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April 23, 2014
Thursday, December 5, 2013

Have dollar, will travel

Axel Kicillof and John Maynard Keynes — anything in common apart from surnames starting with K?
By Michael Soltys / Senior Editor / Economic Outlook

No real solution for economy

Who says that Argentina does not have a predictable government? This week’s moves towards formalizing a tourist dollar and slapping a new surcharge on credit card purchases abroad (upped to 35 percent from 20 percent) were expected left, right and centre — throughout the year anybody could see this coming a mile off with the drainage of Central Bank reserves and even more so after Axel Kicillof (the apostle of multiple exchange rates) reached the top of the Economy Ministry 24 days ago.

These disincentives are no real solution and perhaps not even understood as such — fiscal moves are futile against what is basically an exchange rate problem. Tourist demand might be hitting 11 digits this year, according to the new Central Bank governor Juan Carlos Fábrega, but travel abroad is not the root of the problem since all too many people make global Internet purchases without leaving their homes — the key is the difference between local prices in pesos which have absorbed the full impact of inflation and a dollar exchange rate which has long lagged behind.

The government seems to realize this because it is not hostile to foreign travel as such (or if so, it hides it very well) — flying to Barcelona with Aerolíneas Argentinas two months ago, this columnist read at the start of the flight magazine a letter from Aerolíneas president Mariano Recalde in which he described increasing the flights to (precisely) Barcelona and to Miami as one of his main priorities for 2014. And the gap between exchange rates also seems to be understood as the real battleground rather than repressive curbs in the newly discredited style of Guillermo Moreno (now the commercial attaché at the Rome Embassy) — hence the two-pronged action to narrow that gap by accelerating the devaluation of the official dollar while throwing all the green they can find at the “blue” (not just nine-digit sums of Central Bank reserves on a daily basis but breaking other piggy banks and dollar bonds as well). But while that gap remains above the 35 percent of the surcharge, overseas prices (and holidays) will remain more attractive.

Yet if Argentina’s problem can be described very simply as too many pesos and too few dollars, the government seems to understand the latter half of this equation rather better than the former. On Monday the new Cabinet Chief Jorge Capitanich retorted to criticisms reportedly of Washington origin which questioned the government’s cavalier attitude towards money supply (expanding 35-40 percent annually for the last several years), pointing out that the United States has trebled its money supply since the 2008-9 global financial crisis while the Bank of England has increased it fivefold. For his part Kicillof has taken issue with the correlation between inflation and money supply on several occasions.

Kicillof likes to call himself a Keynesian but this is not a very Keynesian analysis of the situation. “Quantitative easing” in the United States would be applauded by Lord Keynes since deflation continues to be a definite possibility there to this day (while in Japan it remains a reality extremely hard to escape despite all the “arrows” of Abenonmics). By way of contrast, Argentina’s frantic expansion of money supply throughout the “won decade” with its “Chinese” growth rates is the total opposite of the anti-cyclical logic defended by Keynes.

Although it is true enough that the correlation between inflation and money supply has become far less linear globally in the last five years, this obeys causes which do not apply to Argentina’s situation. The pre-2008 booms in the developed world ran on sheer confidence without need for encashment but when the bubbles burst, money was needed massively to fill the vacuum. By way of contrast, Argentina has had zero confidence during the past decade and far too many pesos so that there is no lost confidence to monetarize — instead there is a need to attack the peso excess at least as much as the dollar shortage.

But will this happen? In this election year public spending has reportedly increased 45 percent (not that this outlay enjoyed much reward at the polls) so that money supply, which has slowed at times this year, would need to expand faster than ever unless there is a serious attack on the fiscal deficit — with subsidies as the first target. Raising interest rates would then become the only antidote to the sliding value of the peso.

But if the correlation between inflation and money supply is denied, this course of action seems far less inescapable. Such anti-monetarism looms as the new inflation denialism, now that Moreno has been banished to Rome and his methods are wholly discredited. The new economic team sees no future in fudging the figures — instead there is the illusion that by rationalizing the irrational (e.g. the incredible gap between ex farm prices and the supermarket shelf), inflation can be tamed in time to be honestly reported at genuinely lower levels. But if the money supply feeding the Treasury has no causal influence in inflation, then why worry about the budget deficit (which is big enough to look after itself, as Ronald Reagan used to say)?

In a word, awareness of the problems seems to have advanced with the Cabinet changes but far less the diagnosis.

Moreover, in the immediate term the cures seem worse than the disease, feeding inflation. Thus paying off Paris Club debt would undoubtedly be a correct move for restoring investor confidence but several billion of those shrinking reserves would need to be paid out before anything comes in. A serious attack on the subsidy mountain would obviously be inflationary in the short term.

Nor can devaluation be accelerated in order to narrow the gap between official and parallel exchange rates without creating new problems. For years a static dollar was almost the only anchor against inflation —accelerating devaluation risks pushing up prices and turning inflation into a monster constantly chasing its own tail. In the best of cases, it only adds to the import bill when the trade surplus is the main basis of Central Bank reserves and when fuel needs are on the rise — even more so if there is any success in speeding up growth.

Not that there will be “Chinese” growth any time soon now that the Brazilian economy has contracted in the third quarter.

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