Seeking Alpha
Research analyst, dividend investing, ETF investing, long/short equity
Profile| Send Message|
( followers)  

We want to comment on recent events in Argentina, which have not gotten much play in the news media given the flood of newsworthy events in other parts of the world over the past few weeks. Argentina represents an interesting real-time case study of a developing inflationary crack-up boom, or as Mises termed it in the German language, die Katastrophenhausse (literally, the "catastrophic bull market").

Officially, inflation, or rather the decline in money's purchasing power as measured by an official price index, runs at about 11% in Argentina, but most independent observers reckon it is closer to 25%. Everybody knows that Argentina's government is just making the numbers up, i.e. they are constructed in such a way as to downplay the situation and the government is quite testy about competing inflation estimates. We doubt that even the unofficial estimates truly capture the extent to which the value of Argentina's money is spiraling down the drain; one only has to consider the first paragraph from a recent Bloomberg article:

Zheng [a shopkeeper], 35, says he has to change prices in his stores daily as suppliers send him new lists, with increases on some products ranging from 5 percent a month to as much as 5 or 10 percent in a single week.

“If I didn’t change the prices, maybe I’d end up selling goods at a price below the new costs,” Zheng says. “In Argentina, you have to get used to this.”

A decade after it defaulted on $95 billion of bonds following a four-year recession, Argentina is again witnessing an upsurge in inflation, Bloomberg Markets magazine reports in its May issue. While official numbers put the rate at about 11 percent, independent economists estimate that the number may be about two and a half times as high.

That would place Argentina second only to Hugo Chavez’s Venezuela, where the International Monetary Fund estimated in October that prices rose 33.3 percent last year, the highest in the world.

When some prices rise by as much as 5 to 10 percent in a single week, the annual loss of purchasing power is probably a tad higher than the recent estimates purport. What's interesting though is that no one is as of yet really complaining, as the government's inflationary policy has stoked an enormous economic boom.

The government's tax revenues have been strong due to soaring commodity prices, especially food prices. Argentina is a major exporter of soybeans and wheat, the prices of which have risen markedly in recent years. You could say Argentina's government is a QE1 and QE2 profiteer, which allows it to spend with both hands. A presidential election is approaching in Argentina and president Christina Fernandez de Kirchner is simply continuing the populist policy of her late husband and predecessor Nestor Kirchner, as it has proved to be a great vote buying device in the past.

[Click all to enlarge]

Soybeans, monthly (CBOT, continuous contract).

Wheat, monthly (CBOT, continuous contract).

As Bloomberg further reports:

Accelerating spending by President Cristina Fernandez de Kirchner’s government is stoking prices, economists say. Outlays on everything from highway construction to pensions climbed 37 percent last year from 2009 – and increased 39 percent in January of this year alone. Fernandez’s largesse is made possible in large part by the global commodities boom.

Foodstuffs such as soybeans, wheat and flour accounted for about 70 percent of the country’s export revenue in 2010, according to Agritrend SA, a Buenos Aires-based research company.

Export tax revenue, led by a 35 percent levy on soybeans, rose 11.2 percent in February from a year earlier to 3 billion pesos ($740 million).

Argentina’s 40 million people are spending, too – as a way to protect themselves from rising prices. They’re buying everything from flat-screen televisions to cars and even property. Sales of such goods as home appliances, toys and clothing soared 39.5 percent in December from a year earlier, the biggest increase for that month since at least 1998. Auto sales gained 43.3 percent in unit terms, the most since 2004.

Demand for construction supplies such as cement, steel and paint was up 20 percent in December. Consumption helped push economic growth to 9.2 percent last year from 0.9 percent in 2009. Fueling that growth – and inflation – is government support for annual wage increases of 30 percent or more.

Prices – and wages – have been rising so fast that in November and December, the Central Bank of Argentina was unable to print enough money to meet the demand for cash from consumers and companies trying to cover year-end salaries and bonuses. As Argentines lined up at empty ATMs in the middle of a heat wave, the central bank took the unprecedented step of hiring Brazil’s mint to crank out 160 million 100-Argentine-peso notes, so that there would be enough cash for individuals eager to buy holiday gifts and start their summer vacations.

“If we have an inflation rate of 25 percent to 30 percent, that means an important monetary expansion,” says Roque Fernandez, a former president of the central bank and an economy minister in the 1990s. “What we didn’t know until then was that there were problems with issuing that amount of bills.”

As we have occasionally mentioned before, once a central bank is unable to print enough money to meet demands for cash, one can be fairly certain that the destruction of the underlying currency system is well advanced. This is in fact a typical feature of an incipient hyperinflation, as can be seen from numerous historical examples (most recently Gideon Gono, Zimbabwe's former central bank chief claimed he needed to print a few extra hexillions to "alleviate a cash shortage"). You may well ask: What do Argentina's central bank bureaucrats think about all this? Shouldn't they be concerned? Jean-Claude Trichet at the ECB after all lets his inner hawk hang out as soon as he spies two or three breaches of his inflation target of 2% p.a. in a row, however "transitory" they are deemed to be.

In Argentina, it was decided to only put the best and brightest in charge of monetary policy. Nothing less than a Yale education would do. Yale has a research center devoted entirely to econometrics research. In other words, the measuring of the unmeasurable. Perhaps it should be described as a department of economic history – since it cannot possibly be anything else. To the extent that data on prices and other historical facts can be collated and measured, they describe specific facts that pertained at a definite time under definite circumstances and have become data of economic history. Nothing can be inferred from them with regards to economic theory, in spite of the claims of the supporters of econometric methods.

As Ludwig von Mises noted in "Human Action" (ch. II., 8):

Economics is not, as ignorant positivists repeat again and again, backward because it is not "quantitative." It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a non-repeatable historical case.

And, in a footnote to ch. XII, 5.):

Economics is ... an exact science of real things. But as soon as price data are introduced into the chain of thought, exactitude is abandoned and economic history is substituted for economic theory.

However, it is quite clear that the collation of economic data forms the main basis for intervention in the economy by governments and monetary authorities. This brings forth such horrid policies as Ben Bernanke's money printing experiments, which are based on the idea that one can create genuine economic growth by inflating the money supply and thereby "raising inflation expectations." The goal is to get people that are income-strapped and drowning in debt to spend more money by making life more expensive for them. Absolutely brilliant.

In Argentina, they're doing exactly the same, only more so. As a result the country is a great deal further down the road toward destruction of its currency. Bloomberg further:

In most countries, scenarios like that would strike fear in the hearts of policy makers and consumers. Not in Argentina.

Inflation is a result of companies being unable to meet consumer demand and should be resolved by boosting loans for production, Mercedes Marco del Pont, the current central bank president, says. She plans to increase the money supply by 28 percent this year to accommodate economic growth, a move she says won’t affect inflation.

“The price problem doesn’t have monetary roots,” the Yale University-educated central banker, 51, says. “The conditions that could cause inflation to accelerate don’t exist in Argentina.”

In fact, Marco del Pont says, the global economic slump of the past few years has shown how central bank intervention can play a role in developing the country’s economy. “The bank has a goal of stability not only in the financial system but also in the real economy,” she says.

She plans to increase the money supply by 28% over the next year, but the "price problem doesn't have monetary roots"? One couldn't make this up. She would have been right at home in the Weimar Republic as a member of Rudolf von Havenstein's staff. Is this what an economics education at overpriced Yale produces? After being properly indoctrinated one winds up destroying an entire national economy?

We shudder to think what Mrs. Marco del Pont's idea of "instability" is. What is most astonishing about this uninformed nonchalance is that Argentina has experienced hyperinflation in the past – with the inevitable destructive results:

Many ordinary Argentines, who remember the days in 1989 when the annual inflation rate exploded to 5,000 percent, are taking today’s numbers in stride, too.

“We had it much worse,” says Carlos Roberto Acosta, a 35- year-old taxi driver from Avellaneda, on the outskirts of Buenos Aires. “I was a teenager working in a store when we had hyperinflation,” Acosta says. “I remember the owner coming up to me one day and saying ‘Don’t sell anything’ because we didn’t know how much it would cost to replace it.”

Much of the country’s economy is geared toward coping with inflation. “It’s all about adaptation,” says Marcos Katz, who runs a fabric store in General Guemes, a town of about 30,000 people in the northwestern province of Salta. He says he visits bigger cities such as Cordoba or Buenos Aires once a month to look at the prices in larger stores. “I try to keep up with their pace,” he says. “That’s what a lot of small-business men do.”

Katz, who’s been in business since 1974, says he’s learned to work mainly without banks after living through bouts of hyperinflation. “Banks are a dreadful thing,” he says. “You get a lot of financing from your suppliers.”

One consequence of Argentina’s long history of inflation is that people often pay in cash for even the largest purchases, such as homes or cars.

It's a good thing then that U.S. style forfeiture laws seem not to stand in the way of this cash-paying practice in Argentina. Otherwise they'd have to confiscate everything, put a roof over the whole country and declare it a prison. One can understand why people in Argentina think the "banks are a dreadful thing" after they had to live through the confiscation of their savings in 2001 (the one time Argentina experienced deflation, it was of the confiscatory sort, as Joseph Salerno wrote). In the meantime, an accelerating Flucht in Sachwerte (flight into hard assets) is already underway:

It’s easy for Argentines to remember how to face inflation,” says Claudio Loser, an Argentine who led the Western Hemisphere Department at the International Monetary Fund during the 2001 crisis. “They defend themselves against inflation by investing.”

Eduardo Costantini knows that well. In four days during October, the head of Buenos Aires-based real-estate and asset management group Consultatio SA says he sold 900 lots in an undeveloped housing project outside Buenos Aires for a total of $75 million, without even advertising.”

Costantini, 64, says Argentines are wary of investing abroad because of financial turmoil and are unsatisfied with near-zero interest on dollar bank deposits — not to mention the negative real interest rates on peso deposits.

We'd rather buy gold than lots in undeveloped housing projects in this type of situation, as the odds are that they will ultimately remain undeveloped. While there is no way of ascertaining just how much capital consumption inflation-induced malinvestment has already produced, it is likely to be considerable. Many economic projects that have been begun as a result of the inflationary policy will eventually have to be abandoned as it will turn out that not enough real funding for them is available. Obviously, no one is actually saving in Argentina, as it is impossible to get a decent return by doing so. The main objective of economic activity seems to consist of escaping the effects of the central bank's policies and preserving one's wealth by getting rid of its confetti money as quickly as possible.

In order to mask the true state of affairs, the government has begun to strong-arm those that would cast doubt on its reporting of inflation data:

When inflation remained stuck at about 10 percent in 2006, Kirchner replaced the officials in charge of the CPI report. Since then, Lavagna [Robero Lavagna, former minister of economics, resigned 2005, ed.] says, the government has underreported the consumer price index. The bureau says prices rose just 10.9 percent last year, while research firm Ecolatina, which Lavagna founded 30 years ago, says the gain was 26.6 percent ....

Fernandez last year invited the IMF to visit the country to help create a national inflation index. In February, her government began threatening independent research institutes, including Ecolatina, with fines of as much as $125,000 for not revealing how they calculate their CPI estimates. Jorge Todesca, a former deputy economy minister who heads Finsoport, one of the firms that received letters from the government, said the move is aimed at intimidating researchers and the companies they talk to.

The people at the MIT's "Billion Prices Project" should take heed. Their recent calculations of the development of online consumer goods prices in the U.S. are beginning to look suspiciously deviant too. They have been spared a visit from the statistics commissars so far, but their subversive project could well further inflation expectations beyond plan, and where would we be then?

Since they are safely out of reach of Mrs. Kirchner's bureaucrats, they have also dared to construct a price index for Argentina. The interesting point is of course that although the construction of an average price by adding up the prices of disparate goods and then indexing the result is a logical fallacy, the BPP's online price indexes as a rule show a sharper deterioration in money's purchasing power than official government statistics just about everywhere. It is only the size of the gaps that vary from country to country.

U.S. online prices vs. the official CPI. Mind that gap … clearly, subversive activities are taking place at the MIT, since officially, there is "not much" or even "too little inflation."

The same exercise for prices in Argentina. This is a somewhat more spectacular gap, the depiction of which would be considered barely legal in Argentina these days.

The Argentine inflation policy has created a major feel-good boom that has managed to cut down unemployment from a former 22% to the current 7.3% level. Mrs. Kirchner's electoral fortunes seem well supported in light of this. Policymakers no doubt would point to the decline in unemployment as an unvarnished success. However, all of this seeming success comes at a price. The method of rescuing the economy by means of inflation is very much in the tradition of burning down one's furniture in order to heat one's home. One certainly stays warm for as long as the furniture lasts, but a subsequent period of deep freeze in an empty house is preordained.

Under Mrs. Kirchner's predecessor, her late husband Nestor Kirchner, Argentina has inter alia attempted to introduce price controls on certain goods in order to keep voters happy. Political scoundrels that are debasing their nation's money have done this over and over again throughout history – it is a fairly typical desperate gambit that proves that humans have a disturbing tendency to learn absolutely nothing from history. The measure has also been adopted by the socialist regime of Hugo Chavez in Venezuela, where shortages of staple foods have become a recurring feature of daily life as a result.

There are ominous signs that the consumption of Argentina's capital stock is well advanced, which would suggest the economic crash and final inflationary conflagration are not too far off anymore:

The price of beef – a sacred staple in a country that’s the No. 2 consumer of meat per capita in the world – more than doubled as ranchers couldn’t meet demand from depleted herds. Argentina’s trade surplus shrank to $241 million in December from $1.2 billion a year earlier. Despite the economy’s growth, it’s failing to attract enough investment to meet consumer demand, [Claudio] Loser says.

“The first effect of any inflationary process is euphoria, because people go out and spend,” Lavagna says. “But later come the costs of that policy.”

Once the party ends, Argentina’s next president will have to tally those costs.

Costs? What, there will be costs? Mr. Lavagna seems not to have heard from the neo-Keynesians that dominate macroeconomic thinking these days. All that matters is aggregate demand! That other homogeneous blob K (for capital) is just a magically self-replicating fund no-one needs to worry about. As long as people spend their heads off and stop saving, production will just drop from the Utopian sky and stones will turn into bread.

Argentina is a real life experiment where we can watch from a safe distance how the latter stages of a policy of massive government spending combined with equally massive money printing play out. If a little bit of government spending and money printing is good, then a whole lot of it must be even better. Accordingly, nirvana should soon obtain in Argentina. It definitely obtains already for Mrs. Kirchner's close ally, union boss Hugo Moyano. As the WSJ reports:

One of Argentina's leading truckers' unions, the Fadeeac, has reached a government-brokered agreement with companies for a 24% pay increase in a deal likely to set the standard for other union wage talks .… Unions are pushing for big wage increases this year amid soaring inflation, estimated by economists at a yearly rate of up to 25%. Prices have sky-rocketed over the past year due to an overstimulated economy, a big increase in the money supply and capacity constraints in a number of key industries.

Official – and widely questioned – inflation figures point to a rate of about half that, but powerful CGT umbrella union leader Hugo Moyano has said that negotiations will be based "on prices in the supermarket aisles."

.... Earlier this month, the CGT threatened to launch a nationwide strike after authorities in Switzerland asked Argentina for information about judicial investigations in the South American nation against Moyano as part of an ongoing money laundering probe by the European country.

While the union backed off from the strike threat, the CGT made it clear that it was ready and able to shut down transport across the country to defend its interests.

Despite the friction, Moyano is a key ally of Fernandez, using his influence to limit strikes and wage demands given the CGT often sets the benchmark for collective bargaining agreements around the country. He is also a regular fixture at many of the president's major speaking engagements and political rallies. In return, Moyano has gained widespread influence within the government, which has backed frequent minimum wage increases.

It appears as though Moyano knows about those verboten private sector inflation estimates, or rather, is making his own based on his shopping cart. One wonders if he is aware that he could be fined $125,000 if he fails to reveal his calculation method …but then again, he can always threaten another nationwide strike if the statistics commissars come knocking, given that he seems not above using such threats if cornered personally (as a general remark, that's what one gets for stepping on the toes of UBS – now the Swiss are suddenly investigating money laundering! The end of civilization must be nigh).

In light of the advanced stage of Argentina's inflationary boom, we will keep a close eye on developments and report back on its coming denouement.

Source: Argentina on the Cusp of Hyperinflation