Dollar and Inflation Rate Predictions End 2019

[Joglide]

the other elephant I see is NO program to either increase exports or employment. Or to raise salaries, to match inflation, for that rate.
The purpose of a government, and the reason countries exist, is not just to pay off ill considered borrowing. Neither Austerity, nor Pain, actually help anybody. Neither even assures debt repayment.
There needs to be an active program to make things better.
Zero programs have been proposed.

Hi Ries. We have discussed this before: when you say austerity helps no one, I have suggested before that it is advocated by conservative liberals as a 'corrective' to 'sober up' the labour market - ie cut real wages and increase effort levels while cutting unit labour costs. Of course you (and Maynard Keynes) are right that a "race to the bottom" means if everyone does this and domestic demand collapses and overseas importers won't buy, then we go down in a vicious spiral. Only if labour can be persuaded to be "realistic" in accepting lower real wages to enable capital accumulation at the expense of employees can the solution work out. You imply an export-led recovery or growth programme is now needed, though not sure what sectors you see as leading this? Maybe tourism? Maybe wine and agriculture? Argentinians are good at knowledge-based skills but (as you say) no structure seems to be in place. I always feel the artisan-economy could be transformed into quality goods and services but not sure how...

 

[Ries]

Austerity is a moral thing, not an economic one. Punishing Bad people. Which is usually based on racist and classist simplifications of a complex population. And its particularly not true here- Argentines are industrious and hard working, and have a huge base of small, family owned businesses, far more than many countries.
cutting wages has proven, again and again, to drive the entire economy down. Consumer spending drives every modern economy. With less consumer spending, you get less of everything.
"Realistic" would be transferring the wealth from the top 1%, who dont reinvest it into the economy, instead, to the lower 90% who, in Argentina particularly, would spend it pretty much immediately, and goose the economy.
In Argentina, we see a very small wealthy class that hides money overseas, has savings here in physical US dollars, and static investments in real estate, none of which help the economy or the people.
We saw exactly what happens when the economy contracts, in the corralito- the wealthy simply close the doors of their businesses, and wait. This is disastrous to the economy, and the last time it happened, it didnt do any good for anyone. Unlike in the USA, where, at least, during a depression, assets and real estate get devalued and auctioned off and, might, sometimes, be used in a better way, Argentine real estate and legal laws allow the rent seeking class to weather a depression with no loss of assets- which increases the wealth transfer, and screws the working class even more. You can avoid paying taxes or utilities for literally decades here, and never lose land or buildings.
The working class, on the other hand, kept working, refusing to leave over 1000 factories, and that was one of the few things that kept the economy afloat, while the wealthy retired to Miami and shopped at Sawgrass...

I "imply" that any small country must do two things- export value added products, rather than strip mine raw materials, and increase local consumption. The examples of resource rich countries in Africa, the Middle East, and, say, Venezuela, all show that increasing resource exports hollows out the local economy, naturally concentrates wealth among the few, and leaves countries worse off.

But Macri's only policy seems to be exporting Oil, Soy, Beef and Wine. This way lies madness. Tourism and money laundering keep Uruguay afloat, but its something like 1/10 the population of Argentina- neither is a viable strategy here.

The Argentine economy has all kinds of companies that could be encouraged to produce, export, and employ more. There are proven techniques for doing this, including education, government encouragement of exports, targetted tariffs, export banks that loan to targeted industries, and more. Boeing, for example, would hardly exist without the US Import Export bank, which guarantees loans for its export sales. Nothing like that exists here.
Publishing, Cultural Content like film, music, art and fashion, Internet services- all are relatively cheap to jumpstart, given the already educated population.

 

[Ries]

I am still a bit befuddled as to the origin of this theory that lowering wages is needed- that it will somehow improve an economy. EVERY mainstream economic theory teaches that higher wages, not lower ones, improve economies.
the "efficiency wage theory" states that higher wages increase labor efficiencies as well.
Most empirical studies of modern economies show that raising minimum wages, and wages across the board, benefit economies.

You are arguing that "capital accumulation" is a worthwhile goal.
I would ask, why?
What economic theories support this, and who, exactly, is supposed to accumulate this capital?

My understanding of the role of a national government is that it is, first and foremost, obligated to raise the standard of living of its citizens. To improve the lifes of its people. The first priority of a government is not to its debtors, its to its nation. Debt is something that can be managed in a wide variety of ways, but the most proven success, historically, is to grow the economy, primarily by growing consumer wages and spending. Inflation, in moderate amounts, is your friend, lowering the real value of your debt, and if your economy is growing, national debt shrinks as a percentage of GDP. Austerity, as seen in Greece, England, and the State of Kansas, shrinks the GDP, lowers the ability of the government to repay debt, and eliminates the possibility of refinancing at lower interest rates, or early repayment.
To repay debt, you need tax revenue. To achieve that, you need a vibrant economy, not a shrinking one where the wealthy shift assets and capital abroad.

 

[expat0tree]

I am still a bit befuddled as to the origin of this theory that lowering wages is needed- that it will somehow improve an economy.

Lowering wages isn't done to improve the economy, the point of it is to simply free up available government revenue at the expense of your purchasing power so that the government officials and their extended corporate buddies and families can continue living a luxury lifestyle while trying to please the international investment community by demonstrating a balanced budget. IMF made recommendations to shrink the public sector but it's the hot potato that nobody wants to handle, much like the corrupt judiciary that needs an overhaul and nobody cares to rise up for such an important cause. They need a balanced budget to guarantee access to international markets for years to come, high deficit is a big no no for investors of any kind.

You can argue that it is unethical to try and tackle debt with public money and unfair considering that the rich are not paying their taxes and never lose their countless properties, but Argentines never protest those things in the first place, so why is this a problem?

The core problem here is in the passive attitude towards issues that do matter but never get addressed by the masses, and media coverage is suppressed. I've never seen demonstrators marching down the main street demanding AFIP to enforce their tax collections fairly and then use that tax revenue properly, how come? Maybe that's because people don't really care how the taxes are collected and what they are spent on and with what efficiency. Is it because an average Argentine is too selfish to care about the society as a whole? A Fin would never allow this to happen, they have a special website where they can trace their tax money and see how and where it is been spent. Argentines don't follow up on anything!

People here never seem to hold their own government officials accountable for anything and protest only when things affect their own pocketbooks, but that's not a revolution but a petty protest with no movement or substance. Look at Ukraine for contrast, people there rose up twice in the recent decade and overthrew a powerful authoritarian oligarch in 2014 who systematically impoverished their country under the illusive guidance of Russia. The people didn't carry banners protesting low wages and increases to their gas bill even though their real wages were even lower than those of Argentina today. Instead, they marched against the corruption itself, to a point where lives were lost for the cause of removing the dictator by force, with sticks and rocks. In place came a democratically elected new government that agreed to real reforms and not because they were interested but because they were held accountable for the first time. Today they are half way there, a lot has been done but the people will return to the streets for the third time if no real results achieved, at least there is no more beating around the bush, they know what they want and what needs to be done.

In regards to austerity, Macri did try to grow the economy at first, there was lots of optimism and quite a bit of political leverage too but then he realized that he cannot raise productivity, nor could he spur innovation of any kind without reforming first, so the gross domestic product wasn't going anywhere after 2016 because of the political stalemate, on top of all that, the education system was already proven to be far far behind when the real stats came out and the money to fix it all was simply not there, nor was there any political will for real reforms when he pushed the congress and wrestled with the opposition. Meanwhile people on the streets are more concerned about their gas bill and sube going up instead of talking about the reform, how come? Are they really that stupid not that understand that labor and tax reforms are imperative for the survival of the Argentine industry?

So it's not hard to understand that if the reforms cannot be done now, the only thing left for Macri is to balance the budget in order to at the least abide by the stand by agreement with the fund and at the same time have a more competitive labor force, ready for hire in theory, not that anyone is particularly interested in hiring uneducated Argentines but that's another topic for another day; even if hired en negro at least it keeps the economy going instead of further crushing.

Balanced budget is also the only means to securing a longer-term foreign investment considering Argentina's high risk status from past repayment problems; the country has a lot of raw resources to offer to international players who are not comfortable with a rising budget deficit, they want stability and predictability, not entitled unions with superpowers and slumping productivity, Macri is indeed in a tight place where he cannot please everyone.

Either way, debts needs to be repaid and there is no way that you can raise wages in this climate when the real GDP needs to be rising at least 4% per year for the next several years in order to grow ourselves out of debt and start seeing surplus which once again would be raked up somehow unless we really do somehow magically push through the much needed reforms, in particular those pesky corruption bills and judiciary overhaul.

 

[Joglide]

I "imply" that any small country must do two things- export value added products, rather than strip mine raw materials, and increase local consumption. The examples of resource rich countries in Africa, the Middle East, and, say, Venezuela, all show that increasing resource exports hollows out the local economy, naturally concentrates wealth among the few, and leaves countries worse off.

But Macri's only policy seems to be exporting Oil, Soy, Beef and Wine. This way lies madness. Tourism and money laundering keep Uruguay afloat, but its something like 1/10 the population of Argentina- neither is a viable strategy here.

The Argentine economy has all kinds of companies that could be encouraged to produce, export, and employ more. There are proven techniques for doing this, including education, government encouragement of exports, targetted tariffs, export banks that loan to targeted industries, and more. Boeing, for example, would hardly exist without the US Import Export bank, which guarantees loans for its export sales. Nothing like that exists here.
Publishing, Cultural Content like film, music, art and fashion, Internet services- all are relatively cheap to jumpstart, given the already educated population.[/QUOTE]

I take most of what you say as "read" though there have been very significant variations in inequality levels within Argentina over the period 1930-present and also very different periods of economic growth and stagnation, not always directly correlated (Peron had both growth and stagnation/crisis periods alongside income redistribution and progressive taxation, later Peronist periods similarly). We all agree that an agricultural export-led growth in many years has fostered wealth accumulation for the richest. The terms of trade and the world prices for Argentinian goods have had a significant impact on performance episodes largely irrespective of the complexion of governments, even in periods of closed economic policy (ie tariff protection).

The large economic literature of left, middle-ground and conservative economists find it difficult to explain even in their own terms the path of Argentinian performance, or the relationship of income and wealth distribution and investment patterns. In brief periods such as early Peron the prescription of radical economics seemed to work and (leaving aside international capitalism conspiracy models), the model faltered. You state with a breezy confidence what the fundamental problem is and what the solution is but your argument that there are "all kinds of companies that could be encouraged to produce, export, and employ more" and that there were "proven techniques" to achieve this needs some specificity: Keynesian macro policies have their limits, the investment strategies you mention both take time (eg education) and have variable results - Argentina's problem is that it can point to very few examples of manufacturing or services that satisfy domestic and overseas consumers. Automobiles has had a checkered history, to name one. If the policies you mention were so sure-fire then the question must be asked why in the 85 years since the first crash have they not delivered?

Gross inequality is not economically or morally rationale. Everyone agrees domestic demand plays a part in growth - though China rocketed forward with an export-driven strategy for many years - but there remain fundamental problems in the institutional and political configuration, as well as the visicistudes of the world market. The solution is likely to take decades of investment and stability.

 

[Ries]

"Argentina's problem is that it can point to very few examples of manufacturing or services that satisfy domestic and overseas consumers. Automobiles has had a checkered history, to name one. If the policies you mention were so sure-fire then the question must be asked why in the 85 years since the first crash have they not delivered? "

First, Argentine manufacturing is quite capable. There has never been a lot of exporting because the government has never encouraged it- there have been taxes on exports (completely nutty policy) and intentional friction in terms of customs, shipping, and duties that make it difficult to export.
The policies I mention have, indeed, been used, in places like the US and China, to great success.

as mentioned- an import export bank is a simple first step. It does not actually loan money- it guarantees loans that meet its standards. Most Boeing plane sold outside of the USA is financed this way- which is in the tens of billions of dollars a year. Obviously, this works. It enables foreign airlines and leasing companies to get competitive private financing, if they meet the US financial requirements, at lower interest rates, due to the backing of the Import Export Bank. Argentina should have an Import Export Bank.

As for industries that could viably export- there are many.
Argentina, due to its physical and political isolation, largely by Peronists, has much more manufacturing than its neighbors except Brazil.
For instance, Electric motors and transformers, small machine tools, hand tools, agricultural implements for small tractors and small scale farming, all sorts of food manufacturing equipment from pizza ovens to pasta making machinery to baking equipment, espresso machines, and so on, leather working and textile machinery, silverware, glassware and ceramics, textiles of all sorts, particularly fabrics made from argentine grown wool, cotton, llama, alpaca, and vicuna, clothing, shoes, handbags, lighting, furniture, eyewear, store fixtures- I am aware of small companies in all of these market sectors that are, in quality and product line, placed squarely in between the low end chinese, and the high end europeans. Most smaller countries import all of these things from China.
Take Uruguay, for example- pretty much NOTHING is made there.
But a good third of the products in Uruguay have "Industria Argentina" on them, if you look.

What the government could, and should, do, is set up a small ministry of export. One that would consolidate shipping containers for groups of small producers, streamlining customs and expediting quick shipping of LOTL (less than truck load) 40' containers, shipped to Argentine government run warehouses on the East and West Coasts of the USA. For much less than DHL, or FED-EX, the government could actually charge handling fees to run what were, essentially, Amazon vendors. Ship shoes, frying pans, purses, thread, leather jackets, and packaged foods to a warehouse in New Jersey, then ship to individual Amazon buyers. This is not rocket science- its simple, proven and easy to do. Yes, it would require an upfront investment, but would result in jobs, foreign exchange, and in-country argentine tax revenue when the manufacturers sold the goods.

I have known several argentines who do this informally- there is a guy in South Florida, I met his brother, who sells 4 or 5 brands of mate, alfajores, and dulce de leche on Amazon- I buy mate from him. He makes money, and he is doing this on a very small scale, paying all the frictional costs of Argentine export. I used to live near a couple in LA who ran a coffee shop, and carried back, in checked luggage 100 or so pairs of shoes 3 or 4 times a year. They did quite well, selling argentine shoes in their coffee shop.
The issue is not quality, or price- its government encouraged export costs that are very high.

I know some knifemakers in the USA who really wanted to buy belt sanders made in Santa Fe- and, argentine price was under 50% of competing US products- but the cost of exporting was more than the difference. As in, landed in the USA, more than the american product. The government could change this, but doesnt.

 

[Joglide]

"Argentina's problem is that it can point to very few examples of manufacturing or services that satisfy domestic and overseas consumers. Automobiles has had a checkered history, to name one. If the policies you mention were so sure-fire then the question must be asked why in the 85 years since the first crash have they not delivered? "

First, Argentine manufacturing is quite capable. There has never been a lot of exporting because the government has never encouraged it- there have been taxes on exports (completely nutty policy) and intentional friction in terms of customs, shipping, and duties that make it difficult to export.
The policies I mention have, indeed, been used, in places like the US and China, to great success.

as mentioned- an import export bank is a simple first step. It does not actually loan money- it guarantees loans that meet its standards. Most Boeing plane sold outside of the USA is financed this way- which is in the tens of billions of dollars a year. Obviously, this works. It enables foreign airlines and leasing companies to get competitive private financing, if they meet the US financial requirements, at lower interest rates, due to the backing of the Import Export Bank. Argentina should have an Import Export Bank.

As for industries that could viably export- there are many.
Argentina, due to its physical and political isolation, largely by Peronists, has much more manufacturing than its neighbors except Brazil.
For instance, Electric motors and transformers, small machine tools, hand tools, agricultural implements for small tractors and small scale farming, all sorts of food manufacturing equipment from pizza ovens to pasta making machinery to baking equipment, espresso machines, and so on, leather working and textile machinery, silverware, glassware and ceramics, textiles of all sorts, particularly fabrics made from argentine grown wool, cotton, llama, alpaca, and vicuna, clothing, shoes, handbags, lighting, furniture, eyewear, store fixtures- I am aware of small companies in all of these market sectors that are, in quality and product line, placed squarely in between the low end chinese, and the high end europeans. Most smaller countries import all of these things from China.
Take Uruguay, for example- pretty much NOTHING is made there.
But a good third of the products in Uruguay have "Industria Argentina" on them, if you look.

What the government could, and should, do, is set up a small ministry of export. One that would consolidate shipping containers for groups of small producers, streamlining customs and expediting quick shipping of LOTL (less than truck load) 40' containers, shipped to Argentine government run warehouses on the East and West Coasts of the USA. For much less than DHL, or FED-EX, the government could actually charge handling fees to run what were, essentially, Amazon vendors. Ship shoes, frying pans, purses, thread, leather jackets, and packaged foods to a warehouse in New Jersey, then ship to individual Amazon buyers. This is not rocket science- its simple, proven and easy to do. Yes, it would require an upfront investment, but would result in jobs, foreign exchange, and in-country argentine tax revenue when the manufacturers sold the goods.

I have known several argentines who do this informally- there is a guy in South Florida, I met his brother, who sells 4 or 5 brands of mate, alfajores, and dulce de leche on Amazon- I buy mate from him. He makes money, and he is doing this on a very small scale, paying all the frictional costs of Argentine export. I used to live near a couple in LA who ran a coffee shop, and carried back, in checked luggage 100 or so pairs of shoes 3 or 4 times a year. They did quite well, selling argentine shoes in their coffee shop.
The issue is not quality, or price- its government encouraged export costs that are very high.

I know some knifemakers in the USA who really wanted to buy belt sanders made in Santa Fe- and, argentine price was under 50% of competing US products- but the cost of exporting was more than the difference. As in, landed in the USA, more than the american product. The government could change this, but doesnt.

------------------------------
Much of your (interesting) analysis is focussed on manufacturing though as I suggested this accounts for a diminishing proportion of the economic activity of the country, rather sadly in some respects. The artisan production has not as yet been transformed into a substantial specialised flexible production sector though it is not impossible this could happen. The fundamentals seem to be that like many other countries Argentina has shifted strongly (as a consequence of education in large part and in response to demand) from making things to services, including a substantial public sector.

"The most noticeable change in the labor structure since the 1970s was the fall in employment in the manufacturing industry, and the increase in skilled services (public sector and professional and business services). While in 1974 39% of employment was in the manufacturing industry, the value dropped to just 17% in 2006. On the other hand, while in 1974 21% of employment was in the more skilled-intensive sectors of professional and business services and the government, that share rose to 41 percent in 2006. These patterns do not vary substantially when dividing the population of workers by skills." 'Short economic history of income distribution in Argentina'.
Facundo Alvaredo, Guillermo Cruces, Leonardo Gasparini

Many advanced economies have shifted similarly to services, particularly banking, IT, education, etc and Argentina seems well poised to sell its cultural products as we have said, though it is not at all clear that its financial, banking and related services sector is internationally competitive despite the large numbers of people now employed there. Its health system is impressive in many ways and its legal profession seems competent, though many of these skills are not easily sold abroad without a migration of their human capital.

My point remains that an alternation of regimes promoting weak labor markets and capital accumulation = inequality versus protected labour markets and protected real wages = less inequality, has not resolved institutional problems and some cultural impediments to innovation, In many other areas we agree.

 

[Ries]

I have spent my entire life making things. I know a lot about it. Here, in Argentina, one of the reasons I chose to move here was the existence of a strong manufacturing segment, which either never existed in most of South America, or, like in the USA, has been stripped away by global capital.
Service Industry is great- And Argentina has the potential for income from its film, theater, music, dance, publishing, and internet economic segments- which, just like manufacturing, are discouraged, rather than encouraged, by the government. There are a lot of market segments here that produce things that are no longer made in the US. Most tourists may not see it, but its huge, and unique.

And your point that manufacturing has declined, is indeed, exactly what I am talking about- it has, due to government policies that actually discourage it.

Financial and banking sectors are already disproportionately large, globally- there will be shrinkage in these sectors internationally, not growth, and they do not represent an opportunity for Argentina.

"institutional problems" are, again, global. and also a result of untrammeled global capital shifting production, and employment, at will.

The solutions to Argentinas problems must be an increase in GDP, jobs, and, yes, exports, both service and manufacturing. We already have an advantage in a very educated population, and a base of small manufacturers and culture producers. Those are assets to be managed, not ignored.
There are, for example, over 600 independent theater companies in Buenos Aires, versus about 150 in NYC. This degree of self motivated entrepreneurship occurs in many market segments, from appliance manufacturing to sandals. It is unique in South American, and is a key part of argentine culture and the economy.

Certainly there are no magic bullets that will save everything- the global economic situation is still a huge factor, one that is uncontrollable by any country.

 

[Ries]

interesting article in the NYT about the on the ground effects of austerity in the UK- and the potential political fallout from it in the future.
https://www.nytimes.com/2019/02/24/...tion=click&module=Top Stories&pgtype=Homepage