jamila said:
It is not something that I am particularly interested in but I have been trying to follow along as my move to Buenos Aires is set for September.
So I have a few questions that I would like some help with. If someone could explain I would be very grateful. Remember, this is not my strong point so simple terms and examples would be appreciated.
1. Everyone agrees that Argentina is heading into a recession correct? Normally don't prices of items go DOWN in a recession? Why is it that Argentina prices are going up?
2. I realize that the worst part about a recession in unemployment.. which i think leads to increase in crime... but what else should one expect during a recession?
3. If the value of the peso continues to decrease. I realize that this is bad for Argentina as a whole but... is it negative for those who make their money in dollars/euros? It seems to me that this would be a positive for increasing tourism... Is that not true? why?
Thanks in advance, I am going on faith that there is no such thing as a dumb question!
1. Yes, in economics textbooks they teach you that in a recession that there is downward pressure on prices due to lack of demand for the corresponding supply. However, this is only true if there isn't much debt at the company level. If an industry in general has a lot of debt on their individual balance sheets, then when demand decreases, those companies have less revenue to cover their debt repayments. If they do not cover their debt repayments, then the companies will go bankrupt and the executives will lose their jobs, stock options, etc. So the executives of the companies will attempt to raise prices in order that overall revenue remains the same despite a decline in unit sales. As there is much of a collective herd mentality among executives in a particular industry, then it is pretty common that in the good economic times almost all of the companies will have taken on a lot of debt, and therefore in the bad economic times they all try the same trick of raising prices. Since they are almost all trying to do it, it works.
By the way, Argentina is not in a recession. So this doesn't even apply, nor would this debt scenario apply as most companies in Argentina have little debt. Prices are increasing in Argentina due to Cost of Living Increases in salaries which are a never ending spiral upward.
2. More often than not, recessions are a time of creativity in cultural things like music.
3. The Argentina government is attempting to remove foreign currencies from the economy, so for those that earn in USD or EUR, they might not be able to do so in the future. As for ARS/USD exchange rates and tourism implications, there are many other factors than the obvious ones taught in text books about this type of thing. Most importantly, Argentina has capital controls so there is not a free market in ARS/USD to determine price discovery for ARS/USD.
