions, which are characterized by high inflation, low foreign reserves, persistent fiscal deficits, and weak institutional credibility, make a pure free-floating peso highly vulnerable to sharp devaluations and financial instability. A free float right now could trigger severe exchange rate volatility, capital flight, and a worsening of the current account.

That is not mere speculation. From 1991 to 2001, Argentina had pegged the peso 1:1 to the U.S. dollar. Fiscal deficits and a recession made the peg unsustainable. When the peg was abandoned, the peso plummeted and lost about 75 percent of its value in a matter of months. Hyperinflation and social unrest followed. I would not be the least bit surprised if this recent history has influenced Milei's decision to implement a crawling band. 

Lessons From Other Economies Liberalizing Currency Too Soon

Argentina is not the only country that felt pain after transitioning to a free-floating currency too quickly. In 1998, Russia allowed its ruble to free float in response to fiscal crisis. As a result, the ruble lost 70 percent of its value and inflation spiked. Prior to October 2008, Iceland had a managed float system tied to inflation targeting. Because Iceland had large foreign liabilities and small foreign reserves, its banking system collapsed and Iceland had to free float its krónur. In a matter of a few weeks, the krónur's value dropped by half and inflation surged. In 2018, Venezuela also tried to allow for floating mechanisms amid hyperinflation. However, it made matters worse. 

The takeaway here should not be that floating exchange rate systems are bad. On the contrary! A country that can manage a floating exchange rate system can handle the volatility and absorb the shocks that comes with letting the currency freely move. That is because such economies have the fundamentals to do so, whether that is a credible monetary policy; a sound fiscal policy; deep and liquid financial markets; or public and investor trust. 

Skepticism Behind Argentina's Crawling Band

The case studies above show a few commonalities with why their transition to a floating exchange rate system went awry, whether it was weak fiscal conditions, limited reserves, poor institutional credibility, or sheer panic. Argentina's current plight has such conditions. As of August, Argentina had about $33 billion in foreign reserves. In February, BNP Paribas estimated that Argentina would need about an extra $11-20 billion before the October elections to be able to lift the exchange controls. While the recent currency swap could help improve Argentina's reserves, I remain skeptical that it would be adequate to get Argentina off the crawling band:

• If the exchange rate approaches or exceeds the band in place, the central bank needs to use foreign reserves to defend the peso. Things seem to be improving, but as Argentinean economic history shows, that could change in a heartbeat. 
• Argentina still has an external financing gap of $15.2 billion. While Milei has done a good job of fiscal consolidation by reducing deficits, there is a question of whether it is sustainable, whether due to political opposition or social unrest. The midterm elections on Sunday suggest that Milei is on to something, but knowing Argentina, that could change. 
• The currency swap does not address the real exchange rate misalignment. In February, the central bank set the crawling peg at 1 percent per month. However, inflation in 2024 was 2.7 percent per month. That is a significant improvement from what it was before, but it still creates a gap. As long as domestic inflation outpaces the crawl of the peso, it will hurt export competitiveness while worsening the current account, which echo some of the unintended consequences that the Competitive Enterprise Institute warns about with such currency manipulation. Without addressing this gap, the currency swap is a temporary fix. 

As the Cato Institute illustrates in its criticism of the crawling band, when the gradual depreciation lags behind the inflation, it mirrors similar structural issues that resulted in the 1994 Mexican peso crisis and the 1997 Asian financial crisis. This could be more problematic if the currency swap does not go through or is discontinued. With this hybrid regime, speculators know the direction of the currency adjustment, which creates greater speculation. This expectation of a sharper devaluation encourages capital flight, which forces the central bank to use more reserves. This both undermines the stabilization effort and heightens the risk it was meant to prevent.  

Milei Needs an Exit Strategy

Here is my other issue with Milei's crawling band. The crawling band is often seen as a transitory regime. But what is Milei transitioning towards? Is it a free-floating peso? Is it dollarization? Is it a fixed regime? Milei's lack of an exit strategy plan makes the transitionary regime seem temporary. Investors are attuned to that lack of a plan, and as such make investors weary of investing in Argentina. Since there is not a rules-based adjustment system in Argentina, it can be viewed as a political tool rather than a credible anchor to lead towards long-term growth. Without a clear strategy, markets are not going to have enough confidence in Argentina. As the Peterson Institute for International Economics points out, a substantial currency swap line without deeper reforms will unlikely save the peso in the long-run. 

An Endgame That Could Work

As stated above, a free-floating system would be ideal. It allows market forces to set prices, it signals economic fundamentals, and it incentivizes monetary and fiscal discipline. Conversely, Argentina's structural weaknesses would make a full floating peso risky in the short run, much as history has taught us. While imperfect and prone to amplifying risks if mismanaged, it is the most viable mechanism in the short-run. My ultimate personal preference is a free-floating currency, but only when the Argentinean economy is ready for it, which it currently is not. 

Milei's crawling band could be seen as a short-term pragmatic compromise towards dollarization or ultimately a floating currency. It could be argued that markets need some gentle guiding in the short-run to reach long-term liberalization. That being said, the Milei regime needs to make the transitional crawling band head towards a credible currency system if he has any chance of a liberalized currency system to work. 

Milei could announce fiscal rules around spending limits or deficit caps. A published widening schedule or intervention triggers could improve transparency, thereby improving market confidence. Such monetary rules as a base money growth ceiling or inflation targeting paths could also help. Adhering to rules would improve institutional credibility. So would cutting public sector largesse, eliminating distortive subsidies, publishing public accounts, or ending the monetization of deficits because it signals to the markets that Argentina is breaking cycles of its dysfunctional past instead of doing it for optics' sake. Without reserves, fiscal anchors, institutional credibility, or a rules-based endgame towards a more liberalized currency regime, Milei's half measures would most likely send Argentina into more economic chaos. 

Is the Reign of the U.S. Dollar Coming to an End?: Assessing the Future of Global Reserves

Tariffs notwithstanding, the United States has fiscally been in such a tumult in recent years. Last month, the credit rating agency Moody's downgraded the United States from Aaa to Aa1. This downgrading is significant for two reasons. One is that the United States is the largest economy in the world. The second reason is that Moody's is the final major credit rating agency to downgrade the United States below its top credit rating. Much like with Fitch's downgrade in 2023, Moody's cited long-term debt issues fueled by the mandatory spending. Moody's anticipates that the United States' fiscal performance is to deteriorate at a faster rate relative to other highly-rated sovereigns. 

This got me thinking about a major topic related to all this mess. The United States dollar (USD) is the most held currency in global reserves. However, that clout has been declining over the years (see above). International Monetary Fund (IMF) data show that at the end of 2024, 58 percent of foreign exchange reserves are USD. Contrast that with the dollar being 65 percent a decade earlier. How legitimate is the concern that the percent of dollars in foreign reserves will continue to decline over time?  We should first ask what could replace the dollar as the primary global reserve. 

• Chinese yuan (人民币). China has the second largest economy and is continuing to grow, hence why it is a main contender. However, as long the Chinese central bank (中国人民银行) has exchange rate regime (currency manipulation), capital controls, and institutional weakness, the Chinese yuan will not be a global currency reserve. 
• The euro. The European Union rivals that of the United States and has political stability. However, it has internal economic issues that I have critiqued since 2010 and have done so since then (see here, here, and here). It is not only the lack of a common treasury or a unified European bond market, not to mention that its capital markets are inadequately integrated to muster the assets necessary to become a global leader. As a research paper from the European Commission points out, the euro zone crisis last decade resulted in the downgrade the credit rating of various European countries, thereby strengthening the dollar (Arroyo, 2022). 
• Other currencies. The Japanese yen, Korean won, Australian dollar, Canadian dollar, and British pound lack the scale and liquidity to pull it off. The BRICS countries cannot cobble together a currency basket to rival the U.S. economy because of the structural challenges that do not make their countries' central banks robust. 
• Digital and blockchain alternatives. This option could have potential in the future. However, given current regulatory hurdles and the fact that these alternatives are still relatively nascent, they are not viable options, certainly in the short-term.

There is still no viable contender to step in and replace the U.S. dollar in the short-term. The United States remains a large, powerful economy that accounts for 26 percent of the world's GDP with rule of law and investor confidence. Because it takes a lot of time, money, effort, and political willpower to change currencies, there is inertia vis-à-vis the network effects that are in the U.S.' favor. The U.S.' market for Treasury securities remains large and liquid. The dollar is still the dominant currency choice for international trade transactions because the dollar is so entrenched in global trade and finance. That being said, it is clear from the Moody's downgrading that the U.S.' fiscal situation is untenable and it is looking like there is a lack of political will to change things. 

In July 2024, the CFA Institute surveyed nearly 4,000 global financial professionals. Not only did 77 percent of respondents find that the U.S.' finances are unsustainable, but nearly two thirds had the professional opinion that the U.S. will lose its global reserve status (52 percent in a marginal way and 11 percent in a material way). It was also interesting to see the reasons that respondents thought this would happen. Debt was number one, followed by a downright default (see below).

What does this mean for the global reserves system? Going back to the CFA Institute survey, what the respondents believed to be the most likely systems to replace the dollar would be a multipolar currency system, a digital currency, and hard currency (e.g., gold). If I were to speculate, I would say the system is becoming more multipolar and there will be an emergence of digital currency in global reserves. I believe that the dollar's prominence will remain in the short term but also decline gradually, much like it has in the past couple of decades. The fiscal cliff is not imminent, but it is the direction in which the United States is heading.

What came as a result of the COVID pandemic and the lockdowns has taught me to be more humble with my educated guesses, especially when prognosticating beyond a year or so. What I can say with certainty is that that more the United States government avoids meaningful fiscal reform and adds on deficit spending, the more that dollar will lose its dominance. The question simply will be a matter of how much dominance is lost, what will take its place, and how ugly of a process it will be.

President Javier Milei Improved Argentina in His First Year as Planet's First Libertarian President

As much as I love Argentina culturally, its economy has been ruined by nearly eight decades of Peronist government largesse, including gargantuan government redistribution programs, protectionism, an exceptionally interventionist monetary policy in which the central bank printed money like it grew on trees, and general disregard for property rights (not to mention the civil rights abuses throughout Argentina's modern history, especially in the 1970s). Argentinians were so dissatisfied with the rampant inflation, eroding purchasing power, and pervasive poverty that in 2023, they elected the first self-identifying libertarian head of state, Javier Milei. It is more than Milei's eccentric personality, which included waving a chainsaw at political rallies promising how he was going to cut government spending. Milei had an established career as an economist, author, and professor prior to becoming President. 

This week commemorates the one-year anniversary that he assumed his role as head of state for Argentina. So-called conventional wisdom predicted that Milei's "shock therapy" would make matters worse for Argentina. While I was thrilled to see a libertarian head of state that could potentially be an inspiration to other world leaders to cut back on regulations, taxation, and government spending, I knew he had to contend with a lot. Plus, Argentina had been ranked as a repressed economy by Heritage Foundations' Economic Freedom Index prior to Milei's election. It turns out that in spite of the political and economic obstacles he had to face, Milei had a successful first year. 

• Within the first few months, he was able to cut enough government spending where Argentina had a budget surplus for the first time in over a decade. Milei has continued to generate a budget in subsequent months (IARAF). When you compare Milei's surpluses to previous deficits, the difference is astounding. It is even more so when you consider that Argentina has spent the last 113 out of 123 years running up deficits. 

 

• Milei's elimination of rent control was so effective that it lowered housing prices while expanding the housing supply. 
• Milei has also passed a daily average of 1.8 deregulations since he entered office, which is significant because Argentina is one of the most regulated countries on the planet and its economic growth is thus stifled by regulations. This does not even include trimming the government from 19 ministries to nine ministries. 
• In October 2024, monthly inflation dropped to 2.7 percent, which was about 30 percent a year ago. While that level of inflation seems unfathomable for the Western world, monthly inflation in Argentina has not been this low since November 2021, according to government officials at the Instituto Nacional de Estadística y Censos (INDEC). For a country that has gone through literal hyperinflation, this is a great accomplishment. 

• Argentina's central bank, Banco Central de la República Argentina (BCRA), has lowered the interest rate from 133 percent in December 2023 to 33 percent in December 2024. While this is still among the highest in the world, this move on BCRA's part will lower costs of borrowing money ought to increase investment, consumer spending, and job creation. 
•  Fitch Ratings upgraded Argentina's credit rating to "CCC" last month because of an ability to pay foreign-currency bond payments without issue. 
• Argentina's Emerging Market Bond Index (EMBI), which is JPMorgan's index for measuring debt risk, dropped to a five-year low in October. 
• December 16, 2024 Addendum: I had to add this because this milestone made me excited: Argentina's economy exited a severe recession in the third quarter of this year. 
• If Gallup polling that came out this week is indicative of anything, it is that Argentineans are more hopeful of the state of the economy. 

Postscript. Not everything has been smooth sailing for Milei. In addition to such political obstacles as trade unions and Peronist politicians who prefer the status quo, there has been an increase of the poverty rate, which has reached over 50 percent under Milei. This could very well be part of the short-term pain the Argentineans have to endure to untangle the disaster of Peronist economic policy. If the calculations from the Universidad Católica Argentina are correct, then the poverty in Argentina is already decreasing (see below). [1/11/25 Addendum: Poverty in Argentina in the fourth quarter fell to to 36.8 percent].

Whether the citizens of Argentina can hang on long enough will have sway over the political feasibility over Milei's plans for the second year. Hopefully for Argentina, Trump's political affinity with Milei could accelerate negotiations with the International Monetary Fund and result in a more generous support package, thereby making the short-term poverty spike more tolerable.

That being said, I think it has been a good first year for Argentina. Milei inherited rampant government debt, a high poverty rate, and an annual inflation rate exceeding 200 percent. Milei is getting a handle on government spending, which was one of his major campaign promises. Improved monetary and fiscal policy have lowered inflation, at least by standards in recent Argentinean history. In spite of the increased poverty, wages are beginning to rebound and Milei still remains popular in Argentina. 

Would I like to see Milei do something about dollarization or capital controls? Yes. Furthermore, it is also true that Argentina's tariff rates and overall taxation rate remain high, not to mention Milei being unable to privatize any of the state-owned businesses. It will be more difficult for Milei to achieve his plans for Argentina to become an economic powerhouse once more if he does not address some of these fundamentals soon. But I also know that Rome was not built in a day and that we should not make perfect the enemy of good. I think that if Milei is able to stay on course, 2025 will look even better for Argentina than 2024. If successful, he can provide a mighty case study for how much of a positive impact deregulation, lower taxes, and less government can have on millions of lives. 

¡Viva la libertad, carajo!

Why Argentina Needs to Ditch Its Peso and Pursue Dollarization "Ya Mismo"

Argentina's economic state has been in disarray for quite some time. In 2003, the Argentinian peso (ARS) was valued at about 3 pesos to the U.S. dollar (USD). The peso has undergone such devaluation that it the ratio is 361 ARS:1 USD. In other words, the Argentinian peso is worth about 99 percent less now than it was two decades ago. It is expected to devalue another 70 percent in the next year. Last month, Reuters reported that inflation in Argentina has hit 143 percent. It has gotten to the point where about 40 percent of Argentinians live in poverty. And here I thought that the inflation in the United States hit my wallet! I can only imagine what Argentinians have endured in the past couple of decades. 

This economic pain would help explain why Argentina elected its first libertarian president. In November 2023, 55.7 percent of Argentinians voted in Javier Milei into office. This is the highest percent of votes that an Argentinian presidential candidate has received since Argentina has been a democracy. The Argentinian people have had enough with failed Peronism and are open to a change to improve their economic situation. One of Milei's most notable policy reforms is dollarization, which is the adaptation of the dollar as the country's currency. Below, I will address some of the common arguments used by critics of dollarization. 

Dollarization means giving up seignorage. If Argentina adopts the dollar, that would mean the Argentinean central bank (el Banco Central de la Républica de Argentina, or BCRA) giving its ability to generate profit from creating money, i.e., seignorage. Shortly after coming back from my vacation to Ecuador in 2021, I addressed this point while analyzing the Ecuadorean case study on dollarization. In spite of relinquishing seignorage along with lender of last resort status and being more able to handle external shocks, dollarization ended up being an improvement over Ecuador's hyperinflation in the late 1990s. 

Plus, if Argentina were to relinquish its seignorage, it would mean losing an estimated 0.6 to 0.8 percent of GDP, according to Argentinean economist Emilio Ocampo. Yes, it means the BCRA would lose some revenue. However, for a country with a 2022 GDP of $632.77B, a price of $3.8-$5.1B is a small price to pay for greater economic stability and avoiding hyperinflation. 

Argentina would not be able to handle external shocks without seignorage. First and foremost, Argentina is already at a grave disadvantage with the hyperinflation and devaluation of the peso that has increased poverty in Argentina. Giving up seignorage seems like a reasonable tradeoff. Second, the three Latin American countries that have formally dollarized (Ecuador, El Salvador, and Panama) entered the 2008 financial crisis and the COVID pandemic with lower interest rates than their Latin American counterparts. Plus, the dollarized countries have been able to maintain lower rates of unemployment. 

Even if there were something quite exigent, these countries could still approach the International Monetary Fund (IMF). This argument also ignores the Panamanian case study. Panama integrated its banks into the global markets after a series of liberalization measures. As a result, its changes in the money supply are based on an interplay of local factors and the global credit markets, and not at the whims of the U.S. Federal Reserve. 

Where will the dollars come from? This is one of the main questions that dollarization critics ask. The criticism here is that there are not enough available dollars in Argentina to make the transition to dollarization. As of October, the BCRA had a currency-reserve deficit of $7.5 billion. There is concern if the BCRA cannot cover the difference because it could mean further devaluation of the peso and subsequent economic downturn. However, there are reasons to not be concerned:

1. If Milei shows a sincere commitment to dollarization, creditors will be inclined to lend the difference.  
2. As the Ecuadorean and El Salvadoran case studies show, Argentina would not need to have the difference covered overnight. As a matter of fact, Ecuador and El Salvador were able to dollarize in a way that not only avoided bank runs, but resulted in an increase of bank deposits in dollars. 
3. The Argentinean economy is already dollarized in an informal sense. As of the end of 2022, Argentineans held $246 billion of U.S. dollars in foreign bank accounts, safe deposit boxes, and undeclared cash. This is greater than the $50 billion in Argentinean pesos that exists in the Argentinean M3 money supply. As such, the fiscal cost of dollarization would be low. 
4. There is the matter of the liquidity note (LELIQ, or letras de liquidez) time bomb. In its current state, it would be an obstacle. However, swapping the BCRA's assets for bonds in a foreign jurisdiction would diffuse the bomb. 

Dollarization is not a silver bullet. This seems like a red herring because proponents of dollarization are not making that claim. After examining the Ecuadorean case study in 2021, I realized that dollarization was not going to solve Ecuador's woes. Dollarization does not fix intractable budget deficits. Rather, dollarization was a necessary first step to improve economic conditions. For Ecuador, Argentina, or any country considering dollarization, they would need to realize that dollarization needs to come with other fiscal and macroeconomic reforms.  

The reality of the matter is that the burden falls on the critics of dollarization to prove that the BCRA can stabilize the economy without giving legal tender to hard currency. The critics of dollarization cannot provide a solid alternative to dollarization. As Argentina's history shows, exchange rate pegs or currency boards have not fared well for Argentina. Decades of BCRA negligence and intransigence show that the Argentinean central bank lacks the discipline to do so, which makes dollarization a more attractive monetary regime. In effect, the Argentinean economy already does not have a lender of last resort on the national level. Even if you are to invoke the IMF as a lender of last resort, guess which currency the IMF uses in its lending? U.S. dollars. 

Dollarization is not going to motivate Argentinean politicians to embrace fiscal prudence or austerity. At least with dollarization, having monetary policy and fiscal policy as two separate forms of policy can minimize the damage that Argentinean fiscal policy can wreak on the Argentinean people. It means that the BCRA cannot print pesos to spend more money than it receives in taxes. To finance deficit, it would have to borrow instead of printing. Dollarization would tame inflation and price volatility. It would mean that the citizens of Argentina would not have monetary policy grind them into poverty. Ultimately, it is hope for economic prosperity in Argentina.

Should Silicon Valley Bank Be Bailed Out?: Part II, Moral Hazard and Costs of Deposit Insurance

The banking sector has become a hot topic in the news cycle recently. Last week, I dedicated two pieces to the topic. The first piece was on why Silicon Valley Bank (SVB) collapsed. It was not out of a lack of regulation or scaling back on regulations, but a combination of expansionary monetary policy and poor investment choices from SVB. The second piece was about whether or not we should worry about contagion. I illustrated why the worries for contagion are minimal at best. Today, I want to discuss the themes of whether the government can properly stabilize the banking industry, the concept of deposit insurance, and how worried we should be worried about moral hazard in light of the latest regulatory changes implemented. 

Should we trust the government with bailing out the banking industry?

I do not make this assumption, but for argument's sake, let's assume for a New York minute that there is adequate concern over contagion. I have reservations as to whether the government can handle the task of stopping bank runs. This is more than how the FDIC or the Federal Reserve failed to stop bank runs from Bear Stearns, IndyMac Bank, Washington Mutual, or Wachovia in 2007-2008. As I pointed out last week, the regulatory system in place was incapable of identifying the red flags in SVB's operations and investments (e.g., investment portfolio, rapid asset growth, only 11 percent of depositors were insured). The Federal Reserve Chair Jerome Powell testified shortly before the SVB failure that there was no systemic risk in the banking sector. This was the same Jerome Powell that said that our inflationary woes would only be transitory. 

The federal government lacks the incentive or the wherewithal to measure, identify, and punish risk before a bank failure happens because monetary policy in this context is reactive in nature. That is not merely my opinion, but part of how deposit insurance functions. While deposit insurance is supposed to create financial stability, that is very like not the case. Deposit insurance has been shown to make equity markets smaller than they otherwise would be (Bergbrant et al., 2016). This shrinkage of the equity markets can create financial instability. That could explain why one study shows that the greater extent of deposit insurance, the higher the likelihood for bank failures (Cebula and Belton, 1997). 

Should we be concerned over moral hazard?

By using government funds to help SVB's depositors, such a bailout creates an unintended consequence of moral hazard. Moral hazard is when there is a lack of an incentive to guard oneself against risk of potential consequences. Moral hazard has emerged in other areas of life. With government-sponsored flood insurance, promising such broad coverage incentivizes people to live in hurricane-prone and flood-prone areas. In unemployment benefits, the moral hazard is higher unemployment levels for longer periods of time. Moral hazard also comes into play with housing and student loan "cancellation." 

Bailing out SVB is not immune from the plausibility, and indeed likelihood, of moral hazard. To quote libertarian Reason Magazine: 

"Moral hazard is one of the major worries when it comes to bailouts like these. Both banks and consumers have less incentive to be cautious with their money if they can plausibly assume that the government will step in and save them from any mistakes. So, a bailout like this uses public money to compensate for risk or bad financial decisions and incentivizes more risky or bad decisions in the future."

During his first term, former president Franklin D. Roosevelt said, "We do not wish to make the United States government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future." Prior to last week, the FDIC insured up to $250,000 per depositor per bank. The government then changes the rules in the middle of one of the largest bank closures in U.S. history. 

Instead of holding to its own rules, it states that it will cover all of SVB's depositors by liquidating SVB's assets and using that money to recover any deposits beyond insurance limits. It could have raised the limit to an amount of $1 or $2 million. However, the government tossed aside the limit on deposit insurance. Going from targeted protection to broad protection signals to informed depositors that they can "throw money at risky banks without diversifying or conducting diligence." 

4-9-2023 Addendum: The Cato Institute brings up a good point on median bank account balances. The median account balance is $3,500, whereas the average is $42,000. They used Federal Reserve data to point out that less than one percent of account owners have amounts about the previous FDIC deposit insurance cap of $250,000. This would imply that a) most everyone would have had their deposits covered even if the federal government had not removed the $250,000 cap, and b) the federal government removing the cap really only serves the über-wealthy.

The theory of moral hazard created by deposit insurance plays out in practice. A study from the National Bureau of Economic Research (Calomiris and Jaremski, 2016) shows how "deposit insurance increased risk by removing market discipline that had been constraining erstwhile uninsured banks." If deposit insurance with lower thresholds caused moral hazard, imagine how much more moral hazard deposit insurance without limits will create!

We will not know whether or not financial contagion would have taken place because the FDIC stepped in and guaranteed that all the SVB depositors will be insured. A lesson we should have learned from the pandemic, which is more regulation does not guarantee safety. If anything, the lesson should have been that life is not risk-free. Financial investments are no exception. Alas, that lesson was not the one that sunk in for society. 

People who have made bad investments should be allowed to fail, especially when there is no apparent sign of financial contagion being an issue. A business that ignores the basics of finance or make poor investments to the point of destroying wealth and productivity should not be rewarded. When a bank fails, it means depositors and investors think twice before trusting their money with a given financial institution.  Furthermore, not all investments pan out. Since time immemorial, doing business has come with risks. That is why diversifying one's portfolio is so important: to hedge against risk. To quote the Foundation for Economic Education, "If they can have the profits, they should have the losses as well."

What the government has done is it has privatized profits while socializing risks, which distorts banks' incentives to no avail. Bankers will be incentivized to make riskier bets. It means that more prudent banks and their customers will have to pay for the recklessness of riskier banks. George Will is correct in saying that, "If everything is brittle, politicians have endless crises to justify aggrandizing their powers...This socialization of risk approaches a semi-nationalization of banks." This socialization of risk creates no upper limit on government intervention. By guaranteeing that deposits are covered in any circumstance, the message that the government is sending to the financial sector is that banks will make money in good times and the government will come to the rescue in bad times.  

Postscript

The Federal Reserve kept interest rates artificially low for years and flooded the market with easy money vis-à-vis quantitative easing. This expansionary policy combined with various misguided financial regulations (especially Dodd-Frank) and you have the disarray in the banking sector we now have. The chicken has come home to roost, but the current administration somehow thinks that more of the same type of misguided regulation will get us out of this downward cycle.

By guaranteeing all of SVB's deposits, the moral hazard created by the government is weakening market discipline in the financial sector and actually creating more financial risk. Instead of helping contain failure in the finance industry, the federal government has created conditions in which bank failures are more likely to happen. As the Wall Street Journal astutely points out: 

"A stable financial system requires clear and transparent capital standards, sound regulation, and above all market discipline to punish reckless behavior. The current panic shows that none of those exist in the U.S....The Administration is presenting this as a one-off. But once regulators do something, they create the market expectation that they will do it again. And if they don't, the ensuing market panic will invariably impel them." 

I am not about to predict the future as to what will happen to the banking sector and to the extent to which it will happen. At the same time, there is something to be said for foresight. We have had years of monetary and financial policy that have created perverse incentives for the banking industry. Instead of becoming a lender of last resort, the Federal Reserve is becoming a lender of first resort. If the bailout of SVB and removing the limits on deposit insurance ends up lighting a powder keg that causes considerable economic downturn, let's say that I will be the least bit surprised.

Should Silicon Valley Bank Be Bailed Out?: Part I, Considering Financial Contagion

March 10, 2023 should have been another Friday, but it ended up being when Silicon Valley Bank (SVB) collapsed, thereby triggering the second-largest bank failure in U.S. history. If that were not enough, the Federal Deposit Insurance Company (FDIC) stepped in on March 12 to say that they will protect all of SVB's depositors. In addition, the Federal Reserve created a new emergency lending program called the Bank Term Funding Program. Banks in need of liquidity can have a loan between 90 days and a year. What is noticeable about BTFP is that the assets are valued at par instead of market value.

The federal government went to great lengths to stress that this was not a bailout. In some respects, the government's latest intervention is different from the 2008 bailout. SVB is not going to be revived by taxpayer dollars. The lenders and shareholders are not getting government money approved by Congress. Even so, it is still a bailout. Why? The government is stepping in to shore up the banking system with the FDIC's Deposit Insurance Fund (DIF). The DIF is technically funded by other banks. Right now, the DIF has less than $130 billion, whereas deposits in U.S. banks amount to $22 trillion. The Right-leaning American Enterprise Institute estimates that the bailout will cost at least $100 billion.

What happens when the Fund runs out of money? It is possible to recapitalize FDIC to help fund the DIF and spread the cost done to other banks, but that will be done through garnered returns on your bank account. But that is not how the Fund has traditionally been covered when it runs low on funds. If there is not an appeal to Congress, FDIC can ask the Treasury for more money, which is another way of saying this will in all likelihood be funded by taxpayer dollars. And if the Fed decides to buy up some of that government debt to create the funds, we will pay in the form of inflation. One way or another, taxpayers will pay for SVB's mismanagement. 

How concerned should we be about financial contagion?

This is the big question I would like to ask today. This bailout might seem like nothing more than a subsidy for rich, politically connected venture capitalists in the Silicon Valley. Proponents would argue that is not the case. The main justification for such bailouts is the worry over financial contagion. Financial contagion is when an economic crisis spreads from one market or region to another. 

Financial contagion is not mere conjecture or economic theory. While this phenomenon occurred with the bank runs in the Great Depression, the phrase "financial contagion" first emerged during the 1997 Asian financial markets crisis. The Great Recession and the COVID-19 pandemic are other examples of financial contagion. The argument for the bailout is presented succinctly by the American Enterprise Institute:

Without a clear purchaser of SVB, it was entirely plausible that that there could be additional runs on regional banks by Monday. The costs for stabilizing these banks is likely much less than cleaning up the cost of cleaning up a broader financial collapse. 

While SVB's customer base is primarily in tech, there is at least some marginal risk to the broader economy. SVB was the bank for 44 percent of ventured-backed technology and health initial public offerings (IPO). The bank's loans helped start-ups in life sciences, healthcare, and AI technology companies, not to mention funding 15 percent of Massachusetts' charter schools. These are some concerns that point to the potential of contagion. 

While the concerns about contagion are plausible, I have to wonder how likely they are. Forget the poetic notion that SVB had lobbied to remove the systemic risk label off their bank. As covered in my previous analysis of the SVB failure, the conditions leading to the collapse of SVB are much more idiosyncratic in nature. The bank's customer base was predominantly well-off, risk-taking venture capitalists and players in the tech industry. More traditional banking institutions keep a more diversified customer base, which helps spread out risk and better shield themselves from a single shock. Being a niche specialty bank with a narrow customer base in sectors made SVB more prone to high investment risk. 

As we see below from The Economist's analysis, SVB was unique in terms of size, as well as the combination of uninsured deposits and held-to-maturity securities. The bank had a relatively non-diversified portfolio filled with long-term government bonds and mortgage-backed securities. Such a concentration in SVB's portfolio was more prone to interest-rate risk than the average bank portfolio. There was also the "ill-timed and failed securities sale and planned recapitalization [that] were unique to SVB." Furthermore, the interest rate increases did not happen overnight. They were announced by the Fed and anticipated. SVB's lack of hedging against deflationary policy was pure negligence on SVB's end. 

The uniqueness of the SVB case do not signal a broader weakness in the banking sector, especially since "the banking system's overall leverage is much less than 15 years ago and bank assets are higher quality than back then." There is the final counterargument that there are enough healthy banks out there that could have purchased and absorbed SVB's assets with little to no shock to the economy. We will never know if that would have been the case because the federal government intervened. The question that remains, which I will have to answer at another time, is whether the potential of contagion outweighs the potential for moral hazard.

Part II will cover the costs of deposit insurance and concerns over moral hazard. 

Poor Investment Choices and Monetary Policy Caused the Silicon Valley Bank Failure, Not "Deregulation"

What a month it has been for banking! I am sure that you have heard the name Silicon Valley Bank, or SVB for short, by now. SVB is a state-chartered commercial bank headquartered in Santa Clara, California. Prior to being closed by the California Department of Financial Protection and Innovation on March 10, 2023, it was the 16th-largest commercial bank in the United States, as well as the largest bank in the Silicon Valley by deposits. The reason why this failed bank closing was so significant is because it is the largest bank failure since 2008. 

Not wanting a repeat of the Great Recession, the Biden administration decided to step in. The Federal Deposit Insurance Commission (FDIC) provides deposit insurance to bank depositors in the United States. Normally, the standard coverage with the FDIC is $250,000 per depositor per bank. On Sunday, March 12, the FDIC announced that it would provide coverage to all SVB depositors. What happened at SVB for this to get so bad? 

You can read this article from financial market news outlet Seeking Alpha, but the short version is the following. The Federal Reserve has kept interest rates low, a concern I have expressed more than once (see here, here, and here). On top of that, the Federal Reserve injected billions of dollars into the economy during the pandemic in hopes of avoiding a deeper recession. What did the Federal Reserve end up causing with that quantitative easing and low interest rates? Its expansionary monetary policy was a major contributor to the inflation we have been seeing since 2021. 

Where does SVB come in? Keeping interest rates low and flooding the markets with cash made low-interest, long-term federal bonds and mortgage-backed securities alluring enough for SVB to invest in. As long as the Federal Reserve kept interest rates low, long-term government bonds were a sound investment plan. Part of the problem was that the Federal Reserve's response to the inflation was to raise interest rates, which lowered the value of the bonds. While these bonds carry minimal credit risk, they carry considerable interest rate-risk. 

This would have not been an issue if SVB followed one of the main principles of finance: diversification. The purpose of spreading out one's investments over multiple [types of] assets (i.e., diversification) is to mitigate risk. Not only did SVB have its clientele heavily be focused in the tech industry, but it invested heavily in longer-term mortgage securities and bonds that take more than 10 years to mature, which caused the problems previously described. SVB was negligent in its fiduciary duty to hedge against interest-rate risk. 

SVB made the problem worse because its deposit base was larger accounts (i.e., greater than $250,000). As of December 2022, 89 percent of SVB's $175 billion in deposits were uninsured by the FDIC. This made SVB more vulnerable to the bank run it experienced this month. It is clear that SVB made a series of poor financial decisions that led to its closing. SVB was financially irresponsible when it took depositors' cash and converted it into devalued bonds. 

The Left wants to curtail the decision-making of SVB and blame it on deregulation. Under Dodd-Frank, banks with over $50 billion in assets would be subject to greater oversight. The Economic Growth Act of 2018, which was passed by Republicans, made the threshold at $250 billion. As the libertarian Cato Institute counters in its analysis along with the Left-leaning Brookings Institution, the Economic Growth Act de facto gives the Federal Reserve the discretion to impose greater oversight for banks with assets over $100 billion. For context, SVB reached this threshold in 2020. The Cato Institute also pointed out how SVB's leverage ratio and tier 1 capital ratio were beyond what the regulations required. 

This is not an issue of there being enough regulation. As pointed out in the previous paragraph, the Economic Growth Act gave the Federal Reserve the discretion to provide this extra oversight. It simply failed in this regard. As Brookings Institution scholar Aaron Klein illustrates, the Fed missed multiple red flags that it should have caught: quadrupled asset growth in four years, hyper-reliance on uninsured deposits (the ones greater than $250,000), huge interest rate risk, and contacting the Federal Home Loan Bank (FHLB) system. The FHLB is especially key because the FHLB is the lender of next to last resort. 

As an additional point, economist Gregory Mankiw brings up that the Fed's stress test did not include a major bond drawdown. The fact that the Fed did not have the foresight to include it in its review of banks shows another flaw in government oversight. Another reason why the regulators would not have detected SVB's failure has to do with "hot money," as is explained by Wharton School business professor Kent Smetters. "Hot money" is currency that regularly and quickly flows between financial markets to maximize on the highest short-term interest rates. Smetters pointed out that most banks have more retail clients with "slow money" deposits, whereas SVB dealt with more "hot money" due to much of its clientele being in the technology sector. Since regulatory stress tests de-emphasize money elasticity, there is no plausible way that the Fed could have avoided the SVB bank failure. 

Should the bank, or at least its depositors, be bailed out for SVB's ineptitude? That is another question I plan on answering in the near future. What is clear at this juncture is that the SVB bank failure was not due to there being insufficient regulation or oversight. This debacle was partially self-inflicted due to incompetent investment choices and partially due to myopic monetary policy. This point cannot be emphasized enough because until we can understand the causes, we cannot hope to provide a remedy. 

What I will say for now is that the Federal Reserve is in an unenviable position. The Fed's unprecedented expansionary monetary policy during the pandemic injected too much "easy money" into the economy. The SVB failure is to be one of many symptoms of expansionary monetary policy. The Fed either has to make bank runs systemic or it has to let up on quantitative tightening, the latter of which will escalate inflation even more. Time will tell as to whether the Federal Reserve will learn the right lessons from its excessive intervention in the economy.  

5-7-2023 Addendum: A couple of weeks ago, the Governmental Accountability Office (GAO) and the Federal Reserve released reports on what caused the bank failure. It was nice to see a vindication of what I initially wrote in March. To quote the GAO report (p, 26), "Although FDIC took some actions to escalate its supervisory actions in 2019 and 2020, its actions were inadequate given the bank's longstanding liquidity and management deficiencies. Furthermore, FDIC lacked urgency despite Signature Bank's repeated failures to remediate liquidity and management issues." 

The second page of the executive summary of the Federal Reserve report said that "SVBFG was a highly vulnerable firm in ways that both SVBFG's board of directors and senior management and Federal Reserve supervisors did not fully appreciate." This would imply that either the best at the Fed cannot foresee or that the regulations in play are ineffective. 

How Fiscal and Monetary Policy Greatly Contributed to the 2021-22 Inflation Spike

A couple of weeks ago, I illustrated how profit margins and corporate greed were not ultimately responsible for the inflation spike in the United States. I also covered other plausible causes that could be contributing to the unusually high inflation, ranging from labor shortages and supply chain shocks to the pandemic and COVID-related restrictions. Today, I would like to cover two types of government policy that played their major role in our current round of inflation: monetary policy and fiscal policy. 

Monetary policy is the set of actions set by the monetary authority, typically a central bank, to control the money supply and spur economic growth. In the United States, that authority is exercised by the Federal Reserve Bank (Fed). While it is one of their mandates to keep inflation at 2 percent, the Fed has contributed to inflation. The Federal Reserve's role in inflation can be expressed with the quantity theory of money (QTM). QTM posits that "the general price level of goods and services is proportional to the money supply in the economy." The formula looks like the following: 

MV=PQ

As the St. Louis Federal Reserve illustrates in its primer, M stands for money supply. V stands for velocity, or the rate at which people spend money. P is the general price level, whereas Q is the quantity of goods and services produced. One of the Fed's main policy decisions during the pandemic was to expand monetary supply (FRED).

Not only did money supply skyrocket, but the money velocity started to increase in the fourth quarter of 2020 (FRED).

Going back to the formula MV=PQ, the left side of the equation increased. That means the right side of the equation has to increase in order to match the left side, whether it is from either price increases or an increase in quantity of goods and services produced, or a combination of both. It theoretically could be caused by an increase in both P and Q. 

In practice, we have been dealing with and are still dealing with a supply chain crisis. This bottleneck makes it a lot more difficult for the quantity of goods and services to grow. The inability to expand output (Q) means that the increase in aggregate demand puts upward pressure on prices. In other words, expansionary monetary policy in an economy with constrained economic output results in inflation. 

Researchers at Johns Hopkins and the Federal Reserve Bank of Chicago admit that tightening monetary policy could have averted the inflationary pressures (Bianchi and Melosi, 2022). On top of this mess, the Fed kept interest rates at historic lows through 2021, which only seemed to boost consumer demand and exacerbate price increases. 

To read more on how expansionary monetary policy caused high inflation in 2021 and not in 2008, you can read this report from the Fraser Institute (Globerman, 2021).

While monetary policy contributed to the inflation, the other major culprit is Congress. Fiscal policy is the usage of government spending and taxation in attempts to influence the economy, which mainly falls under the purview of Congress since it is the legislative branch. During the pandemic, there were multiple spending bills passed in the name of COVID relief. These spending bills were very much demand-side in nature, especially the economic stimulus payments. In December 2020, I expressed concerns that the payments would spur consumer demand and were ultimately not necessary. It turns out that I was correct. Here is some research and expert analysis showing that the government's spending packages contributed to inflation: 

• Researchers at Johns Hopkins University and the Federal Reserve Bank of Chicago found that while the spending accelerated the economy, it also resulted in fiscal inflation (Bianchi and Melosi, 2022).
• Marc Goldwein of the bipartisan Committee for a Responsible Federal Budget acknowledged that we would still have had 2-3 percent inflation without the American Rescue Plan (ARP) Act. Goldwein stated that the ARP was adding fuel to the fire of inflation. Similarly, economists on the Left and Right estimated that the ARP contributed to 2-4 percentage points of inflation. 
• The Tax Foundation points out how in 2020-21, the United States had the second largest stimulus spending as percentage of GDP. To understand how fiscal policy contributed, you can read a draft of "The Fiscal Theory of the Price Level" by Hoover Institution scholar John Cochrane. 
• The Federal Reserve Bank of San Francisco shows that both the CARES Act under the Trump Administration and ARP increased disposable income higher relative to other countries. This led to core inflation (i.e., consumer prices minus food and energy) being higher in the United States (see below). The Bank estimated in March 2022 that the expansionary fiscal policy increased inflation by 3 percentage points (Jordà et al., 2022).

There is a lot going on here, so let's recap. The pandemic was the epicenter for this crisis. There was bound to be some economic disruption caused by the pandemic. COVID regulations exacerbated the economic impacts, especially when it came to economic output and supply of goods and services. Shutting down large swathes of the economy with lockdowns disrupted the ability to work and generated the loss of customers, thereby limiting supply of goods and services. In 2020, the Fed increased money supply in a way that made the quantitative easing of the Great Recession look tame. It miscalculated the supply chain bottlenecks, which put inflationary pressures on prices in the macroeconomy. 

In the meantime, economic stimulus payments boost consumer demand, which was the wrong policy move when supply is much more of an issue than demand. The stimulus payments led Americans to spend rapidly, in spite of the inflationary pressures caused by monetary policy. This is especially true of the American Rescue Plan since a) the money supply increased, b) there CARES Act was enacted, c) more people were getting vaccinated, and d) businesses were reopening. 

While such global factors as supply chain shocks and energy shocks contributed, make no mistake: expansionary monetary policy and expansionary fiscal policy were major contributors to the inflation that the United States been experiencing for over a year now.