Is President Kirchner Improving The Lives Of Argentinos?

[Voiceofreason]

The government is in a very fragile situation.

They are trying to stay in power by pumping money into the system through all their different hand out schemes and subsidies, yet they are running out of money to do it.

That is why in the past two years they have been printing money at a rate of expansion of 40% per year of the monetary base. Since they are the first to spend it they avoid inflation the first time and in essence tax the rest of us by driving up general prices. This is obviously unsustainable as rational expectations will cause people to mark up prices before they get to spend the newly minted pesos next time around.

Add to this that the government pays less on sovereign debt due to a low "official" inflation figures and an artificially low "official" exchange rate, they are in a "catch twenty two" as the saying goes.

Rising inflation drives up borrowing costs and with a fixed exchange rate means they also have inflation in dollar terms, causing exports to fall. If they don't control inflation the cost of running the propaganda machine will overwhelm them completely.

Then again. If they devalue the peso, they will have to pay more on their dollar denominated debt putting huge pressure on central bank reserves and thus increasing the risk of another sovereign debt default.

It's not a matter of if they will lose the ball; it’s a matter of where and when.

 

[sesamosinsal]

I think I said it in another thread, but the printing of money here isn't the cause of inflation. It's a symptom of it. There are many factors that cause inflation here. More often than not, inflation is based upon perception. The media fuels a lot of that. Furthermore, there are businesses and unions that also want to make more money. In summary, unions want to pay their workers more money; businesses want to churn a profit; and the media reports it all. It's a vicious circle.

At the end of the day, saying that printing money causes inflation is a pretty simplistic view of the reality here in Argentina.

The government's only defense when there are calls to increase wages is to print money, especially when there is no increase in the workforce's productivity. IF the government didn't give into the unions, this country would really explode. Imagine what would happen if she told all of the CGT union bosses that there wouldn't be salary increases this year... Yikes.

The cost of the social welfare programs probably have very little to do with the vast amount of money being printed.

The government will also never run out of pesos. They can keep printing and printing as much as they want because the Central Bank is no longer "independent." This infuriates quite a few people up north because central banks are only supposed to bailout the banks, not people.

Lastly, the devaluation of the peso won't influence the value of dollar-denominated debt. The national government pays dollar debt with dollars, not pesos.

 

[Conorworld]

You are right in some ways Bradlyhale. It is not printing money per se that causes inflation because you can put that in a bank account or under your bed. It is what you *do* with the money that is a main factor for inflation. When you give people money, in the case of Cristina in the way of subsidies and wage increases, they will buy more. Demand increases but a lot of the time supply does not keep up and you have basic inflation. Now add in import restrictions and demand is exacerbated. It's simple Economics 101.

The government has many options it can use to alleviate a lot of inflation but they are not politically palatable. They could increase interest rates but that will increase interest-based payments an debt and possibly increase the price of the peso. They could tax things to stem demand but people don't like taxes. They could allow more imports but the flimsy domestic manufacturing sector would be eroded.

So instead the government has chosen the most reckless path. The difference between say, increasing taxes/interest rates to stem inflation and printing money to pay for higher wage demands is that people will tolerate inflation if wages keep up. Yes people will balk at price increases but will at the same time go "Oh well that lomo is 25% more expensive than last year but I am 25% richer". Tax increases is all austerity and evil government taking money from me where wage increases are lovely government giving me money.

But as I said, no one can win the race against inflation if you fight it with wage increases. It always fails. Always. But this government would rather try and dodge the bullet.They will fail.

Lastly Bradlyhale in relation to your final paragraph. When you devalue the peso in relation to the dollar, the debt you owe in dollars gets bigger. The corralito proved the danger of that. The government may have dollars but their foreign reserves are being raided to pay for their voodoo economic policies.

 

[sesamosinsal]

Yes, I forgot demand-pull. That certainly factors in somewhat. But I think speculation is a larger factor. How many of us, for example, will be paying 25% more this coming December in rent? People think it will be 25 percent because the media says it will be. However, it could be more.. or maybe less (in my dreams).

Perhaps we're thinking in different ways here, but when the peso is devalued, the debt in dollars does not become larger--in pesos, yes, but not dollars. A country can acquire more dollar debt to defend its currency, but a devaluation in itself doesn't increase foreign debt.

 

[Voiceofreason]

If Argentina were to devalue, the dollar denominated debt would be a greater burden because of the increased cost to acquire the dollars to pay for it. One of the costs being inflation. Of course in an ideal world you can borrow more to pay off current debt, but Argentina is placing new debt at higher interest rates, hereby underlining the problem. The riskier Argentina is the more interest it pays and the bigger pressure on the economy as a whole. Eventually its availability of foreign capital dwindles and the ability to roll over debt is no more. This is why CFK supports Chavez; they buy up a lot of Argentine debt.

The real kicker is that we are indebted not to build productive infrastructure and invest in projects that will provide future income, if not to pay for current expenditures like government employee salaries. This means there is no hope to pay of future debt as we are subject to the whims of international commodity prices and the benevolence of other countries to buy our debt, sell us electricity, gas etc. Not a long term plan, I’m sure you will agree.

Things are so desperate, the nationalized pension fund (ANSES) is funneling money to the government and all retirees are getting back are IOUs. I have friends and family in every bureau and I can tell you we are looking into the abyss.

 

[sesamosinsal]

If Argentina were to devalue, the dollar denominated debt would be a greater burden because of the increased cost to acquire the dollars to pay for it. One of the costs being inflation. Of course in an ideal world you can borrow more to pay off current debt, but Argentina is placing new debt at higher interest rates, hereby underlining the problem.

OK, this makes sense. Thanks for clarifying.

 

[sesamosinsal]

If I'm not mistaken, the Central Bank provides significantly more cash to the government than the ANSES.

On page 3 of the weekly BCRA report (or CTRL+F, then type "adelantos transitorios al gobierno nacional"), you'll see that the BCRA has lent (read: created) 126 billion ARS to the national government, almost double the amount from 12 months ago.

I believe these began last year after they modified the "carta orgánica."

If I'm correct that these began in May or so of last year, the BCRA has lent a total of more than half of all pesos in circulation to the national government in just under a year.

 

[sesamosinsal]

Eh, it's late, but obviously the adelantos to the NG began prior to May last year. My point was that they really started to increase back in May 2012. I seem to recall seeing that number at 90 billion ARS at that point.

 

[Voiceofreason]

Good find.

You are correct the ANSES defunding began before with the help of the current Vice President who presided the entity. Their new cash cow is as you the BCRA, and the numbers are huge. It's evidence of their diminishing sources of cash to keep the party going.

Interestingly that same report shows you the 40% expansion of the monetary base or "base monetaria" on the top right of that page.

The graph on the bottom right is very telling also. As the reserves dropped from around U$D46.7bn to 42.3bn the exchange rate went from 4.3 to 5 in the same one year period (Feb '12 to Feb '13).

Link to the report: http://www.bcra.gov.ar/index.asp

It's all right there staring us in the face. I have family friends that were fired after the government takeover of the BCRA. Just as well, i wouldn't want to be a part of this anyway.

 

[Joe]

Things are so desperate, the nationalized pension fund (ANSES) is funneling money to the government and all retirees are getting back are IOUs. I have friends and family in every bureau and I can tell you we are looking into the abyss.

Spain has also been forced to have the pension funds buy government debt. Why? Simple, no one else will touch it.

Spain and Argentina appear to be on the same timeline for disaster. Spain is hoping Germany will play the White Knight and come rescue Spain with it's treasure chest. Argentina's White Knight is Chavez, but he is a pretty threadbare Knight.

Socialism is pretty cool until you run out of other people's money.

Xoom! One option, tax all international money transfers at 25%, to keep the gravy train running. What do you think?