Let me begin with an apology for my relatively late entry into this debate. I would have interjected earlier, but for three months, I have been dealing with cancer and starting a new job as Assistant Professor of Economics at the Panamerican Institute of Senior Management. This prevented me from following content like the exchange between Professors Philipp Bagus and Jörg Guido Hülsmann on mises.org. Professor Bagus recently brought it to my attention, and soon after, I came across Dr. Bob Murphy’s podcast episode on the topic.
I will not summarize the debate here. It is best to read it firsthand. Consult the full Bagus-Hülsmann discussion. Listen to Murphy’s Human Action Podcast episode.
I hold deep sympathy for elements of both sides in this intra-Austrian discussion. Ultimately, however, I align with President Milei and Professor Bagus: the risks of an immediate central bank closure in late 2023 were excessive.
To clarify the terms of the argument, I concede two points to Professor Hülsmann—with apologies to Professor Bagus. First, the Argentine peso is indeed fiat money, not credit money. Second, hyperinflation would not necessarily have followed the closure of the Central Bank, provided the monetary base was frozen. The demand for pesos depends chiefly on expectations of proximate purchasing power, not on the prospect of dollar conversion at some indeterminate future rate.
The critical variable, therefore, is how one freezes that base. As Murphy correctly notes, the danger lies in the sterilized monetary mass. In late November 2023, remunerated liabilities (LELIQs and pases pasivos) totaled ARS 24.8 trillion against a monetary base of only ARS 8.3 trillion. This 3:1 ratio created the famous “Leliq bomb.”
Milei faced three paths for handling these liabilities:
- Immediate Liquidation: Convert liabilities into base pesos on day one, which would have quadrupled the base and guaranteed hyperinflation.
- Outright Default: Freeze the monetary base by defaulting on the sterilized mass. This stops inflation without expanding the base but would have collapsed the banking system.
- Orderly Liquidation: Await an orderly winding down of the liabilities. This remains Milei’s ongoing strategy.
Murphy advocates for the second option as the principled, non-inflationary path. While he is technically correct that a default freezes the base without expansion, he perhaps underestimates the explosive political and legal reactions this would have provoked in Argentina.
Precedents for sovereign default exist, but they are double-edged. The Supreme Court has upheld compulsory conversions during crises, such as the 1989 Plan BONEX and the 2001 Pesificación. However, Murphy proposes a complete wipeout, which would have gone significantly further than these past partial losses. This would have invited an immediate legal war.
Politically, defaults topple presidents. The 2001 crisis in particular proved this starkly. As a more general reference, Macri has been the only democratically elected, non-Peronist president to finish his term since 1928. A default would have handed the opposition the decisive political ammunition required to launch an impeachment attempt against President Milei before his reforms could take root.
Economically, defaulting on LELIQs would have destroyed the banking sector’s primary asset. This would have caused instant insolvency and would have triggered a system-wide bank run. While a frozen base prevents hyperinflation, the resulting chaos would have temporarily paralyzed the financial system and would have made fiscal balance much more difficult because of the increased interest burden brought by increased risk premiums.
In retrospect, demanding the closure of the Central Bank on “Day One” reflects a high time preference. It would have prioritized the immediate satisfaction of a libertarian ideal over the long-term survival of the reform project. By avoiding the chaos of a banking collapse, Milei prudently bought the necessary time to stabilize the patient.
However, prudence has its limits. Milei is currently erring on the side of caution, perhaps excessively so. With the “Leliq bomb” largely defused and the balance sheet now manageable, the economic rationale for delay is vanishing. Furthermore, with the political capital of a new Congress, the administration will soon lack political excuses as well.
While caution in 2023 was wisdom, hesitation in 2025 is choice. Milei could likely close the Central Bank safely this coming year. If he fails to do so by the end of 2026, we will no longer be discussing strategy, but a broken promise.
