The economic policy decision-making process exists, for the most part, in a theoretical world. Today’s decisions are taken from yesterday’s problems and (hopefully) adjusted for the conditions that make each situation unique. For example, central bank policy over the past few years has drawn heavily from “lessons learned” during the Great Depression and, to a lesser extent, from the two decades-old Japanese malaise.
Runaway inflation is another economic topic for which many historical parallels can be drawn, but for which no magic bullet clearly exists, as no two hyperinflations have the exact root causes, nor do they unfold in the same manner. While it is difficult to know how to navigate through such a period, it is relatively easy to know what not to do. Case in point: Argentina.
Argentina last defaulted on its national debt a little over 10 years ago and since then has had a near impossible task of getting any outside funding. When one is locked out of the sovereign debt market, foreign direct investment is the only hope. But in order to attract enough foreign capital, a nation must adopt policies that put the needs of the business community at or above the needs of the citizenry. Therein lies the problem in Argentina.
The Kirchner dynasty – the late Nestor and his then-first lady Cristina Fernandez – rode into Buenos Aires in 2003 amid strong populist sentiment, in a manner straight out of Evita. When Nestor left office, Cristina succeeded him as President. But as the economic tide turned amid global weakness, she was faced with the near impossible task of placating both the business community – the lifeline of Argentina’s economy – as well as the populace – the sole source of her power.
The result, it appears, is a worst case scenario where no one is satisfied. The first misstep was to encourage a little currency devaluation in order to prop up the export sector. The problem with devaluation, especially in South America, with its storied history of currency instability, is that a tweak can quickly turn into a route as investors bail. Right now, investors and locals are bailing. Though the “official” exchange rate is pegged at ARS 6.60 to the dollar, the black market rate has been falling rapidly and is reported to be near 11. Currency reserves have fallen to about $30 billion, the lowest level in eight years.
The policy responses by President Fernandez de Kirchner to pacify the masses have further alienated the business class. Last year she seized control of YPF, the nation’s largest energy company, and more recently imposed price controls on basic foodstuffs. While such measures may offer a short term boost, the economics of price controls soon win out. The energy price controls have run their course, with widespread disruptions now the norm. The recent freeze on grocery prices will soon mean empty shelves. Meanwhile, any hope of a private investment lifeline has been squandered by Fernandez government policies.
My guess is, as soon as Argentina drains its reserves and ignites a true hyperinflation, and has run out of options,the IMF will step in (again). Argentina will lop a few digits off the value of its currency (again). The only thing that can be done now is to watch it unfold and, after the fact, add Argentina to the list of cautionary tales.