June 18, 2013
Going nowhere fast
The government clearly has its own agenda, which has no room for inflation (beyond bursting out of a 17-month straitjacket of 0.7-0.8 percent to post 0.9 percent for September, according to INDEC statistics bureau). Not only does the argument that inflation is the price of growth run out of steam when that growth trickles to a halt — the inflation stemming from stagflation tends to be even higher because while previously the “Chinese” growth of almost double digits absorbed around a third of the expansion of money supply and hence inflation, each peso injected into the economy becomes pure inflation when almost all the growth is nominal and virtually none real.
Why, then, the insistence on pesofying the economy when it would have made far more sense even only a year or two ago when the national currency still retained some vestiges of purchasing-power? Last week’s “Chaco scare” on the money markets was an example of a wholly gratuitous problem caused by this crusade — in order to save releasing 263,000 dollars to redeem two minor Chaco bonds in the appropriate currency, dozens of millions of dollars were lost to an investor panic as to whether their loans in hard money would be repaid in squishy-soft pesos, a virtual default. This is a microcosm of the problems generally being caused by the currency curbs (presidentially denied with the same insistence as the inflation which is their root cause) — these may have staunched a capital flight which was reaching impossibly high levels this time last year but at the price of blocking capital inflow, thus leaving the economy with even less dollars than ever (and YPF bereft of overseas investment while the fuel import bill is arguably the biggest dollar-guzzler). So far the only possible benefit of pesofication is that it might just have given a stricken housing market a mechanism for cutting its losses — previously housing values stayed inflexible in the face of falling demand (in large measure because of dollar inflation) but pesofication at the official exchange rates offers a means of relaxing the price while upholding it nominally.
Instead of seeking the technical causes for these problems, the Cristina Fernández de Kirchner administration prefers to externalize the blame to hostile media or “vulture funds” preying on naval training frigates marooned in West Africa (seeking scapegoats within government ranks, as some have started to do, would be hardly better). Last November economic policy took an entirely new tack following CFK’s landslide election victory — it might not be a bad idea to embark on a drastic overhaul of economic policy once again a year later.