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What's the political obstacle stopping Argentina from reducing inflation? You'd think at 150% it would be so bad that people would vote for literally anything to stop it. I don't get what they could be funding with money printing that people could feel was worth it.
Agentina at this point has a terminal case of populism, from what I understand. This plus central bank being subservient to the whims of the state, plus simple export-driven economy where diverting labor from agriculture to industry eliminates surpluses, plus human capital flight… Really a proof for why independent CB is valuable. And low time preference is indispensable.
On the other hand, a good use case for crypto.
The largest problem is that the central government doesn’t control spending. This is why the terminal case of money printing exists, Argentina’s constitution is extremely fucked up and resembles a combination of the pre-civil war US, the EU and a modern federal country. Provinces are supreme other than some powers they nominally ‘delegate’ to the federal government. There are like 20 provinces and many are controlled by a single party, cluster of local patricians or just a single family.
Read this extraordinary OECD profile. Argentina is one of the most decentralized countries in the world. Provinces seem to have a constitutional right to borrow up to 25% of their income (most of which comes from their share of federal tax receipts) per year from the federal government. It would be as if US states could unilaterally require the federal reserve to print money for them on an ongoing basis, without Washington being able to do much about it. The federal government collects something like 85% of tax income, but then distributes in practice well over the appropriate share of it to the provinces through this weird arrangement and must pay for all spending at the federal level on the military, infrastructure, etc.
In theory the federal congress can take over provincial government to rein in spending in an emergency, but in practice local power centers are themselves so populist and so entrenched that this is widely seen as impossible, and whenever a federal politician tries to bring the provinces to heel, the provincial elites get scared their powerful patronage networks will go unfunded and so replace the leader with someone more amenable.
If you look at spending patterns every time there’s a remotely non-terrible year in Argentina spending jumps 10-15% in real terms. Like the friend whose money seems to run through his fingers, they can’t not spend everything they have, and more. And of course the provincial system creates perverse incentives where each province has to maximize its bennies before the whole thing goes kaput again.
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When the center right Juntos por el Cambio took power they inherited high inflation and pledged to address it, but action ended up being mangled by an internal struggle between the Central Bank of Argentina and the Treasury. The CBA wanted to more agresively target inflation but the Treasury pointed out because the pension system had a lag adjustment, disinflation would prevent them from getting their finances in the black. Fighting inflation and restoring the nation's fiscal health were both campaign promises of Macri's; unfortunately he sided with the Treasury and they raised the inflation target from 10% to 15%. International investors responded in kind to the poor financial stewardship and things have continued to spiral from there
The current peronist government, Frente de Todos, is actually addressing inflation with really high interest rates of 97%, at least in theory, but they're probably implementing it poorly. Whereas a normal Central Bank would be doing open market operations the CBA doesn't have the reserves for that, so historically they do sterilization instead, or selling bonds to remove money from the economy. The drawback is that issuing bonds is creating a debt that needs to be repaid, so it's a way of signaling that you're putting more money into the economy later, which might raise inflation expectations.
Part of the problem is that the normal psychological effect of performative monetary tightening, which is what’s primarily responsible for changes in expectation in normal countries, doesn’t exist around Argentinian central bank rate-setting, since nobody has faith that any tightening regime will be completed before enough people start whining for the populists to get back into power and turn on the taps.
Argentina is a hilarious country. Basically a bunch of retired college educated 30 year olds who live at home in poverty. It’s the weirdest thing you’ve ever seen. A mansion cost a millions dollars to own and $700/mth to rent. (Too many people buy real estate to hedge inflation but everyone lives with their family so there’s no renter demand so rent is dirt cheap to rent the upper classes investment mansions).
Steak cost 10% of the cost in the USA but clothes cost 150%. It’s literally so weird. The whole thing is weird. Way too many oddball terrifies and taxes on certain things that throw parts of the economy off.
Beautiful place though. And nice people too. Argentinians are some of the nicest people out there.
Plan to move there sooner or later.
I mean some of that is surely PPP terms combining oddly with subsidies.
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I think it’s one of those countries where material quality of life is much worse than in the rich world for the average person, but still high enough (plus mild climate, relaxed culture, relative safety) that most people are kind of fine with the arrangement.
The best comparison really is Southern Italy, which Southern Italians will always tell you is a shithole (and it kind of is) but at the same time don’t want to leave because compared to working hard 9-6 in Milan for (much) more money, staying in Calabria and living a chill life is preferable to them.
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Agreed. I have a kind of not-that-backed-up theory that all the previous, mismanaged crises Argentina has lived through have had a lasting psychological effect that makes it harder to restore balance. Like if a normal country has a rocky weather in the economy people don't necessarily all react in some extreme fashion, whereas Argentinians have good reason to expect their leaders to respond poorly and for things to escalate, so they'll rapidly shift purchasing habits or pull money from banks and help make their fears a self-fulfilling prophecy.
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