Argentina on the cusp of hyperinflation

[Conorworld]

Something nasty is going to happen. Most countries that willingly take an inflationary method of growth to the extent that Argentina is doing now will result in an economic shock. Deflation has the habit of once entrenched it is incredibly difficult to get out of, like having your car caught in a mudpit. Inflation has a habit of exploding.

I'm kind of seeing similarities with the inflationary period in Argentina and in Weimar Germany. Weimar went on a pro-inflationary programme after the war as it alleviated a lot of the cost of demobilization and allowed the economy to remain in virtual full employment whereas the victors of WWII went on an opposite programme resulting in a recession deeper at times than 1929-32 for them. In the end it exploded in the faces of the Germans. Hyperinflation was entrenched by 1921. In the end it took the Belgian and French occupation of the Ruhr and a German process of passive resistance, paying the wages of striking workers to cause the explosion into insanity. Hyperinflation is a strong possibility for Argentina and it will only take one shock to push it even further.

Personally I don't know how people in Argentina cope. I just find it funny how in 5 or so years Argentina and BA in particular has gone from being incredibly cheap to being more expensive than Europe and the US in many cases. It's a horrific and sad loss of competitiveness. If the commodity boom is to stop and I mean stop for a decent enough time rather than the short drop between 2008/9, that's all it will take for things to show that the emperor has no clothes and is horribly exposed to the elements.

 

[MorganF]

What is most interesting is that (counter to what you would expect; or at least, counter to what I expected, so probably I'm just not that smart!), cities being expensive is often NOT a sign of wealth but a sign of poverty. Take the list of the most expensive cities in the world, for example, from La Wik:

http://en.wikipedia.org/wiki/List_of_most_expensive_cities_for_expatriate_employees

#1 - Luanda, Angola (????)
#2 - Tokyo (makes sense)
#3 - N'Djamena, Chad (WTF?)
#4 - Moscow (makes sense)
#5 - Geneva
#6 - Osaka
#7 - Libreville, Gabon (????)

etc....

My worry is that, BA getting up on the ranking is NOT because we're more like Osaka but because we're more like Gabon.

 

[Hache]

@Conorworld: After reading your post, the boiling frog theory came to my mind, but I'm just trying to rationalize something that to me seems irrational: In my 35 years, I've seen too many frogs

the emperor has no clothes and is horribly exposed to the elements.

and too many naked emperors.

Personally I don't know how people in Argentina cope.

With what? That could be the answer to the whole riddle.

 

[redrum]

as you buy and sell gold be aware that for "US persons" it is taxed as a collectible, and there are strange rules and extraordinary high penalties in the fine print. as a hedge against hyperinflation if it works the tax on the hypergain will be in effect a confiscation of the gains at much higher rates than other assets, again no surprise, so make sure you read the rapidly changeable tax code before moving into and out of collectibles so that you are tax efficient

yes clooz thanks for that input. would we expect anything else? god forbid we should try and protect our purchasing power by making smart, educated investment decisions against the corrupt policies of a government, which is robbing us by means of inflation.

no matter what you do, they will have their hands in your pockets. fortunately, there are some ways around it. i suspect a large black market will open up as people look to conduct transactions off the grid.

 

[Amargo]

My worry is that, BA getting up on the ranking is NOT because we're more like Osaka but because we're more like Gabon.

Don't underestimate Gabon! A colleague of mine visited the country for business purposes and he was really shocked to the level of wealth he found there. The country has a lot of oil and not a very large population (I think slightly over 1 Million).
Angola (Luanda is its capital) has also lots of oil.
N'Djamena sound ridiculous though.
BA is becoming something like a paraguayan City, with lots of people selling things on the sidewalks, etc.

 

[pauper]

My worry is that, BA getting up on the ranking is NOT because we're more like Osaka but because we're more like Gabon.

What, you mean having the world's highest per capita consumption of champagne?

 

[MorganF]

What, you mean having the world's highest per capita consumption of champagne?

I would bet a bottle of champagne there's a pretty friggin' high standard deviation on that average

 

[MorganF]

Don't underestimate Gabon! A colleague of mine visited the country for business purposes and he was really shocked to the level of wealth he found there. The country has a lot of oil and not a very large population (I think slightly over 1 Million).
Angola (Luanda is its capital) has also lots of oil.
N'Djamena sound ridiculous though.
BA is becoming something like a paraguayan City, with lots of people selling things on the sidewalks, etc.

Wow, I had no idea about Gabon. Researched it online a bit after reading your comment and what I found was interesting and surprising, like this blog from an expat there:

http://franglaisexpats.blogspot.com/

It's an interesting contrast to BA, where (here) there is a pretty pronounced divide in most ways between the locals and the expats... but in Gabon, where the skin color is so profoundly different, it takes on a whole new proportion.

 

[Conorworld]

Well I think that a bit of the bite of the inflation is counteracted by increased public spending, wages etc that are built on the commodity boom. I could be wrong but IF the price of commodities that Argentina exports were to drop, things could get nasty and the wheels on the truck could fall off.

I am just surprised at how there isn't a bigger backlash in Argentina against the rapid increase in inflation.

I always found those lists of most expensive cities in the world fascinating. A lot of the cities mentioned in MorganF's quote are developing countries with large commodity booms such as oil. I was reading an interesting article on Luanda in Angola where the price of a hotel room averages about $500. The things they use to examine the level of prices are uniform for all cities-hotel rooms, price of coffee, rent etc. In the instance of Luanda, it fails to take in that the country is still recovering from a horrific civil war and then suddenly found itself in the midst of a commodity boom. There are not enough hotels etc for the workers, analysts and so forth in the city and the basic rules of demand and supply push the price up. BA seems to have completely different fundamentals.

 

[LAtoBA]

Well I think that a bit of the bite of the inflation is counteracted by increased public spending, wages etc that are built on the commodity boom.

Actually it is precisely that, the profligate spending by the government that is fueling inflation. The more money the government puts into the system, the more prices will go up. Of course there are other factors but that is a biggie.

I am just surprised at how there isn't a bigger backlash in Argentina against the rapid increase in inflation.

There is definitely a backlash. Pay attention to what's going on in the news. In the last week I don't think I went a day without watching a news story related to the "gremios" (unions) and their demands for higher pay. Follow closely their calls for wage increases--their demands are typically in line with inflation, since union wages are some of the few wages in Argentina actually adjusted for the real rate of inflation in Argentina--not the one fabricated by the government. Higher wage demands are common in a country with inflationary pressure. This becomes a never ending cycle that only exacerbates the inflation problem.

As long as prices continue to increase (especially food prices) expect more protests and more discontent among Argentines in the coming months, especially those on fixed incomes such as pensioners.

A pension bill that would have actually raised the minimum monthly retirement payment to 82% of the minimum wage was actually approved in October of last year by Congress, but ultimately vetoed by Christina on the grounds that it would bankrupt the country. She is right, it's passing would've bankrupted the country, but you see it's only a matter of time before this very bill is passed yet again by Congress. As food prices increase Argentines will demand it regardless of its impact on the country's finances. And ultimately imo Christina and the government will have to acquiesce to those demands, confront inflation or face political backlash. Either way it won't be pretty.