Give it to us Straight
By Bianca Fernet, Argentina:
If you’ve noticed a dramatic increase in prices this month, allow me to assure you that it is not your imagination. Inflation has accelerated dramatically since President Mauricio Macri took office on December 10. That’s a fact. The big question is whether this is a short-term consequence of removing currency controls and reunifying the Argentine peso, or a long-term trend that could spiral out of control. Argentina has an unshakable problem with inflation, or persistently rising price levels and the subsequent deterioration of the value of the currency, that will be hard for the new government to shake.
The Struggle Is Real
Estimates for how much prices have gone up vary, but this is undeniably the highest inflation in two years, since the major devaluation when Axel Kicillof became Economy Minster in 2014.
According to the Buenos Aires City Government, inflation from November to December clocked in at 4.22 percent as measured by the increase in a basket of basic food goods calculated based on the necessities of a family of four. Anecdotal and independent estimates of inflation both in the City and across the rest of the country show increases within a similar range, so for simplicity’s sake let’s take Buenos Aires City official statistics as a reasonable starting point for addressing the problem.
Price increases were led by inflation in the price of meat, which increased by a whopping 13 percent.
Besides food, almost every aspect of the economy experienced a price increase with a striking 12.23 percent increase in the price of healthcare-related expenses.
While there is no contention over December’s high inflation, the story diverges when we get to January.
The government claims that December’s high inflation numbers were a short-lived phenomenon in response to expectations of price increases resulting from the end of currency restrictions. In other words, a self-fulfilling emotional prophesy unavoidable in disentangling the currency web weaved by former President Cristina Fernández de Kirchner. Secretary of Commerce Augusto Costa and Minister of Production Francisco Cabrera point to the fact that prices rose by 1 percent during the first week of December, but only 0.9 percent during the second and 0.6 percent during the third as evidence.
Economy Minister Alfonso Prat-Gay stated that the increases were just a “sensation” and that, “we are coming down in the first 15 days of January to inflation levels more or less similar to what we experienced in October [1.5 percent] and September [1.7 percent].”
Private estimates of inflation during the first 15 days of January show a figure between between 2.5 and 4 percent for the month, or double the number estimated by the Economy Minister.
Prat-Gay goes on to estimate that by February the impact of lifting the currency controls will have run its course, and inflation will be below 1 percent per month. Most private estimates suggest that in 2016, inflation will be between 25 and 30 percent.
Methinks Mister Prat-Gay would benefit from a calculator and a healthy dose of reality.
The Political Impossibility Of Fiscal Readjustment
In a phrase, Prat-Gay’s economic strategy consists of monetary shock combined with fiscal gradualism. In plain English that means he is moving quickly to remove controls related to the currency, which have a comparatively minimal impact on the average person, whereas the government is slowly reducing government spending, which can make or break someone’s day-to-day economic well-being.
Mauricio Macri’s government inherited a macroeconomic nightmare consisting of three entangled areas:
- A Central Bank (BCRA) with no cash that owed billions of dollars to importers and holders of bogus futures contracts
- A system of parallel currency rates characterized by a market (blue, “blue chip swap,” contado con liquidation) rate that exceeded the official rate by margins of up to 70 percent
- A bloated public sector in which the state employees close to 25 percent of the population across the country (closer to half in some provinces), and the general population has come to rely on energy subsidies and price controls to get by
The first two concerns are part of monetary policy, while the third and most complicated is part of the country’s fiscal policy. Taxes don’t come close to paying for the third, so Argentina’s government spends far more money than it takes in. Even when you strip away the alleged shameless graft of the previous administration, there simply isn’t money to pay for number three.
Macri’s economic team led by Prat-Gay has been quick and unapologetic in addressing the country’s monetary problems. Within weeks of taking office they removed the myriad of currency controls and allowed the Argentine peso to float, regardless of the jarring impact this has on the Argentine business community who are coping with continuing unpredictability as the various mechanisms and workarounds that developed in response to the controls slowly unravel.
This “rip the bandaid” strategy cannot be applied to fiscal spending, which in addition to being politically unpopular to cut, must pass through legislative budget approval processes in Congress. To make matters worse, we are in the midst of the baffling annual union wage increase bargaining sessions known as the paritarias. Labor leaders smell the looming fiscal cuts especially in light of the recent controversial firing of thousands of public workers and are demanding salary increases between 28 and 35 percent to compensate for the upcoming year’s expected inflation.
Will Inflation Stay High?
By removing currency controls and allowing the Argentine peso to float without also correcting the fiscal imbalance so abruptly, Argentina is left with two options:
- Monetize the fiscal deficit by printing money to cover the expenses, AKA inflation
- Finance the fiscal deficit by raising debt, AKA selling bonds, and attracting investment
Option 1 is not good. High inflation deters investment, exacerbates poverty and leads to instability.
Option 2 is off the table in a real way until the Macri administration finds a way to settle with the holdout creditors known as the “vulture funds.” As of last week the prospects were not as rosy as we would like; however, Cronista reported today that JP Morgan sees the negotiations moving in the right direction and predicts a resolution that pays the holdouts between 70 and 80 percent of the face value of the defaulted bonds in the form of additional bonds. Until a settlement is reached, President Macri can go to as many meetings at the World Economic Forum in Davos as he wants, it won’t change the fact that the majority of global capital is risk averse capital and will avoid Argentina like the plague.
Furthermore, global conditions are not on Argentina’s side when it comes to attracting international investment. While the government has predicted a 0.5 percent increase in GDP for 2016, international banks and the IMF have adamantly contradicted this figure, predicting a recession of -0.7 percent in 2016 and meager growth of 0.2 percent in 2017. This is due to China’s slowdown, low commodity prices and a deteriorating situation in Brazil, a major destination for Argentine exports.
Give It To Us Straight
Argentina grew tired enough of former President Cristina Fernández de Kirchner’s economic fantasy land to elect Macri, partially based on his promises to restore reliability to Argentina’s economic statistics agency INDEC and to end the bombastic and downright dishonest management style of his predecessor.
Admitting that inflation would temporarily rise upon the removal of capital controls and realignment of the currency was laudable; calling dramatic price increases a sensation and claiming they will be over by February is not so much. While INDEC understandably will need until September to publish official inflation statistics, in the meantime the Government should either outsource the task to a reliable third party or establish a less-than-perfect estimate based on private sources.
Currently, Economy Minister Prat-Gay’s minimization of the real problems that high inflation causes in the lives of Argentines makes him come off as dismissive, flippant and disconnected. Like when he dismissed monthly electricity cost increases of AR$350 as negligible, or only “the cost of two pizzas,” he runs the risk of losing touch with the economic needs of the people that it is his responsibility to promote and protect.
Inflation’s latest tear is a real reminder that just because people can now buy dollars and imported goods doesn’t mean Argentina’s economic woes are over. By Bianca Fernet, Argentina.
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Argentina keeps making the cardinal mistake of borrowing in other peoples’ money. Argentina only has control over money it creates through its Central Bank. In fact it can never go bankrupt in its own currency.
It should stand to reason that it must fund itself and it’s services and infrastructure, pensions and welfare by itself.
If the government can establish the Output Gap – the difference between what the economy is like now and its potential with full employment etcThat will cap the spending ceiling and the government can spend without interest payments. This is a much mis remembered ability of central banks. bankers like to keep it that way.
Argentina’s problems began in 1976?
One of the most prosperous countries in the world in the early 1900’s it had become riven with political and economic confusion before WWII.
It was with military man turned populist politician/ economist Peron that things really started to go haywire.
All politics are probably too emotional but in the Latino variety objective reality is a disposable concept.
In Buenos Aires province half the work force works for the government, but their economic ‘production’ does not generate enough REAL wealth to pay them.
But if you concentrate hard enough this problem can disappear and those who interfere are like those who ruin a romantic movie by asking: if they are alone at the beach where is the music coming from?
The past is past. Here’s an idea Macri could try. I have written a short radio and TV speech he can publish in some newspapers as well. He should say:
“Look, you can fire me when I ask for re-election, but here we are: too many are on the Gov payroll, we can’t pay you all, so we are letting many of you go. This will be announced in the next couple of weeks.
We are first setting up emergency contacts for all cities, for help, and that will happen quickly, and then we will announce.
This is hard, but needed because we can’t pretend to afford paying so much, and also have a real economy. We have to set up a real economy so Argentina can get back to normal, and hope to get on the track of more good jobs for more people, instead of struggling to invent things to barely get by.
To keep the new “help” system, those getting help will be on a strictly checked database. One of the worst crimes will be defrauding the national help system. The help will be minimal, and if you can help others and you’re on the help system you’ll be asked to help others. This will be run by local help officials. It will be very basic.
And since inflation is picking up, we are cutting back on new money issue to but a brake on it. If this causes hardship, it is better than inflation. Once under control, we will not use money pumping to “juice” the economy. Thats is a game played often in many countries, and we have become addicted to it.
I and many who hate inflation are the little voice in the addicts mind that says “why cant I stop?” I am telling you-we are stopping whenever I see it even maybe getting out of control.”
Would he have the courage for this? Few politicians would.
Gee, how silly to borrow in US$ when they should have borrowed in their own currency, a puzzle!
Answer: they CAN’T
Argentina’s demand for money exceeds its tax receipts, Decades of expansion of the public sector, (up to 50% of the work force in BA province) all of whom expect a pension can not be met by the resources of the economy.
Simply put- there is not enough money in Argentina that is stupid enough to lend itself to the government.
The answer- borrow or, in the polite vernacular, issue bonds, which for the above reason ( not enough money in Argentina) must be sold to foreigners.
New problem; as stupid and gullible as these foreigners might be, even they aren’t stupid enough to lend Argentina their hard currencies in return for promises that could be met by printing Argentine money.
So Argentina had a choice: either live within your means or borrow from foreigners who want to be paid back in their money. Since the former would mean ‘unrest’- maybe a take over by some populist colonel taking off his shirt and screaming; Justica! – it was out.
PS: after about 15 years of litigation Argentina will have pay about 70 % of the bonds it wanted to default on.
Can you imagine how quickly this problem would have been solved (for Argentina) if the bonds weren’t dollar denominated?
Isn’t it ironic that the 3 amigo socialist comrade leaders are darn good at ruining economies of Argentina (Cristina the ex), Venezuela and Bolivia?
As for Argentina – yeah they had some chutzpah to DEFAULT on the bonds from the bankster loan sharks to boot.
Yep there are consequences and EMs with USD dominated bonds are sweating. At least they read what not to do from Argentina playbook…
Vespa, the only amigo that comes close to being a socialist was Chavez as he nationalized willy nilly a bunch of companies but I’d call that statism, socialism having to do more with the means of production in the hands of the workers. It’s an easy tag though.
Mind you, the ruining of the Argie economy did not start with Kirchner but way before that with the military coup of 1976 (just to keep a short gaze into the past) They took over with a negligible debt and by the time they fell from within in 1983 the debt burden acquired by the Malvinas war and their neoliberal policies had grown exponentially. Enter IMF and Washington (Consensus) darling, president elect Saul Menem, he completed the destruction of the economy in a way that the brutish military could not: open customs and a dollar peg hollowed out the industrial base that took 50 years to build and had made possible the creation of a wide middle class. It was socialism all right, for the happy few, the financial parasites and speculators. Just like it is in Usakistan. This socialism meme has passed its expiration date.
I enjoy reading financial news from Argentina, but would appreciate if you could supply a more meaningful context. Over time I have no real idea of price levels for the average middle class working family. Maybe including the price of the average house/apartment in USD, or price of an airline ticket to New York, or price of kitchen appliances, etc. A small foot note would add more meaning to an outsider, especially if it showed the change over time.
Here is a site where you can do comparison of costs of living for cities around the world. Things like a loaf of bread and renting an apartment.
Asking for the government statistics agency to report the real inflation in housing, food and energy, the three things essential to life – a truly refreshing and revolutionary idea that should be applied worldwide. /s
there are no finances in argentina, it is all fictional.
kirchner left the place broke, therefore it must print money to pay for things, as lending to it is untenable.
they make great wine and beef, though.
also, an excellent time to go as a tourist, but it’s so far away.
Well… I´ve been reading a few of Bianca Fernet articles… First question: ¿who is Bianca Fernet? i know Fernet Bianca, and is one famous the alcoholic beverages in Argentina. I´ve look for Bianca fernet and did not found anything about a person with that name.
What can i say… every thing this person (that firm bianca fernet) wrote and thought are born from a neoliberal thesis way of analyzing the reality.
It depends from where you stand the things you see
For 12 year of Kirchner (Nestor first, then Cristina) government in Argentina politics were think and created for the commond good. The mayoritie of argentine people improve their life even rich people. The government worked for their people not for banker or concentrated economics groups, and thats why the media hates kirchner, as chavez , Correa or Evo Morales.
Economic decision were made under a political frame, not the opposite like in the US or Europe.
Now, Neoliberals and economic concentrated groups took control of our government again… bad news for the people, good news for the market… We already know how this is going to end… Our country in debt again. Very sad.
I will like to know real name of Bianca Fernet (she or He is making fun of all of you that read)
sorry for my basic English.
Bianca Fernet is a pen name of a real person. You guessed correctly that the name is a nod to one of Argentina’s favorite drinks.
Argentina’s economy has been in trouble for years, largely due to government policies. When you have inflation of 25% to 40%, you know you have a problem! Everyone understands that the handouts a government (any government) gives, whether to the poor or the rich, are much appreciated by those who receive them. Paying for those handouts is the other side of the coin….
Wolf, If you mention inflation you also have to mention rise of salaries, unemployment level, personal and nation debt and many other variables to understand our life here. Inflation is not a problem by it self, I agree that can be a mayor problem. Its not me who says this. What if salaries win inflation? what if consumption rises even despite inflation? If you analyses the past 12 years of economic politics in Argentina, you can find that we did not have “Inflation”, we did have rises of end consumer prices from concentrated groups that have oligopolies and monopolies in most of our markets like food, cars, clothes, basic goods, iron and many other products. So they never lose their benefit margins. Huge benefits margins taking money from workers pocket.
That is our mayor problem in Argentina. Or was. Our mayor problem now is a neoliberal government that is opening our country to US and Europe central banking policies and institutions like IMF and WorldBank again… Same old recipes that are good only for 1%. We know this from the past. We were the experimental field for this policies in the past… and are still paying the price.
Thanks for responding my post!!!
Best regards from Buenos Aires!!
I understand your thoughts….
Let me just explain that a country that has 25% – 40% inflation cannot borrow money in its own currency over longer maturities (3 month bills, OK, but it can’t sell 10-year or 30-year debt). That’s the case in Argentina. It cannot issue long-term debt in its own currency. No one would buy it. So it issued dollar-denominated debt in the past, and serially defaulted on it because it could not devalue the dollar though the peso was constantly devalued.
So it’s constantly out of money and has to print it. Hence, even more inflation. And so under Kirchner, it came up with all kinds of silly policies to tamp down on inflation, hide inflation, and prop up the peso, and those policies were terrible for the economy.
What do you mean with “killed the economy” ?
We may have few dollars in the central bank (35 billions) but dollars as a foreign currency is for international commerce, i accept that this trade is going down but not because of us. International prices and volumes are very low for our export goods. I ear you explaining very good this world problem in talk with Max Keiser and in your reports also.
We live, produce and spend in argentinian pesos.
Printing money is not a problem if you do it as demand ask. Central bank here does not behave like the FED or EU Central Bank. Here all printed money went to people pocket, and very fast that goes to consumption giving up grade to all the economics areas and even taxes so government can pay the interest rate of internal loans… You can verify this very fast.
For workers and people with variable earnings in pesos the economy was good. Good in this case is that people can improve their way of life, make plans and realize them. Dont forget that here in Argentina our economy depends on what you have, we do not live in debt for things you buy. Our economy is more primitive if you like. Personal debt is very low.
All of my talking is about the last 12 years. That ended on 10 of December with change of political regimen.
New government is lead by CEO´s and representatives of the concentrated groups I talked before… no good for the “gente de a pie” (people on foot).
2 examples, new minister of economy came from JP Morgan. New minister of Energy is an ex CEO of Shell… how can this people will care about common citizens???? and take measures for improving poor peoples life??? I never saw this happen…
The economy is leaded by politics for the good of majorities or is leaded by concentrated groups for their own interest…
Thank you very much for this conversation!!!