Sad But True.

[Stevied]

Stevied...
I have relatives here and have been visiting for nearly 35 years. I moved here permanently in the fall of 2014. The peso to dollar was 16 then and is 16 now nearly two-and-a-half years later. Prices in pesos have more than doubled since then so it really makes no difference if you have access to dollars. In addition, have the wages of the people here nearly doubled in that time? No they have not. Do Argentine's make half or less for the same types of jobs in the US? Yes they do. So it is not cheaper to live here especially for native argentines. Having been in the accounting field in the US, I am familiar with what salaries are paid in the area and have asked several here what those jobs pay in Argentina. On average, an entry-level degreed staff accountant starts at about US$40,000 per year. The same position here would be lucky to get close to US$18,000 equivalent per year. $55 pesos for a coffee and 2 medialunas is very costly here. I marvel everyday at how the people are surviving and how they can afford to go to any restaurant or a movie or just buy groceries.

I understand - my wife is Argentinian and all of her family livess in Argentina. I don't disagree that it is more expensive than before. My point is that Argentinians were living a subsidized lifestyle for many years - and its not sustainable. The rapid increase reflects the market trying to adjust to the realities of an increasingly unsubsidized system. The government has overspent for many years, and eventually someone has to pay for that. One way to pay for it is to grow the GDP - but Argentina has been a terrible place for foreign investment in the past - while Macri wants to change that, it will take some time before investors feel comfortable that the open investment climate is here to stay. I agree that it's tough for the average Argentine - some of our family are struggling - but they also understand that this situation is a result of past policies.

 

[sergio]

How is Macri improving anything? I supported him but now I think he is a failure. Where's the investment? What signs are there that the sacrifice you speak of shows any sign of being justified? All I see is super high inflation, more taxes and more efficient tax collection. As for supermarket prices, almost everything is produced nationally but prices are crazy. This has to be pure greed on the part of the supermarket owners. There is always hope but real change in Argentina will take more time than I have left.

 

[UK Man]

How is Macri improving anything? I supported him but now I think he is a failure. Where's the investment? What signs are there that the sacrifice you speak of shows any sign of being justified? All I see is super high inflation, more taxes and more efficient tax collection. As for supermarket prices, almost everything is produced nationally but prices are crazy. This has to be pure greed on the part of the supermarket owners. There is always hope but real change in Argentina will take more time than I have left.

You said it all in your last sentence it's not going to happen overnight. Even when Thatcher was Prime Minister it took her years to grab power back from the unions. Fortunately she was given the time to do it as the public recognised the unions had been abusing the power they had. Similar is needed here but Macri has it ten times harder than what Thatcher had. His biggest challenge lies in getting voted in again which will allow him more time to make changes. Getting inflation down also takes time as uncertainty just fuels it. Changing how the people here think will take years as well.

 

[Gringoboy]

The big difference is that Thatcher declared open warfare on the unions, particularly the Nation Union of Mineworkers, resulting in the decimation of the mining industry, causing havoc and heartache for millions of people in the north of England. Not a good comparison at all, because the problems Macri faces are deep seated economic problems not caused by the unions, as such.

 

[Stevied]

Well folks, an apology to all who have talked abouy how crazy expensive BA has become. I'm in-country for a few weeks, with my last visit over a year ago. I am shocked by the prices and frankly don't understand how the average argentinean in BA does it. What I also find strange is the seeming randomness of high prices. I spent a bit of time yesterday comparing prices at Coto with prices I pay in NYC. Some things were about half the price I pay, but a greater percentage of products cost about the same as in NYC, and some things were more expensive! Meat is still much much cheaper here than in the US; but milk was about the same. Eggs are half the price as in the US, but soft drinks about the same. Cabs are cheaper here, but restaurant prices were really high. We went to Kansas for dinner the other night, and it was about what I would spend for a BBQ restaurant in NYC. But a local italian restaurant near my sister in law's house in Coughlan was about half what we would spend in the US. There just appears to be a randomness to the high prices!

 

[Girino]

Well folks, an apology to all who have talked abouy how crazy expensive BA has become. I'm in-country for a few weeks, with my last visit over a year ago. I am shocked by the prices and frankly don't understand how the average argentinean in BA does it. What I also find strange is the seeming randomness of high prices. I spent a bit of time yesterday comparing prices at Coto with prices I pay in NYC. Some things were about half the price I pay, but a greater percentage of products cost about the same as in NYC, and some things were more expensive! Meat is still much much cheaper here than in the US; but milk was about the same. Eggs are half the price as in the US, but soft drinks about the same. Cabs are cheaper here, but restaurant prices were really high. We went to Kansas for dinner the other night, and it was about what I would spend for a BBQ restaurant in NYC. But a local italian restaurant near my sister in law's house in Coughlan was about half what we would spend in the US. There just appears to be a randomness to the high prices!

Yes, dear Stevied. This inflation is an Argentinian state of mind or distrust. There is no real reason for inflation but FEAR. So there is no rationale behind the rate at which prices inflate, it is just a feeling. I have been comparing some items, as well, and there are differences of up to 30% between stores on the same block. Simply put, someone woke up very scared and put a price, someone else didn't yet woke up that scared and put a lower price.

I think there is nothing a modern govern could do to stop it, but let nature do its course and let Argentinians self-choke themselves with their madness.

PS: if you are a lazy Argentinian you suffer this much more if you are a good work bee that can cook its meal and do his house chores.

 

[HMSBeagle]

I hold an advanced degree in finance as well as specialized knowledge about currencies and south America. Now, I could publish papers using fancy economic models and even calculus to prove that this or that past or present monetary policy or fiscal policy yada yada yada is responsible for the mess. Fugadaboutit.

The key driver of inflation of consumer basics here is the Argentine people. Government policies are an obvious aggravating factor.

The Argentines have a beggar thy neighbour culture that will never change no matter who the president is.

These are the same people who set the peso 1 to 1 to the US dollar ( a huge deception) for as long as they could get away with it because deep down, the argie thinks he is superior and there fore anything he possesses is worth more and more and more for the simple fact that he owns it. This leads to endless inflation.

The inflation is compounded by the inherent laziness. Yesterday was yet another "holiday" i.e. an excuse not to work. Instead of adding value to goods or services, i.e. offering the consumer a better deal pricewise to sell more inventory, they do the opposite by raising the price a little bit every month with no corresponding increase of value.

The inflation is baked into the cake in the rental leases and employment agreements.

Inflation is sticky, i.e. prices go up but tend not to come down even when the initial price rise is no longer needed to cover costs.

Macri has failed to deliver. The first thing he did was take out new loans to pay off the hedge fund vultures and that was supposed to open the doors to New York finance again, making the cost of money cheaper and bringing untold benefits. Didnt happen.



At this point the peso is extremely overvalued at 16. It will collapse. It needs to collapse to 30 or 40 to get back into equilibrium. It makes no sense for dollars to chase pesos that are devaluing faster than the interest rate of a plazo fijo. And, that is assuming the bank will give you your money back when you ask for it, which is doubtful. This is when they start questioning your source of funds.

Real estate here is overvalued by up to 1000% A huge bubble that needs to pop.

 

[MikeB12]

What is the process of a currency and real estate market collapsing? Can this current state hold for years before a collapse?

 

[HMSBeagle]

What is the process of a currency and real estate market collapsing? Can this current state hold for years before a collapse?

Its too long of an explanation for a blog like this, but the peso will probably collapse when the government sees a benefit i.e. lots of outstanding peso denominated debt it doesnt want to pay back, so it stops supporting the peso and boom it devalues, thus saving millions of dollars paying back its debt. There are other scenarios but its too much to go into here. As for the bloated real estate values, a world wide problem, there is no financing here so owners dont need to sell, dig in and refuse to sell, the first sign is a collapse in the number of sales, before eventually a seller needs cash and sells at a lower price. Real estate becomes illiquid, i.e. cant be converted to cash until eventually disgusted sellers throw in the towel and sell for what they feel is far less than value.

By the way, devaluing the peso makes paying dollar debt all but impossible, so it reneges i.e. defaults on its dollar bonds and the government collapses. This is what Argentina does every time and it wont be different next time.

 

[MikeB12]

Thanks HMSBeagle. One other question if you don't mind: how do you come up with an estimate of 30 to 40 - 1 for the currency to be at equilibrium? I see people saying all the time this currency is over/undervalued but what metrics are they using to arrive to that conclusion? Also how do we know that the real estate market is overvalued? Just trying to get a handle on this myself, if it's too complicated of an explanation, is there any articles you can point me to?