Inflation expected to top 30% this year


Jan 1, 2010
Sobering article in yesterday's BA Herald


Next year inflation could go through the ceiling

The monster is back

Almost ninety years have gone by since an inflationary explosion devastated Germany’s middle class, but folk memories of the days when it took a wheelbarrow full of banknotes to buy a bus ticket still scare the living daylights out of the grandchildren and great-grandchildren of the people who actually experienced it. Whenever inflation threatens to raise its head, Germans do whatever it takes to make it go away, a habit that has not made them very popular among their fellow Europeans. But Argentines are made of sterner stuff. Though they never suffered anything quite as dramatic as the catastrophe that put paid to the Weimar Republic and, according to some historians, opened the doors of power to the Nazis, their encounter with the beast lasted for a great deal longer. However, instead of deciding it would be foolish to let it go back on the rampage, many came to the conclusion that they should simply learn to put up with its destructive habits.

In view of the damage inflation has done to Argentina, the ruling elite’s refusal to take it seriously is unfortunate. It is true that confronting it is difficult; for well nigh four decades, prices kept rising at a rate that others would have found intolerable, pushing aside everything a series of governments, among them several ruthless military ones, tried to put it their path. However, during that period, Argentina slipped lower and lower down the economic league tables. Half-way through the twentieth century, its per capita income was far higher than those of Spain and Italy. By the time the third millennium started, it was a mere fraction.

No doubt the inflationary mentality, the notion that it is better to let things slide than to face up to them while there is time, had much to do with an on-going debacle that many outside observers still find inexplicable. It certainly contributed to the attrition of the once dominant middle class and the increase of poverty. Many who are now trapped in insalubrious neighbourhoods remember the 1970s with nostalgia not because they feel attracted by the political lunacy that characterized that wretched decade but because before June 1975, when president Isabel Perón’s government was forced by circumstances to devalue the peso and abolish many price controls, they or their parents could afford to eat properly, buy a car and a house and do lots of other desirable things.

It was not until Domingo Cavallo decided, in early 1991, that the time had come to in effect replace the peso — or austral, as the Radicals called their version of the national currency — with the US dollar, that Argentina could enjoy a few years of price stability. Thanks to what happened later, it is now widely assumed that the nineties was a terrible decade, but Cavallo’s currency board would still be working had people, especially politicians, businessmen and trade union bosses, allowed it to; much like the Greeks and Spaniards once they switched to the euro, too many made the most of the country’s improved credit-rating to pile up debts they would later find impossible to repay. It should not have been that hard for Argentines to be as fiscally disciplined as their contemporaries in the US, but too many politicians and businessmen found the very idea impossibly outlandish.

This being so, it is not that surprising that, for the umpteenth time, Argentina boasts one of the world’s highest inflation rates. This year it could top 30 or even 40 percent. Unless something pretty drastic is done, next year it could go through the ceiling. Neither is it surprising that the government responsible for unleashing the monster is refusing to do much about it apart from mistreating tradesmen it accuses of price-gouging. Instead of tackling the phenomenon head-on, President Cristina Kirchner prefers to let the local inflation czar, Guillermo Moreno, continue to have a great time playing Whack-A-Mole with grocers, supermarket managers, petrol-station owners and farmers, in the mistaken belief that if he manages to hide the symptoms the disease will simply vanish. Equally useless has been Moreno’s attempt to dampen expectations by fiddling the numbers provided by the country’s once respected statistics bureau. As far as most people are concerned, Indec’s output is irrelevant.

Unluckily for many Argentines, there is much more to inflation than commercial greed. Preventing it from gathering pace, let alone stopping it in its tracks, requires stern measure. That is why Argentina is so vulnerable. Hereabouts, “adjustment,” that is to say, reducing public spending so it bears some relation to the available resources, is a dirty word. Trade unionists also insist that there is no such thing as wage-push inflation.

Over the years, Argentine thinkers have produced hundreds of books, papers and academic studies they imagine show that, despite what “orthodox” economists may have to say, defanging inflation can be painless. This, apparently, is the view of the new Central Bank president, Mercedes Marcó del Pont: as inflation is the result of too much money chasing too few goods, the best way to deal with it is not to reduce the supply of the former but to increase greatly that of the latter. It is a most beguiling theory, but experience suggests that trying to put it into practice will only make matters far worse.
I´d say inflation is about 30% NOW. The dollar is not rising at the rate of inflation, so expats living on dollars should be feeling it. I was here during the Menem period. There was a sense of optimism in the country. Nowadays few have anything positive to say about Menem though he was successful in taming inflation and in creating efficient services - telephones, water gas, electricity. All were highly inefficient before he privatized them, so bad that few expats would put up with the conditions that existed (waits of YEARS for a telephone line installation). Menem´s critics accuse him of high corruption and argue that the convertibility system was a ¨fiction¨. How it was a fiction is beyond me as by law the Central Bank had to have one US dollar for every peso printed. The problems came in Menem´s second term when the government overspent, mainly trying to win favor from politicians so that Menem could get the constitution changed to allow him to run for office a third time. As the economy declined the government looked for ways to get around the convertibility law. First provinces began printing Monopoly Money - pieces of paper with names like ¨Patacones¨ that were supposed to be negotiable instruments. They actually worked for awhile and allowed provinces to print up money and get around the convertibility law. That just accelerated overspending and led to increasing instability. From thereon everything fell apart. It´s been one mess after another ever since. A characteristic of the people here seems to be the inability to get at the root of a problem. They´d rather patch things up and get it going again until the next breakdown. It´s a way of operating that functions at all levels of the society. Little to no planning, last minute decisions, improvising, lack of interest in how things might be done differently, obstinacy. I am not bashing. I am observing from experience of many years.
Many Args. think Menem's first term was good. It was after his son was killed that he went to pieces. Popular belief is that it was a murder ordered by the drug mafia who financed his re-election campaign, as a warning for Menem to toe the line.

Anyone knows more about this?
So what about investing in Argentina? How do people feel about that?
SaraSara said:
Many Args. think Menem's first term was good. It was after his son was killed that he went to pieces. Popular belief is that it was a murder ordered by the drug mafia who financed his re-election campaign, as a warning for Menem to toe the line.

Anyone knows more about this?

The story I've heard again and again is that he was financed by the 'Turcos', or people from the Middle East during his first run at the presidency. He basically told them to get f'ked after he got elected, so they got back at him. According to this story, he was hit three times in accordance with their tradition, once in the bombing of the Israeli embassy, once in the bombing of the AMIA, and the last one being the 'accidental' death of his son in a dubious helicopter accident. But, like any other popular story, take it all with a grain of salt.

Menem was as corrupt as they get, but at least he wasn't corrupt, inexperienced AND totally inept like the current idiot is.
tez said:
So what about investing in Argentina? How do people feel about that?

Many (most?) expats think it's lunacy to invest in Argentina because of the statements you've seen in this thread, which are not fiction.

Has anyone seen the posters on walls, telephone booths, etc, that say something like "don't pay the invalid exterior debt" (working from memory - invalid isn't quite right but I can't remember the word on the posters to translate)? Seems to me that like the article says at least some in Argentina think that their weird view on how economy works is not the problem, but those evil capitalists who are actually making them pay back money that they borrowed.

Not a good environment for investment.
I've had discussions with friends here who blame 90% of the country's problems on other countries daring to require loans to be repaid. How dare they!??

On the day Portugal's credit rating went from AA to AA- and caused a flutter in stock and currency markets, does anyone know what Argentina's is? I rather suspect it would resemble a "larger woman's" bra size.
A lot of that blaming comes from the way Argentines are taught, I believe.

As I've mentioned previously, I have a 14 year old sister-in-law going to school here. She goes to a private school (not an exclusive one, it's only about 250 pesos a month). Required reading in history classes is "Las Venas Abiertas de Latina America." I'm sure everyone remembers the book Chavez gave to Obama early in Obama's presidency when the two met.

The thing about a book like that is that it contains good elements of truth - but only half truths. It doesn't tell the other half of the story, like it's the corruption and greed in their own countries that allowed bad deals to be made, it's the ongoing corruption and greed that ensures the populace will remain ignorant of any other way to do things because it benefits those in power.

The history professor tells her class all the time, with venom (my sister-in-law, being from Paraguay, actually feels quite uncomfortable with the amount of hate the teacher displays), that the United States is evil, that it is absolutely bent on keeping Argentina poor. She has no real reasons for that statement because it doesn't do the US any good to have a poor neighbor where they are not even really taking advantage of that poverty, but since when does logic play a part in this?

My sister-in-law's English professor is much more honest about these things. A couple of days ago she came home from school and told me the English professor said "I'm so tired of hearing people in this country blame others for where we are. Until we take responsibility for our own actions we are going to continue being poor and ignorant and ruled by corruption and greed."