Monday, February 4, 2013

Worst economic policy decision of the year

When it comes to misguided economic policies, Argentina wins the prize more often than not.

Today the government of Argentina announced a two-month price freeze on all products sold at the nation's largest supermarkets, representing about 70% of the Argentine market. It is apparently a voluntary freeze, worked out in a joint accord between the supermarket chains and the government. On its face, this is a blatant attempt to cool the inflationary fires that are slowly consuming the Argentine economy, and it comes on the heels of the IMF chastising Argentina for manipulating its inflation statistics. Now, not only does Argentina manipulate its inflation statistics, it also manipulates its prices.

It won't work, of course, and is only likely to make things worse. It won't take consumers long to figure out that they have two months to stock up on things before prices resume their rise. And that will almost surely lead to shortages and more consumer anxiety and more efforts to stockpile goods with a long shelf life. Thus will begin in earnest the decline in the demand to hold pesos, and their more rapid circulation, which in turn will result in more inflation. Will the politicians never learn?

It's deja vu all over again.

The chart above shows the allegedly manipulated CPI statistics. Note how year over year inflation has been suspiciously flat around 10% per year since early 2007, when the government puts its own man in charge of the statistics office. For the past 36 months, year over year inflation has been almost exactly 10% every single month—something that is nearly impossible in the real world.

The chart above almost surely does not show manipulated data for currency in circulation. For the past 36 months currency in circulation has grown almost 40% per year. It is virtually impossible for currency to grow 40% a year at the same time inflation is only 10% per year. The M2 measure of Argentina's money supply is also growing at breakneck speed, averaging about 32% a year for the past three years. The growth of currency and M2 points strongly to inflation being 25-30% per year, as most independent economists suggest it is.

Inflation in Argentina is not the result of rising supermarket prices, it is the result of a rapid expansion of the Argentine money supply. Argentina is literally "printing money" to pay its bills, even as the central bank's monetary reserves have fallen by almost 20% in the past two years. This will end in tears, in shortages, in more government repression, in more capital flight, and eventually in another big devaluation.

The official exchange rate for the peso is currently 5 per dollar, but the "blue" rate (i.e., the black market rate) has dropped to 8 per dollar, suggesting a potential devaluation of almost 40% is lurking in the wings.

Advice to tourists headed to Argentina: take plenty of $100 dollar bills with you. You'll need to figure out how to exchange your dollars for pesos at the blue rate (something the government is trying hard to discourage), but you have a huge incentive to do so, since otherwise if you use an ATM or your credit card while in the country you will be buying pesos at the official rate.


JPL said...

Good comment as usual.
Based on the M2 (and growth in M2) what is the your take on the US dollar's future?



Joseph Constable said...

"Worst economic policy of the year".

So far.

RichmondG30 said...

"Argentina is literally 'printing money' to pay its bills"

Gee that sounds familiar. Where have I heard that before? Hmmmm.....

Joseph Constable said...

A commenter from Argentina from another site says the whole thing is a PR stunt concocted by the Supermarket Chains and the government to give the Supermarkets an edge in upcoming union negotiations. The government has an interest in keeping the wage increase as low as possible. There are no penalties if a market breaks the price freeze. Plus, the Supermarkets suspended discounts during the freeze so there the prices are already higher. That is what he said.

What say your contacts, Scott?

Scott Grannis said...

Re: "what is your take on the US dollar's future?"

Argentina is literally printing money, given the almost 40% annual increase in currency in circulation. But the US is not.

US currency in circulation is growing at a 9% annual pace, which is not unusual given that the lion's share of US currency is held abroad. Strong demand for US currency is the driver of growth, not government printing.

US M2 is growing at about a 7% pace, which is only slightly faster that its 6% annual growth since 1995. This is not necessarily inflationary, and is in part demand-driven: almost all of the growth in M2 since 2008 has been in bank savings deposits.

Argentina has a problem that we don't, fortunately.

Mark Alexander said...

If Argentina devalues, how do you think that would affect a company like Cresud (CRESY)? Do you think the stock would be badly hurt by this?

Scott Grannis said...

Re: CRESY. It looks like a lot of the potential deval has been priced in already. A devaluation is certainly bad, but the market is now probably trying to calculate how much real estate will rise in the wake of a deval, since that would boost inflation. Hard for me to get optimistic about anything in Argentina these days, however, since the government seems hell-bent on doing everything wrong. In my experience you can never underestimate the ability of the ARgentine government to make a mess of things, especially when the peronists are in power.