November 23, 2014
Lonely at the bottom?
References galore to mega-crises of the past (the 2001-2 meltdown, the 1989 hyperinflation and the demonized decade which followed, the “Rodrigazo” of 1975) — both by a government anxious to shine by comparison and by an opposition which sees the next addition to that list as being just around the corner. And no shortage of thinking ahead to the 2015 presidential elections and beyond either.
But nobody seems to have any road map to offer for the murky present where a disconcerted uncertainty reigns — not even something as basic as a budget at national, provincial or municipal level which reflects current realities (thus the official exchange rate is set to reach 6.33 pesos 10 months down the road by the end of the year, according to the 2014 national budget). Quite apart from the all-obsessive issue of the exchange rate, does anybody have any clue as to the fiscal or monetary guidelines for this year or incomes policy? Which in turn leaves everybody clueless as to where inflation is heading.
Yet evoking all the crises of the past also poses a worrying question — how many memories are there of a soft landing from the various periods of turbulence since 1975 in order to balance the bleakest pessimism? Not too many although the sequels to the “tequila” crisis of 1994, the “Asian flu” of 1997 and the global financial collapse of 2008-9 could all have been worse.
Amid the general price panic, Mothers of Plaza de Mayo leader Hebe de Bonafini, of all people, reminded us of the existence of the law of supply and demand by calling for a supermarket boycott. Beef prices might have shot up in recent days (how much is turbulence, how much rainfall and how much simple greed?) but will the general public stand for 70 pesos per kilo of milanesa for any length of time? Only if the government continues printing pesos at the current frantic pace — as might well remain the case. Just as mountaineers supposedly climb mountains because they are there, businessmen will charge a million pesos for the simplest product if such quantities are placed in circulation — that is the nature of the beast.
But the expansion of the money supply is merely a symptom — the root cause is the reckless increase of public spending under the Cristina Fernández de Kirchner administration which is financed by printing money alongside squandering Central Bank reserves. Until the last couple of years a frantic pace of 35-40 percent in pumping up public spending has resulted in inflation of “only” 20-25 percent because capital flight took the remaining pesos out of circulation — the success of the currency curbs since late 2011 in taming capital flight (and also any inflow in the process) potentially means the full increase of public spending being reflected in inflation.
The CFK administration has already started tackling the symptom but action against the root cause still remains to be seen — taking the 2014 budget back to the shop would be useful not only for updating its criteria but also restoring fiscal balance. Interest rates edge ever closer to 30 percent as the Central Bank took over seven billion pesos out of circulation on Tuesday alone via bond issue. For almost the first time since early 2010 (Martín Redrado’s stormy exit) the Central Bank is thus showing some signs of autonomy almost in silence but the crunch question is surely whether it can or will desist from printing money to bail out the Treasury.
Yet these root causes and crunch questions are also somewhat relative unless the premises of the “national and popular” model are accepted. In her Tuesday harangue CFK held almost every sector of the socio-economic spectrum responsible for current woes but hardly mentioned the outside world — one of the problems of claiming all credit for the “won decade” while scorning any commodity price boom “tailwind” is that it becomes harder to blame external factors, even when this would be at least semi-legitimate.
All that optimism radiating from the Davos summit, which seemed to regard 2014 as a year almost “condemned to success,” is quickly starting to look like irrational exuberance. If even the sluggards of recent years like the European Union were picking up pace with solid growth forecast for the United States and stock market records being broken until deep into January (possible slowdown in China was almost the only doubt), ran the logic, then the rest of the planet would surely follow — world growth forecasts as high as three percent were predicted right at the start of the year. But they reckoned without the emerging markets.
Apart from Argentina, the lists of emerging markets in trouble invariably star Turkey, India, South Africa and the Ukraine but do not imagine that Brazil is doing much better — and this only deepens Argentina’s problems, especially where the auto industry is concerned.
On Tuesday Brasilia revealed that industrial output contracted 3.5 percent last December, the worst performance in five years — after only one percent in 2012 and the global average of 2.5 percent last year, the World Cup host really seems to be entering into a rut. This is bad news for the auto industry, which has co-starred with soy in the Argentine growth of recent years, and the impact would be more general if Mercosur had not become so dysfunctional — the two partners only account for 11 percent (Brazil) and 16 percent (Argentina) of each other’s imports respectively.
Not that Argentina seems to have been importing anything at all in recent days in the current frenzy to protect Central Bank reserves which have now fallen below 28 billion dollars (for all its decline Brazil is still sitting on 375 billion) — as from next Monday, the import regime will reportedly tighten up yet further if that were possible. Even in the days of reserves topping 50 billion dollars, sceptics used to mutter that it was mostly Treasury IOUs anyway — such voices do not seem to surface these days but what would they say now?
Meanwhile there is still no sign of any long-term plan — the closest the government seems to come to a strategy is the highly orthodox policy of raising interest rates against inflation (as Turkey, India and South Africa are all doing) along with intensified controls while they wait for the next harvest to be cashed. Perhaps the CFK administration’s credibility gap is such that no policy would command confidence (even if coming from a less controversial minister than Axel Kicillof) but if the lady insists on going the distance, she will need some road map for the last 672 days or 96 weeks.