The first principle is that you must not fool yourself, and you are the easiest person to fool. – Richard P. Feynman, Nobel Prize-winning physicist
Argentina, under the leadership of President Cristina Fernandez de Kirchner, is not only fooling itself, but losing its credibility in the eyes of international organizations, companies, and investors. Official numbers published by the government (INDEC) shows inflation occurring at a rate of 5 to10 percent per year since 2007. Unfortunately, the published numbers are not remotely close to the real inflation numbers. According to independent economists that are not burdened with President Kirchner’s bullying, the more accurate figures for inflation are reaching an alarming mid-20 percent, more than double from what the government is claiming.
President Fernandez long ago approved a full frontal attack on factual inflation numbers, attempting to sleep Argentina in a fictional world where inflation is not seen as the cancer that it really is, but only as an annoying cold. Inflation is no stranger to Argentina, which to combat hyperinflation twice in the 1980s. As a result, Argentina, not unlike many countries in Western Europe, is extremely sensitive to rising prices. In most cases, inflation does cause a significant amount of damage to the general economy, but obstructing accurate statistics with doctored statistics causes more pain to Argentina, essentially prolonging the time bomb that will soon run down.
The consequences of inflation are many-fold, and in Argentina’s case, the cracks are already showing. First, in periods of high inflation, creditors lose and debtors gain. This is already happening to inflation-linked bondholders, who are missing out on billions of dollars based on fabricated inflation numbers that benefit the state of Argentina, but not investors who hold these type of securities.
Second, inflation causes uncertainty, thus corporations and consumers are less likely less to spend, affecting economic output in the long run. Argentina is experiencing this from local and international companies, but something much worse is occurring – capital is fleeing at record levels. It is reported that in the last four years approximately $73 billion have left the country to other markets. When Argentina defaulted between 2001 and 2003, $19 billion left the country, causing a bank run which ultimately brought the economy to its knees. Luckily for Argentina, it is has been able to withstand the $73 billion capital departure because of high demand for its agro-exports.
Third, when inflation goes up. purchasing power goes down, meaning the Argentine peso has less value, thus one peso can purchase fewer tangible goods. Argentinians are very aware of the real inflation, buying hard assets as a hedge against inflation. Interestingly enough, there has been a car-buying spree as people park their savings in cars instead of banks, fearing the peso will be devalued dramatically with rising inflation. In the U.S., when you purchase a car the value drops immediately once you drive it out of the driveway; in Argentina it is the opposite, an anomaly in its truest form. The car’s value loss is absorbed by inflation, enabling car owners to sell it in the future at a higher price than the purchasing price.
Fourth, people living off a fixed-income, such as retirees, would witness a decline in their purchasing power, lowering the standard of living. It is a scenario that no country wants to confront – just ask Greek leaders how they are coping with their crisis.
Finally, when inflation is higher than other countries, generally speaking products become less competitive. The Argentine executive administration is aware of this, noticing an imbalance in trade and central bank reserves. The solution: auto importers are forced to export Argentine wines, chicken feed, and olives. For every dollar they import in cars, they must export the same dollar amount in Argentine goods. Economic policy is being handled in a comical unorthodox manner, but the strategies enacted are fanning the flames for more spending, causing more inflation, and leaving Argentina at a disadvantage compared to its neighbors.
Chile, Colombia, Mexico, and Peru are all on the path of adopting free market policies, and many Latin American countries are experiencing unprecedented growth with sound economic policies. Argentina is doing the opposite by employing protectionism in an ever-changing, globalized economy. It must be noted that in 2010 and 2011, Argentina’s growth has been impressive, but its sticking factor is nonexistent because it is driven by inflationary spending. If there is no incentive to save because of fear of inflation, people will buy houses, cars, electronics, etc., to shelter their money and nest eggs. As a result, consumption becomes rampant and growth increases substantially. Yet, consumption via fear of inflation is not sustainable, making it unviable as a long- term policy.
Argentina only needs to look westward to Chile to see the fruits of embracing trade and lightly regulated commerce. According to the global consulting firm Ernst & Young, Chile is the most globalized economy in Latin America, and ranks 25th in the world. Chile’s economic policies allowed a swift recovery from the 2008 economic crisis, fostering stable inflation and growth. Argentina, on the other hand, is considered the second most protectionist nation, next to Russia.
However, if we were to take a look at Argentina’s exports, it would paint a different picture – record sales of cars (largely due to increase demand from Brazil), commodity prices driving the soybean prices to record highs (mainly due to Chinese demand), and wheat plus corn exports performing strongly. In fact, Argentina is the second largest exporter of corn, sunflower meal, and sunflower oil. It ranks third in exporting soy. Manufacturing exports have received a huge boost because of car exports to Brazil. Now on the infamous other side of the coin, notwithstanding auto and manufacturing, Argentina is too reliant on high commodity prices, and it is the high prices that are driving exports and bringing in much needed revenue and growth. The problem with this scenario is that it is a recipe for disaster; the export industry is over-heating and unpredictable, akin to the subprime mortgage crisis in the U.S. where investors naively assumed that real estate prices would forever ascend.
Another culprit of inflation has been the beef industry. Argentina has a reputation of grandeur when it comes to their beef. Restaurants around the world that display the “Argentine Steakhouse” sign have a certain allure, similar to France and their wines. In 2005 Argentina exported 771,400 tons of beef. However, in 2011 beef exports dropped to a bewildering 300,000 tons. In just 6 to 7 years, Argentina went from one of the leading exporters of beef to only the ninth largest exporter of beef, possessing only 3 percent of the global market share. Uruguay, Argentina’s tiny neighbor, exports more beef – a token of pride for Uruguayans, and a microcosm of Argentina’s waning leadership in the region. The collapse of the beef industry can be traced back to inflation increasing costs and wages, as well as restrictions on beef exports by the Argentine government to protect domestic prices. Beef is a staple in the Argentinian daily diet; so take beef away because of high costs, and surely President Fernandez can undeniably expect vocal social unrest.
Argentina is losing ground in the global market when it comes to their livestock exports. China’s demand for beef is growing exponentially as more and more people are climbing up the social ladder, but lost opportunities are being cemented because of incomprehensible trade and economic policies, including limiting exports and containing prices to support the domestic market. This is very interesting for a country that exports more football players (human capital) than any other country in the world, but yet it holds on tightly to the fences of protectionism.
Argentina is missing a glorious opportunity in the emerging market boom, insisting that their economy is humming along without being dependent on the IMF, the U.S., or any other status quo Western power or institution. Argentina is proud that it acts alone, as if it were an island. Argentina is currently in a rift with Spain – mostly over the Argentine unit of Repsol (a Spanish energy company) – that has escalated to a degree that Spain is threatening to ban biodiesel imports from Argentina. Mexico too is in a dispute with Argentina over auto import/export limits, And is even threatening Argentina with taking the matter to the WTO. For years Argentina had a trade surplus with Mexico, but now that the last two years were the negative, Argentina is looking to solve this issue by closing their borders to Mexican imports – yet another measure by Argentinian leaders that mainly alienates investors, capital and the sense of normal stability.
As an emerging economic power before 1950, at one point in the 1920s it was the seventh largest economy in the world. Unfortunately, Argentina has undeniably regressed as a state actor and a leading economy, in the past 30 years succumbing to inflation, steep currency devaluations, bail-outs, and most damaging, an abandonment of its debt obligations and ultimately default. From 2001 to 2003, Argentina defaulted on billions of dollars of debt payments. The government decided to just walk away and not pay its bills. To this day the government is dealing with litigation from Italian bondholders to U.S. hedge funds. With a lack of credibility and trust, coupled with a manipulated inflation figure, it is no surprise that capital is fleeing, dollars are being bought with tenacity, and investors are avoiding the country. President Fernandez has implemented a governmental culture that ignores reality, reaping the gains in the short-term, while endangering a once powerful country through endless setbacks and relapses.
This article was originally published in the Diplomatic Courier's May/June edition.
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Argentina: Fact or Fiction
May 23, 2012
The first principle is that you must not fool yourself, and you are the easiest person to fool. – Richard P. Feynman, Nobel Prize-winning physicist
Argentina, under the leadership of President Cristina Fernandez de Kirchner, is not only fooling itself, but losing its credibility in the eyes of international organizations, companies, and investors. Official numbers published by the government (INDEC) shows inflation occurring at a rate of 5 to10 percent per year since 2007. Unfortunately, the published numbers are not remotely close to the real inflation numbers. According to independent economists that are not burdened with President Kirchner’s bullying, the more accurate figures for inflation are reaching an alarming mid-20 percent, more than double from what the government is claiming.
President Fernandez long ago approved a full frontal attack on factual inflation numbers, attempting to sleep Argentina in a fictional world where inflation is not seen as the cancer that it really is, but only as an annoying cold. Inflation is no stranger to Argentina, which to combat hyperinflation twice in the 1980s. As a result, Argentina, not unlike many countries in Western Europe, is extremely sensitive to rising prices. In most cases, inflation does cause a significant amount of damage to the general economy, but obstructing accurate statistics with doctored statistics causes more pain to Argentina, essentially prolonging the time bomb that will soon run down.
The consequences of inflation are many-fold, and in Argentina’s case, the cracks are already showing. First, in periods of high inflation, creditors lose and debtors gain. This is already happening to inflation-linked bondholders, who are missing out on billions of dollars based on fabricated inflation numbers that benefit the state of Argentina, but not investors who hold these type of securities.
Second, inflation causes uncertainty, thus corporations and consumers are less likely less to spend, affecting economic output in the long run. Argentina is experiencing this from local and international companies, but something much worse is occurring – capital is fleeing at record levels. It is reported that in the last four years approximately $73 billion have left the country to other markets. When Argentina defaulted between 2001 and 2003, $19 billion left the country, causing a bank run which ultimately brought the economy to its knees. Luckily for Argentina, it is has been able to withstand the $73 billion capital departure because of high demand for its agro-exports.
Third, when inflation goes up. purchasing power goes down, meaning the Argentine peso has less value, thus one peso can purchase fewer tangible goods. Argentinians are very aware of the real inflation, buying hard assets as a hedge against inflation. Interestingly enough, there has been a car-buying spree as people park their savings in cars instead of banks, fearing the peso will be devalued dramatically with rising inflation. In the U.S., when you purchase a car the value drops immediately once you drive it out of the driveway; in Argentina it is the opposite, an anomaly in its truest form. The car’s value loss is absorbed by inflation, enabling car owners to sell it in the future at a higher price than the purchasing price.
Fourth, people living off a fixed-income, such as retirees, would witness a decline in their purchasing power, lowering the standard of living. It is a scenario that no country wants to confront – just ask Greek leaders how they are coping with their crisis.
Finally, when inflation is higher than other countries, generally speaking products become less competitive. The Argentine executive administration is aware of this, noticing an imbalance in trade and central bank reserves. The solution: auto importers are forced to export Argentine wines, chicken feed, and olives. For every dollar they import in cars, they must export the same dollar amount in Argentine goods. Economic policy is being handled in a comical unorthodox manner, but the strategies enacted are fanning the flames for more spending, causing more inflation, and leaving Argentina at a disadvantage compared to its neighbors.
Chile, Colombia, Mexico, and Peru are all on the path of adopting free market policies, and many Latin American countries are experiencing unprecedented growth with sound economic policies. Argentina is doing the opposite by employing protectionism in an ever-changing, globalized economy. It must be noted that in 2010 and 2011, Argentina’s growth has been impressive, but its sticking factor is nonexistent because it is driven by inflationary spending. If there is no incentive to save because of fear of inflation, people will buy houses, cars, electronics, etc., to shelter their money and nest eggs. As a result, consumption becomes rampant and growth increases substantially. Yet, consumption via fear of inflation is not sustainable, making it unviable as a long- term policy.
Argentina only needs to look westward to Chile to see the fruits of embracing trade and lightly regulated commerce. According to the global consulting firm Ernst & Young, Chile is the most globalized economy in Latin America, and ranks 25th in the world. Chile’s economic policies allowed a swift recovery from the 2008 economic crisis, fostering stable inflation and growth. Argentina, on the other hand, is considered the second most protectionist nation, next to Russia.
However, if we were to take a look at Argentina’s exports, it would paint a different picture – record sales of cars (largely due to increase demand from Brazil), commodity prices driving the soybean prices to record highs (mainly due to Chinese demand), and wheat plus corn exports performing strongly. In fact, Argentina is the second largest exporter of corn, sunflower meal, and sunflower oil. It ranks third in exporting soy. Manufacturing exports have received a huge boost because of car exports to Brazil. Now on the infamous other side of the coin, notwithstanding auto and manufacturing, Argentina is too reliant on high commodity prices, and it is the high prices that are driving exports and bringing in much needed revenue and growth. The problem with this scenario is that it is a recipe for disaster; the export industry is over-heating and unpredictable, akin to the subprime mortgage crisis in the U.S. where investors naively assumed that real estate prices would forever ascend.
Another culprit of inflation has been the beef industry. Argentina has a reputation of grandeur when it comes to their beef. Restaurants around the world that display the “Argentine Steakhouse” sign have a certain allure, similar to France and their wines. In 2005 Argentina exported 771,400 tons of beef. However, in 2011 beef exports dropped to a bewildering 300,000 tons. In just 6 to 7 years, Argentina went from one of the leading exporters of beef to only the ninth largest exporter of beef, possessing only 3 percent of the global market share. Uruguay, Argentina’s tiny neighbor, exports more beef – a token of pride for Uruguayans, and a microcosm of Argentina’s waning leadership in the region. The collapse of the beef industry can be traced back to inflation increasing costs and wages, as well as restrictions on beef exports by the Argentine government to protect domestic prices. Beef is a staple in the Argentinian daily diet; so take beef away because of high costs, and surely President Fernandez can undeniably expect vocal social unrest.
Argentina is losing ground in the global market when it comes to their livestock exports. China’s demand for beef is growing exponentially as more and more people are climbing up the social ladder, but lost opportunities are being cemented because of incomprehensible trade and economic policies, including limiting exports and containing prices to support the domestic market. This is very interesting for a country that exports more football players (human capital) than any other country in the world, but yet it holds on tightly to the fences of protectionism.
Argentina is missing a glorious opportunity in the emerging market boom, insisting that their economy is humming along without being dependent on the IMF, the U.S., or any other status quo Western power or institution. Argentina is proud that it acts alone, as if it were an island. Argentina is currently in a rift with Spain – mostly over the Argentine unit of Repsol (a Spanish energy company) – that has escalated to a degree that Spain is threatening to ban biodiesel imports from Argentina. Mexico too is in a dispute with Argentina over auto import/export limits, And is even threatening Argentina with taking the matter to the WTO. For years Argentina had a trade surplus with Mexico, but now that the last two years were the negative, Argentina is looking to solve this issue by closing their borders to Mexican imports – yet another measure by Argentinian leaders that mainly alienates investors, capital and the sense of normal stability.
As an emerging economic power before 1950, at one point in the 1920s it was the seventh largest economy in the world. Unfortunately, Argentina has undeniably regressed as a state actor and a leading economy, in the past 30 years succumbing to inflation, steep currency devaluations, bail-outs, and most damaging, an abandonment of its debt obligations and ultimately default. From 2001 to 2003, Argentina defaulted on billions of dollars of debt payments. The government decided to just walk away and not pay its bills. To this day the government is dealing with litigation from Italian bondholders to U.S. hedge funds. With a lack of credibility and trust, coupled with a manipulated inflation figure, it is no surprise that capital is fleeing, dollars are being bought with tenacity, and investors are avoiding the country. President Fernandez has implemented a governmental culture that ignores reality, reaping the gains in the short-term, while endangering a once powerful country through endless setbacks and relapses.
This article was originally published in the Diplomatic Courier's May/June edition.
