Sunday, February 09, 2014

The Argentine economy and a German journalist's pants-wetting over "hyperinflation"

"Inflation in Argentina: The specter is back," declares the headline, (Peter Burghardt, Inflation in Argentinien. Das Gespenst ist zurück Süddeutsche Zeitung 08.02.2014)

Memories of previous episodes of inflation and political turmoil make scare headlines about the current situation in Argentina understandable and attractive. The German mainstream media don't seem to be as far into the show-business model as the US media are. But interpreting things through the script of conventional wisdom can lead reporters to to ignore particulars of the current situation. Argentina has spent the years since 2001-2, the last big economic and political crisis, developing a model to protect their people against just such crises.

Burghardt writes about how the Dólar blue, the black market exchange rate for the dollar, is currently 50% higher than the official exchange rate that was reset upward a couple of weeks ago.

Under the government of Carlos Menem in 1991, the peso was pegged to the dollar to control a previous episode of inflation. Which put Argentina in a de facto currency zone with the US. From the US point of view, officially the neoliberal/IMF/Washington Consensus view at the time, it worked fine. American corporations could do business with Argentine companies and invest and borrow and lend there on a stable currency basis. For Argentina, it was a currency zone with all the downsides of the present-day euro currency zones and none of the (severely inadequate) protections and common institutions that even the euro has.

As Paul Krugman and other economists who pay attention to how currency zones work have been patiently explaining since 2009, there are two basic ways a currency zone can respond to the inevitable development of differences in productivity between different areas of the zone. One is transfer payments from the momentarily more productive to the less productive. In the currency zone known as the United States, that takes place in various forms: federal contracts, regular transfer payments in normal times, and the increase in regular transfers like unemployment insurance during recessions, known as "automatic stabilizers." Stimulative economic programs for the currency zone can also play a big part in that kind of adjustment.

The other kind of adjustment would be through real depreciation, a relative fall in incomes in the less productive sectors of the currency zone. Outside of a currency zone in a world currency regime like the current one of free-floating exchange rates, a change in productivity between one country and another - Argentina and the US, Greece and Germany - could be handled through currency devaluation in the less productive country.

With the currency peg to the dollar in 2001, when Argentina was hit with massive speculation against the peso, speculation that would have had the effect of driving with peso down without the dollar peg, devaluation was off the table. The peso was tied to the dollar. So Argentina began experiencing the kind of brutal real devaluation that we see today being imposed by Angela Merkel's austerity policies on Cyrus, Greece, Ireland, Italy, Portugal and Spain. This is why Argentina's experience with the dollar peg is often compared to the euro crisis of today.

The result was a political upheaval in 2001. As Graciela Mochkosfsky writes in Pecado original, Clarín, los Kirchner y la lucha por el poder (2011):

En diez días, se sucedieron cinco presidentes: De la Rúa; el presidente provisional del Senado, Ramón Puerta; el gobernador de San Luis, Adolfo Rodríguez Saá, elegido por la Asamblea Legislativa; el presidente de ésta, Eduardo Camaño, y, al fin, Eduardo Duhalde. La clase media de las principales capitales, en especial la Ciudad de Buenos Aires, enfurecida por el congelamiento de sus aborros, salió a las calles a protestar. Casi cada nocbe, decenas de miles de personas hacían sonar sus cacerolas -la protesta se llamó, por ello, «cacerolazo» -, marchaban hacia Plaza de Mayo y permanecfan frente ala Casa de Gobierno basta la madrugada, con un solo grito: «que se vayan todos» los políticos.

[In ten days, five Presidents succeeded each other: {Fernando} De la Rúa; the provisional President of the Senate, Ramón Puerta; the Governor of San Luis, Adolfo Rodríguez Saá, chose by the Legislative Assembly; the President of that body, Eduardo Camaño, and, finally, Eduardo Duhalde. The middle class of the principal capitals, especially the City of Buenos Aires, enraged by the freezing of their savings {a defensive measure against the extreme speculation}, took to the streets to protest. Almost every night, tens of thousands of people beat on their pans {cacerolas} - the protest was called cacerolazo because of that - marched to the Plaza de Mayo {in front of the national Presidential palace Casa Rosada in Buenos Aires} with just one cry: "out with all of them," the politicians.]

Burghardt writes, "Kaum ein Land jenseits der USA ist vernarrter in US-Dollars. Mit jeder Währungskrise nimmt das Misstrauen in den Peso zu." ("Hardly any country outside of the USA is more infatuated with US dollars. With every currency crisis, the distrust in the peso increases.")

Burghardt proceeds to compare the current situation to the crisis of 2001-2, raising the question in my mind as he does so whether he actually knows anything about that crisis. Is he just interviewing speculators at international banks and hedge funds? Or is he only talking to affluent Argentines who want to get their hands on dollars for travel or trade? This is not to say there is no problem. It's just that Burghardt's report functions like a press release for financial speculators and gives little relevant background.

One wouldn't realize from his account that the Cristina Fernández' government has a reindustrialization policy that require capital controls to accommodate exports via depreciation like the one two weeks ago but also to protect domestic industries against imported inflation in machinery, supplies and resources that would wreck their ability to develop and compete domestically and internationally.

There's also raw, predatory speculation, as discussed in this report from TV Pública argentina, which tends to take a perspective friendly to Cristina's kirchnerismo policies. If speculators can pull out dollars and drive down a domestic currency, they can then come back in later and buy local businesses as bargain-sale prices. Any country concerned with its own development has to be vigilant against these kinds of attacks. El ataque a los "emergentes" 08.02.2014:



Burghardt seems to be clueless enough that he thinks that the Keynesian policies pursued by the Kirchners had nothing at all to do with Argentina's healthy growth, diversifying development and remarkable reduction in poverty and inequality since 2003, when Néstor Kirchner took office as President. It was due to "Geschick und Konjunktur" "luck and the business cycle." Good grief!

Two things strike me about this article. One is that the lack of understanding of how currency zones work that we've seen in the German political and media elites and in much mainstream reporting continues.

The other is a lack of understanding, shared by people in the US and other developed countries, about how differently inflation is experienced in a country like Argentina than in Germany especially. The dominant conservative economic ideology in Germany puts a premium on low inflation, even more so than its counterparts in the US. That's actually a huge policy problem in the currency zone that many Germans hardly seem aware they are part of. For the euro crisis and the depression in the eurozone as a whole to end, Germany would have to pursue stimulative economic policies that would mean higher inflation in Germany.

If you're terrified of of 3% inflation, the normal inflation in a developing country like Argentina sounds apocalyptic. A reporter coming from that perspective can scarcely be expected to explain sensibly to a German or American audience what inflation in a given situation like the one in Argentina at present.

To top it all off, Burghardt ends his article by going Tommy Friedman on us and quoting his taxi driver. Which makes me think I'm being far too generous to his analysis. Or lack thereof.

In an earlier article, Währungskrise in Argentinien. Das Geld und der Schwarzmarkt Süddeutsche Zeitung 28/01.2014, Burghardt does recount some additional historical background, mostly on how "hyperinflation" happened repeatedly in the past. Hyperinflation is the ultimate bogeyman for conservative economics, in Germany as in the US. And he at least refers to how Menem pegging the peso to the dollar wound up badly.

In the earlier article, Burghardt seems shocked, shocked that Argentine officials would go so far as to call out an international oil firm like Shell over the speculation. My good man, that just isn't done in polite company! Question the financial speculations of the One Percent? Insist that the public interest may not be identical to the profit-gouging speculation of one multinational? Oh the horror, the horror!

He writes, "Das Ehepaar Kirchner kam an die Macht, erst er, dann sie, und es ging dank hoher Nachfrage, verbilligter Ressourcen und umfangreicher Sozialhilfe wieder bergauf, ehe Néstor Kirchner 2010 starb und seine politisch umstrittene Witwe die Richtung verlor." ("The married couple came to power, first he then she, and things went very well due to higher demand, cheap resources and wide-ranging social assistance, before Néstor Kirchner died and his politically controversial widow lost her direction.") Dude, I hope that stuff gets you some precious access to some oligopoly types that can give you some more scare quotes about "hyperinflation." Because it's pretty clueless reporting otherwise.

As in the later article, it seems unfathomable to Burghardt that the "higher demand" might have had something to do with, you know, the actual economic policies pursued by the Kirchners. I guess if we wanted to be generous, his wording might suggest that the "wide-ranging social assistance" helped somehow. But it's basically the same ""luck and the business cycle" theme as in the later article.

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