December 9, 2013
It grows on you
Inflation as economic cancer
In Evelyn Waugh’s Brideshead Revisited, early in 1939 a terminally ill Lord Marchmain returns home from Venice to die, eventually expiring in midyear, and for the first few weeks he is improbably happy — he can place his bed wherever he likes, play childish games, command everybody’s respectful attention and act the patriarch in general. A similar syndrome might well apply to at least some cancer patients today in the initial phase — granted an unexpected holiday freed from all the pressures, responsibilities and stress of modern working life with no pain at first and perhaps a cortisone-induced euphoria, they might enjoy themselves for a while, especially if they can manage not to think too far ahead.
If inflation being the cancer of the economy is one of the most frequently heard clichés of economic analysis around (which is not to demean it in any way since things invariably become clichés because they happen to be true), this unexpected upside à la Lord Marchmain is even more true of inflation and for much longer periods. If the Glasgow comedian Billy Connolly once said: “Bigotry is like smoking — you know it’s bad for you but it’s fun,” he could easily have said the same about inflation.
Indeed inflation may well have given Argentina a “fun decade” more than a “won decade” much of the time — with plenty of nominal growth which does not completely rule out real growth either. This does not only apply to the “monetary illusion” of more cash in the payslip — even if the wage-price race has only one winner (and always the hare, never the tortoise). The economic policies of the last decade have notoriously distorted relative prices with hugely damaging effects on the economy. yet these wider spreads also create business niches to exploit on a much bigger scale than in a normal economy.
One good example of this is the housing market. The currency curbs have driven Argentina’s dollar-based real estate transactions into a free fall (with sales down 22.3 percent in this city in July alone) — pesofication was resisted from the start and the ersatz greenbacks offered by the Cedin whitewash certificates launched just six weeks before last month’s primaries seemed to suffer from a “wait and see” attitude ahead of that vote (with the subsequent electoral results evidently not arousing the confidence of investors).
And yet building materials are the mirror image of the stricken real estate market, surging 14.4 percent last month — if the purchase and sale of extant property is artificially crippled, then housing starts will spring up in their place because people have to live somewhere.
Yet the party seems to be drawing to an end as the symptoms of cancer become more evident. The annual money supply expansion of 35-40 percent sustained for at least the last four years has to run into the law of diminishing returns at some point (especially when the government goes to so much trouble to block the capital flight draining off so many of the printed pesos) — rather than creating “virtuous circles” of consumer-led growth, pumping money into the economy has become more inflationary than reflationary. The “fun” stage of inflation includes turning life into a constant spending spree with the inability to save but that also led to dollarization and capital flight — the currency curbs thus arose to fight problems really caused by inflation.
Funding high public spending levels by printing banknotes would be bad enough but unfortunately that is not the whole story — the tax burden squeezes ever tighter to pay the bills. Is Argentina the only country in the world where record revenue hauls (an unfailing occurrence with inflation) are announced with pride in full expectation that the rest of the population will celebrate the taxman’s bigger bite? Although just in these recent post-primary weeks, the government has been announcing tax relief, including for the self-employed yesterday (always relative, of course, to years of tax floors not being updated to inflation) — could we be in for a conversion to supply-side economics?
The 1982-9 experience showed that inflationary plateaux can be maintained for an incredibly long time in an index-linked economy (rates averaging 17 percent and even 25 percent continued for month after month within that period) yet once the escalation starts, nobody wants to be left behind. And this factor is severely compounded by the zero credibility of INDEC statistics bureau — anybody obliged to “guestimate” inflation will give themselves the benefit of the doubt and according to one a think tank, the inflation forecasts of the man in the street for this year average 39 percent, far ahead of the 2.1 percent (projecting annually to 25.2 percent, as against INDEC’s 10.6 percent) which Congress has just reported for August from the pooled calculations of private independent economists.
Another point of no return is when peso inflation turns into dollar inflation because this immediately works against a competitive exchange rate. Any country has the right to decide if it wants hard or soft money — if a “national and popular” government inflicts a constant loss of value on its peso, then that is its sovereign decision but if it seeks to impose that devaluation on other currencies via an artificial exchange rate, then it is heading straight into cost-push inflation.
Nor is the dollar the only other currency in the world (hard as some people here might find it to believe). If the peso was artificially overvalued (due to policies prompted by a lack of dollars), so was Brazil’s real until very recently (due to an excess of dollars, strangely enough), thus making the gap with reality more sustainable, but now Brazilian depreciation ups the pressures here to accelerate devaluation — and hence inflation.
Losing this competitive advantage obviously most hurts the companies which are the least competitive because they have not invested in updating technology or improving productivity — in a protectionist economy which discourages investment and where job protection is at a premium, this is going to mean a lot of businesses.
No easy answers to inflation. Some politicians talk as if coming clean on INDEC is the solution but while honesty is indeed the best policy, the day they do that is when the problems really will begin. Although if over two-thirds of the world’s countries can keep their inflation below an annual five percent, the cure should not be as elusive as cancer.