Inflation In L.a.

[EdRooney]

If you peg the currency, inflation will be eliminated in a matter of weeks. How long would you need to keep it in place to prevent the currency from returning to its previous value?

 

[RodalfoWalsh]

Bingo.

I'm not sure how this jives with your proposal for a dollar peg. It was the dollar peg that eliminated inflation here and destroyed Argentine industry, pushing over half the country (53%) into poverty.

You don't think those 53% or more weren't heading for poverty with 2600% annual inflation. Once inflation reaches a critical mass it can't be stopped by any other means than a peg. Are we there yet? Maybe not, but if not, we're close.

 

[RodalfoWalsh]

If you peg the currency, inflation will be eliminated in a matter of weeks. How long would you need to keep it in place to prevent the currency from returning to its previous value?

My guess, two years although that would obviously have to be evaluated in the moment. You'd have to go through at least a year of contract negotiations. Obviously you would unpeg slowly. The key to success would be determining an accurate exchange rate for the initial devaluation.

 

[EdRooney]

Are you seriously comparing 20-40% inflation with 2500% inflation? That's just nuts. But don't change the subject: how long would your peg last, and how would you get out of it?

Edit: OK sorry I just saw your answer.

In the first three years of convertibilidad, as expected, a 3% trade surplus was turned into a 6% trade deficit. That's over 5% of your economy going up in smoke on the altar of fighting inflation. Congratulations you just put 300,000 Argentines out of work.

So with unemployment skyrocketing and social services getting further stressed, how do you plan to implement the rest of your programme?

 

[RodalfoWalsh]

Is there another answer? Growth.

If devaluation is aggressive (which comes before a peg in my plan) we shouldn't see a deficit. Argentina has a huge amount of under exploited human capital, and plenty of exportable resources. It's taken over valuing the peso by a factor of two to choke out growth in the last couple of years.

 

[camberiu]

If you peg the currency, inflation will be eliminated in a matter of weeks. How long would you need to keep it in place to prevent the currency from returning to its previous value?

If you cut government spending, privatize companies such as EMBRAER, Vale and the like, and implement fiscal responsibility laws, like Brazil did back in the 90s, (and Argentina did not) not long.
Brazil de-pegged the Real from Dollar in 1999.

 

[sesamosinsal]

Once inflation reaches a critical mass it can't be stopped by any other means than a peg. Are we there yet? Maybe not, but if not, we're close.

What do you mean "are we there yet?" The current government has already (loosely) pegged the USDARS at the rate they deem convenient in order to control inflation. If it sounds similar to what happened in the 1990s, it's because it is!

A peg of any kind only works if the country has enough dollar inflows/reserves (and maybe some swap lines with the Fed) to maintain it. Argentina isn't one of those countries. Ecuador might be one, but not all is hunky-dory with the dollar in Ecuador. Ecuador's real currency isn't the dollar, but the dollar's backing: oil. Ecuador imports way too many goods from abroad; heck, their grocery stores have more American goods than Ecuadorian goods, it seems. The trade balance, current account and government debt to GDP aren't exactly worth raving about.

The solution to killing inflation is decreasing the velocity of money. There are numerous ways to achieve that, but fundamentally the central bank has to raise interest rates. This is precisely what the BCRA has done in the last few months, and it is one of the reasons why the dólar blue is going down.

 

[RodalfoWalsh]

Decreasing the velocity of money addresses the fundamental cause of inflation.

Inertial inflation on the other hand is based on expectations, that is where we are today. You need to address both since raising central bank rates has little effect on consumer psychology. I'm also doubtful of the effects of the BCRA rate on the dollar blue, I think there are a lot of other factors which are contributing to decline in the price.

The peso has been pegged to the dollar since 2003 however it's hasn't proved effective for controlling inflation, and for the last couple years it hasn't done any favors for Argentine industry either. It has also been extraordinarily expensive while principally benefiting special interests.

A dollar peg (re peg?) has to follow devaluation. I strongly disagree with Ed Rooney's opinion about the value of internal demand and import substitution for the overall economy. It did work to reduced unemployment but just like convertibilidad, we've held on to it for far too long and it's turned a pair of cement boots. We need to cut the dead weight and stop stifling viable growth opportunities.

 

[sesamosinsal]

Decreasing the velocity of money addresses the fundamental cause of inflation.

Inertial inflation on the other hand is based on expectations, that is where we are today. You need to address both since raising central bank rates has little effect on consumer psychology. I'm also doubtful of the effects of the BCRA rate on the dollar blue, I think there are a lot of other factors which are contributing to decline in the price.

The peso has been pegged to the dollar since 2003 however it's hasn't proved effective for controlling inflation, and for the last couple years it hasn't done any favors for Argentine industry either. It has also been extraordinarily expensive while principally benefiting special interests.

A dollar peg (re peg?) has to follow devaluation. I strongly disagree with Ed Rooney's opinion about the value of internal demand and import substitution for the overall economy. It did work to reduced unemployment but just like convertibilidad, we've held on to it for far too long and it's turned a pair of cement boots. We need to cut the dead weight and stop stifling viable growth opportunities.

Psychology might be relevant in trying to determine the sources of inflation. For example: Are people buying dollars because dollars are a good investment, or are they buying dollars because the front page of Clarín says they should?

However, fixing inflation or deflation is pretty straightforward, and psychology has little to do with it. You either decrease or increase the currency in public circulation -- something that requires cooperation between both monetary policymakers and fiscal policymakers. We see this cooperation (some may call it "interference") between the BCRA and the government. We do not see it in the U.S., which is presumably why you mention the importance of psychology here because the Fed has really tried to stoke inflation fears in speeches, reports, etc.

It's all an illusion. The problem here is that the Fed's easing program (QE) benefited US Treasuries (and the stock market and real estate by extension) -- not the pocketbooks of consumers -- and that government spending in the U.S., which is one sure fire way to increase inflation, has consistently decreased since the financial crisis. A central bank can't make you spend money that you don't have or aren't eligible to borrow.

The aftermath of expanding or contracting is the hard part. Either way, psychology (demand [inflation], or lack thereof [deflation]) cannot defy supply. If you have less money, you spend less. If you have more money, you can spend more.

The value of internal demand and import substitution is crucial for any economy to survive long-term. We are in the last days of the model by which countries like the U.S. or the U.K. take on billions in debt to sustain gaping trade and current account deficits. This was the problem in Argentina in 2001. It's the problem in Europe now. It's the problem that the U.S. will soon face -- and when it does, so will the rest of the world. We're very close.

 

[RodalfoWalsh]

Limiting demand side inflation by supply would be very traumatic.