When is the Next Crisis?

[Joe]

I've often heard the locals say that "we have a economic crisis every 10 years or so".

Could the rise of inflation be the start of the next crisis?

From what I have read, the last crisis was primarily caused by excessive overseas borrowing. Because few want to lend to Argentina anymore, there is not a excessive debt problem like in the past crisis.

So maybe Argentina can avoid a big crisis like before???

 

[Canick]

crisis will come. no one knows exactly when. most think that nothing drastic will happen before elections in October. there are many current threads (hyperinflation etc) already dealing with the crisis theme. maybe give them a re-read, but if history shows anything, within the next few years, a strong "change" or correction is most likely to come. My personal opinion is that first we see what happens in the US and Euroland and CHina. and no, I don't think Argentina will avoid it and yes, argentina has massive debts.
i'll try to be more eloquent later, but right now I'm suffering through a bad cold and its warm and fuzzy medicines....

 

[gouchobob]

I've often heard the locals say that "we have a economic crisis every 10 years or so".

Could the rise of inflation be the start of the next crisis?

From what I have read, the last crisis was primarily caused by excessive overseas borrowing. Because few want to lend to Argentina anymore, there is not a excessive debt problem like in the past crisis.

So maybe Argentina can avoid a big crisis like before???

I think the situation in Argentina today is basically run-away government spending increases 30-40% year over year and money supply growing at 25+ percent a year. This has led to the inflation you see now. What's keeping things afloat at the moment is very high commodity prices and the revenues being generated for the government. I believe the entire economic model is unsustainable. The question is when will it implode. My view is that you have to look at China which is driving commodity demand and prices. If China's growth slows significantly then demand and prices for commodities will fall and I believe this will occur as well probably in the next 18 months. Once the support of high commodity prices is removed the government will have to severely cut spending or go broke very quickly. Either scenario will result in major economic fallout, falling incomes and higher unemployment. Will it be as bad as last time? Hard to tell, but recovery may take a lot longer than last time as there probably won't have rising commodity prices and demand that helped pull the country back from the last crash.

 

[EdRooney]

Bob's analysis as usual is thoughtful and insightful regarding the supply side of the economy, but there are a couple of other factors that I think should be noted.

1. What will happen with domestic consumption if the economy keeps growing? What has differentiated this current economic cycle is that at other times when Argentina's commodity du jour prices peaked (e.g., in '96 under Menem, twice during the last dictatorship, etc.) the profits for the most part left the country by staying in the hands of the wealthiest 8% of the population, never "trickling down". This has not been the case over the last 8 years, this time with lower sections of the population having a greater share in the bonanza, mostly in the form of jobs. For example Menem kept inflation down, but unemployment hovered around 20%, creating de facto inflation (if I have no income, everything’s price goes up for me). This round of inflation has not seen a decrease in the purchasing power of the median Argentine household.
2. Consumer credit. A large part of the current consumption boom is due to the fact that everyone has a job, but from my jaundiced view, too much of this consumption is driven by consumer credit, which is inevitably a gateway to finance speculation unless there are very strict market regulations (see Iceland, Ireland and the US).
3. Energy Growth. The bugbear of any rapidly growing economy (such as the Asian Titans in the Aughts) has been its ability to provide energy to growing industry. Unfortunately, the privatisations of the 90's devastated alot of the Argentine infrastructure and crippled the public’s ability to maximize its resources for domestic use.
So in all, there are issues that would need to be monitored, but an economy with an 8% annual growth rate and 15% inflation is not alarming for currency stability, especially in view of the low unemployment figures. And the proof of this is the way Argentina along with Brazil, Bolivia and other countries weathered the latest crisis up North. In fact, I personally would be much concerned about an economy like, oh I dunno… say the US with a frightening wealth disparity, a gargantuan public debt and high long-term unemployment.

 

[Johnny]

Bob's analysis as usual is thoughtful and insightful regarding the supply side of the economy, but there are a couple of other factors that I think should be noted.

1. What will happen with domestic consumption if the economy keeps growing? What has differentiated this current economic cycle is that at other times when Argentina's commodity du jour prices peaked (e.g., in '96 under Menem, twice during the last dictatorship, etc.) the profits for the most part left the country by staying in the hands of the wealthiest 8% of the population, never "trickling down". This has not been the case over the last 8 years, this time with lower sections of the population having a greater share in the bonanza, mostly in the form of jobs. For example Menem kept inflation down, but unemployment hovered around 20%, creating de facto inflation (if I have no income, everything’s price goes up for me). This round of inflation has not seen a decrease in the purchasing power of the median Argentine household.
2. Consumer credit. A large part of the current consumption boom is due to the fact that everyone has a job, but from my jaundiced view, too much of this consumption is driven by consumer credit, which is inevitably a gateway to finance speculation unless there are very strict market regulations (see Iceland, Ireland and the US).
3. Energy Growth. The bugbear of any rapidly growing economy (such as the Asian Titans in the Aughts) has been its ability to provide energy to growing industry. Unfortunately, the privatisations of the 90's devastated alot of the Argentine infrastructure and crippled the public’s ability to maximize its resources for domestic use.
So in all, there are issues that would need to be monitored, but an economy with an 8% annual growth rate and 15% inflation is not alarming for currency stability, especially in view of the low unemployment figures. And the proof of this is the way Argentina along with Brazil, Bolivia and other countries weathered the latest crisis up North. In fact, I personally would be much concerned about an economy like, oh I dunno… say the US with a frightening wealth disparity, a gargantuan public debt and high long-term unemployment.

Check the S&P downgrade as of today. A warning shot across the bow of good ship Uncle Sam.

 

[EdRooney]

Well as gouchobob said:

"I believe the entire economic model is unsustainable. The question is when will it implode."

As troubling as short term warning signs like today's S&P downgrade are, the big warning flags are the long term structural aspects of the economy: 1% of the population has a third of the wealth, health care costs are out of control, 51% of fiscal income goes towards military spending, manufacturing has been eliminated and/or outsourced, 9% structural unemployment with decimated social safety nets. The model is obviously unsustainable.

 

[gouchobob]

Bob's analysis as usual is thoughtful and insightful regarding the supply side of the economy, but there are a couple of other factors that I think should be noted.

1. What will happen with domestic consumption if the economy keeps growing? What has differentiated this current economic cycle is that at other times when Argentina's commodity du jour prices peaked (e.g., in '96 under Menem, twice during the last dictatorship, etc.) the profits for the most part left the country by staying in the hands of the wealthiest 8% of the population, never "trickling down". This has not been the case over the last 8 years, this time with lower sections of the population having a greater share in the bonanza, mostly in the form of jobs. For example Menem kept inflation down, but unemployment hovered around 20%, creating de facto inflation (if I have no income, everything’s price goes up for me). This round of inflation has not seen a decrease in the purchasing power of the median Argentine household.
2. Consumer credit. A large part of the current consumption boom is due to the fact that everyone has a job, but from my jaundiced view, too much of this consumption is driven by consumer credit, which is inevitably a gateway to finance speculation unless there are very strict market regulations (see Iceland, Ireland and the US).
3. Energy Growth. The bugbear of any rapidly growing economy (such as the Asian Titans in the Aughts) has been its ability to provide energy to growing industry. Unfortunately, the privatisations of the 90's devastated alot of the Argentine infrastructure and crippled the public’s ability to maximize its resources for domestic use.
So in all, there are issues that would need to be monitored, but an economy with an 8% annual growth rate and 15% inflation is not alarming for currency stability, especially in view of the low unemployment figures. And the proof of this is the way Argentina along with Brazil, Bolivia and other countries weathered the latest crisis up North. In fact, I personally would be much concerned about an economy like, oh I dunno… say the US with a frightening wealth disparity, a gargantuan public debt and high long-term unemployment.

Ed I'm not sure I understand all your points but it looks like you have been drinking a little to much of the Kirchner cool-aide. Growth is somewhere around 8% but inflation is no where near 15% more like 30%, if that's not alarming I don't know what is. The reason the countries in South America did relatively well during the financial crisis is that they are big commodity suppliers to China who had a massive stimulus program back then, my point is that when this commodity binge ends then a lot of the prosperity you refer too will quickly become a memory. I think official unemployment figures are about 7% but in reality closer to 15%. About 40% of the population gets buy on $8 dollars a day or less. What do you think the government inflationary policies are doing to the poor? The number of poor people is almost certainly growing rapidly with no end in sight.

Your point on the privatizations of 90's devastated the infrastructure, huh? What do you think has been going on for the last 8 years in Argentina. Nearly zero investment in everything including energy, chronic shortages of natural gas and electricity are the result.

 

[EdRooney]

OK Bob, thanks for taking the time to reply. Before we start throwing mud about Kool Aid consumption, I'm sure we can keep this on a rational adult level.
Your first point is that inflation is higher than what I cited: and its true that this is hard to get unbiased information about because it’s such a hot-button political issue here after the 70's and 80's hyperinflation, and because the INDEC 's only purpose is to make the numbers look low so as skirt paying the IMF. The INDEC placed it at under 10%; Clarín would have us believe its 30%, but both have political ends in these figures, and neither are reliable. My point, however is that this number is a chimera anyhow because it deals with prices but not purchasing power. To repeat what I said earlier: in the 90's there was negligible book inflation, but the purchasing power of the average Argentine declined dramatically, and this is REAL inflation. It’s impossible to have real inflation and a sustained , across the board consumption boom, which is what this country has seen over the last eight years. I'm not a kirchnirista (i do like kool-aid though, especially Passion Fruit flavour!), but these numbers are extremely encouraging even for those like myself who would never vote for CFK.
Your second point, that this is based on an Asian commodity binge is important: that’s why I addressed it in my first response. To repeat, obviously Argentina needs to quit being the kitchen cabinet to the world and move on to being its garage, but in the meanwhile, up until 2002 market binges have always been wasted due to an atrocious wealth disparity. For example, under convertibility there were government policies actually favouring capital flight flowing in from the grain booms of the 70’s and 90’s. Yet what has been done with these cash influxes in recent years? They’ve used them to undo the decimation of the country’s infrastructure sold off under the neoliberal governments of the 90’s: AFJP, Aerolineas, paying off the external debt, etc. all of which has lead to the greatest wave of job creation in the country’s history.
This leads me to your third point that 40% of the population gets by on less than $8 USD/day. This is exactly my point because let’s look a closer look at those numbers (PPP). In 2002 9.9% of the population was living on less than $1 per day. That number was down to 3.4 in 2006 and dipped below 2.0 in 2009. I don’t have your $8 figures on hand to make a parallel, but looking at the country’s GINI, PPP and employment figures, it is undeniable that poverty has decreased drastically under the last two governments when it had been increasing drastically when following Washington Consensus principles.
As to your last point, you give evidence of shortages as proof of not investing in infrastructure. In my last response I discussed the relation of this to rapid growth, and would refer you to reread it, preferably with a tall glass of…TANG!
Best,

Ed

 

[Johnno]

I just want you all to know that *I* am doing my bit for the local Argentine economy - I buy local beer (Schneider) - and a lot of it - I buy a lot of local cider too - and local cigarettes - and now I am determined to buy (and consume) even more - thus doing my bit for the economy - its a dirty job but somebody has to do it

 

[Joe]

If we say there is 20% inflation, is that sustainable for a long period of time?

The last crisis occurred in isolation, my feeling which similar to Bobs, is that the next crisis may be a result of a economic calamity elsewhere:

1) Commodity bust because the China property bubble burst
2) A Dollar panic (today's S&P warning - a first in history I believe for the USA)
3) A Euro panic (Greek default cascading to Spain, Italy, etc.)

What would be the effect on the Argentine economy if one of these occurred.

Stagflation?
Currency crisis?

How much of the personal, government and corporate wealth in Argentina is held in dollars? in Commodities?

What strategies are wealthy Argentines using to protect themselves against the next crisis?