Episode 18: The Economy pt II - Growth

Its been a while since I last wrote a piece on the economy (here) - so here goes another one about the Argentinian economic growth cycle; after all, everyone loves a bit of medium level economic analysis, right? Right?


Anyway, average wage increases over here are around 25% a year to keep up with inflation. Interestingly, even though the government puts official figures at around 13% (as i mentioned previously) they still encourage such wage increases - as if they indirectly acknowledge the real figures. Furthermore in the last budget they also raised pension payments and increased handouts to the poor (of which, of course, there are many) as the economic climate affected trade with Brazil, their biggest partner. They are also raising taxes by 23%, allowing them to have a projected budget surplus of 0.02% (although, because its in ARG$, it really doesnt equate to much). So, sounds like good news?

Not really. To pay for all this, they are committing the cardinal sin of paying for debt with Central Bank Reserves - think of it as if the Central Bank in England used their gold bars to pay off our debt (under the gold standard back in the early 1900s). The debt, then, is financed using inflation - assuming the debt was taken out under lower interest rates (I can't confirm this, but it is a reasonable assumption) then the government could print more money to pay for it (in addition to taking out reserves), keep the poor happy(ish) and try and retain popularity for the re-re-election next year (one of the main reasons for the protest)

If you couldn't be bothered to read all that, just skip to the bottom line (i.e. here). What's my prediction for the economy of Argentina? Well, in 2001 they had an enormous economic crash - whilst I dont think its going to get that bad in the immediate future, it is certainly heading in the wrong (communist?) direction. Financing debt with inflationary techniques such as printing money is most certainly not sustainable in the long term (google the history of the Rentenmark), and has the added affect of eroding away everyones savings seeing as banks wont offer similarly high interest rates. Strong comparisons are to be made with Venezuela, where street crime and poverty are pretty bad.

So, to link back to previous things i've written - why did the government here need to introduce measures banning the official sale of the peso? To stop the COMPLETE abandonment of their currency due to the inflation already in place by their economic policies.

Am i wrong? Probably. After all, they say an economist can only (sometimes) explain past events - but never predict the future!