Argentina’s Inflation Problem, and How It’s Permeated Every Aspect of the Culture

Gone are the days when "rich as an Argentine" was an un-ironic expression.

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Argentina’s Inflation Problem, and How It’s Permeated Every Aspect of the Culture

As I write this article I’m sitting in a café in Cordoba, Argentina and reflecting on President Macri’s one year in office. A year ago his party PRO narrowly won. Now, 12 months later, he’s running the country and there’s one word that keeps coming up, again and again: inflation.

Argentina’s annual inflation rate is roughly 40%. No fault of the current government and not entirely their predecessor. But the incredulous policies and corruption of the previous Kirchner administration made it worse. Addressing Argentina’s economy was replaced with number fudging, divisive populist rhetoric and printing money. So Macri’s task for the next three will be one of normalizing. Indicative of getting down to work, the new administration has recognized the peso’s true value and has reached settlements with bondholders following Argentina’s default after the 2001 financial crisis.

But technical discussion of economics dehumanizes the Argentinian reality.

I’m having a typical breakfast, a café con leche (latte) and two medialunas (small croissants) and considering the total. When I arrived in Buenos Aires in 2009, I paid 7 pesos. Today in café “Kantine” the bill is 55. As my breakfast has skyrocketed, the peso has plummeted. From 2009 to now, it has dropped from 3.50, to one U.s. dollar, to over 15.

Every year, from apartment rent to natural gas to—God forbid—beef, prices have gone up by as much as 50%. When my wife and I signed the rental contract for our apartment last year, we agreed to a standard practice: two-years followed by a 30% hike in the second. Even menus, like those in “Kantine,” are plasticized so that prices can be erased and updated.

“We will not be able to eat great asados anymore!” my father-in-law cried.

As Argentines have experienced firsthand, inflation is the unabated price increase of goods and services. As prices rise, currency devalues. Expansionary monetary policy to stimulate economic growth is a direct cause.

But there’s inflation and then there’s inflation. In 2015, Venezuela was number one at approximately 60%. Ukraine was in second place with 49% and Argentina sixth, between Yemen and Malawi. But at one point it was far higher. From 1989-90 it topped 20,000%. Inflation is a natural, and healthy part of any economy, but everyone worries when it’s prefixed by “high” or “hyper”.

The US 2016 inflation rate will be about 1.5%, and Canada’s 1.7%. When my wife and I visited family in Canada last year, it was her second time. She couldn’t believe that the can of Coke she saw for a dollar in 2010 was still a dollar in 2015.

Imagine that every paycheck devalues the moment it enters your account. Prices rise everywhere, and your salary barely keeps up. Insecurity? Helplessness? Anxiety? Argentina has the most psychologists per capita. Is inflation to blame?

Getting ahead seems impossible. Every day is a battle in Argentina, from hustling between stores comparing prices to peso-pinching to waiting in bank lines to pay bills or collect subsidies. So they hunker down, try to survive. and resign themselves to the truth that there is no “Argentine Dream.”

Every month, peso-by-peso, prices in supermarkets, corner stores, cafes, gas stations and real estate steadily rise. But this is expected, so at the beginning of every year, workers strike.

Strikes are colourful and rhythmic, with paper fliers, drums and exploding noisemakers. But far from impromptu reactions, they are calculated instruments of negotiation, keeping salaries barely at par with cost of living. Inflation is even written into contracts with several wage increases per year (indexation).

In 2012 my wife and I bought a used Ford Focus for 40,000 pesos, the equivalent of $US 10,000 at the time. Last year, we sold that same car for 90,000 pesos, about $US 7,000. After selling the Ford, we put the cash in a term deposit where we earned nearly 30%. A dream investment if it weren’t for a superior inflation rate.

Supermarkets are enlightening. We visit one on Tuesdays because of weekly price promotions. But purchases are limited to conserve stock: “Two per customer.” At the checkout, we wait as tills routinely run out of bills and as managers run from one to the next dispersing wads of depreciating pesos. If we pay with credit we have the option of quotes. In fact, paying in installments—as many as 12—is common for groceries, clothing, and appliances.

Until this year, the 100-peso note was Argentina’s largest denomination. But Zimbabwe-ish in their foretelling, the federal bank has issued 200 and 500 notes this year and in 2017, 1,000 pesos.

The Argentine government is desperate for Argentines to invest in-country, but there’s little trust in banks. In 2001, following financial collapse and to avoid capital flight, banks froze accounts—the infamous “Corralito” measure. Many had U.S. dollars, but were offered devalued pesos in return. Argentines lost their life savings. Today, mattresses and shoeboxes are safer.

With the government straining to keep dollars in the country, protectionism became the answer. Today, imported goods are prohibitively expensive. The 15-inch MacBook Pro that I’m typing on and that I paid US $2,000 for in Canada costs over US $4,000 here. So Argentines pay more than the rest of the world, with inferior currency that continually loses value.

Argentina has become so expensive for Argentines that trips to Miami or Chile are shopping holidays. Even with the frightening border duties, a smart TV bought abroad is cost effective.

And if prices don’t increase just with inflation, they vary widely with uncertainty. Worrying about revenues, retailers price indiscriminately, such that the same item may cost 200% more or less around the corner. And product quantity and quality drop. My favorite chocolate bar, for instance, suddenly weighs less.

Expansionary monetary policy is behind inflation. Governments print money to meet budget needs, and in the case of the previous Kirchner administration, it was innumerable handouts to the poor and working classes and enormous public sector employment. The Kirchners are populists, and therefore self-proclaimed champions of the poor. Without money for handouts, they lose their votes.

But this isn’t new. In fact, since the 1930s, Argentina has had nearly a dozen chronic inflation cycles. Money is needed. Money is printed. Inflation increases. Hyperinflation ensues. Economy collapses. All followed by monetary reform (new currency), again and again.

At the turn of the 20th century, Argentina was one of the richest countries on Earth. “As rich as an Argentine” was once an expression. Even the country’s name alludes to wealth—argentum is Latin for silver.

However, despite all the potential, around 1930 Argentina went awry, spinning into a cycle of recurrent violence, dictatorships, inflation, and economic collapse, to become one of the least politically and economically stable countries in the world. This is the country we know today, and the reverse development has been branded “The Argentine Paradox”.

But the “why” and “when” of Argentina’s entrance into self-destruction are unclear, because there’s no other like it. Economist Simon Kuznetz famously said “There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina.”

Several factors are the root of Argentina’s current state. Argentina’s explosion from the starting gates was based on a rich fertile land producing meat, grain, wool and leather for export. But aside from an extensive rail system, the country was poorly industrialized and failed to diversify. Whether it started with the Great Depression or WWII, the export-dependent country had a world less willing and able to buy its products. There was also a divide in the population that has never been righted; a few wealthy landowners and industrialists and many uneducated and dependent workers. In fact, Argentina’s education and health system lagged other prosperous countries of the time. Argentina especially relied on the UK as an investor and customer. When the world opened up after WWII, Argentina closed its borders to become a self-sufficient nation under Juan Peron’s protectionism, beginning its isolation.

Finally, what was apparent under the Kirchner administration is Argentina’s autoimmune disorder. It’s own government is its undoing. The romanticized and immortalized Juan Peron and his wife, Evita were the start of Peronism, a populist political ideology that has kept aflame by succeeding parties and coincided with Argentina’s decline. Built on the facet of sticking up for “the people” their policies are likely responsible for their perpetual poverty. For more than 80 years political instability and rampant corruption have been the norm with democracy continually under threat. Few have wanted to invest in Argentina, except maybe now.

For 12 years, the Kirchners, rather than addressing the country’s economy, manipulated the perception of it. Inflation was a dirty word and they took every step to avoid admitting it including threating and fining economists for publishing independent rates. For years the government reported a sub 10% rate and manipulated the CPI. Only by threat of international sanction did they relent. They even reported a poverty index below Germany’s. Government published statistics were so unreliable that The Economist magazine refused to publish them.

Most ridiculous, was the manipulation of the Big Mac Index. Every year The Economist, publishes the prices of Big Mac meals around the world, as an informal way of comparing purchasing power. Over time it also shows inflation. Under the Kirchners, as a right to operate in Argentina, McDonald’s maintained its Big Mac meal at a lower price than any other.

Now under Macri, the next three years will be even tighter than the last thirteen, as a subsidy-dependent society will now have to do with less. What are uneducated parents who receive a stipend for their children, living in a house granted by the government and powered by subsidized utilities to do?

Even wealthy landowners feel the squeeze. In Argentina’s fertile pampas you encounter an Argentine ingenuity: “silo bolsas” (silo bags). Like their name alludes to, silo bags are grain stores but in bag form. These giant white slugs have permitted farmers to weather the storm – an inflation hedge. Soybeans are far more stable than the peso.

But economic and political instability have existed over such a long portion of Argentina’s history, nearly a century, that it’s part of the culture. High inflation, strikes, military intervention, violence, and economic collapse are fairly regular.

During the 2013 lootings my wife was unnaturally calm. “We’ll probably have to stay in the apartment for a couple days.” We watched on TV as scores of scooters, like wasps arrived at supermarkets smashed through windows and ran out with merchandise. Meanwhile police were striking for a salary increase. Three blocks from our apartment, business owners built barricades and spray painted images of guns on either end of the street, warning any would-be intruders. Rumor is it’ll happen again this year.

Inflation reaches far.

In our former middle-class neighborhood, crime reached an intolerable level. As our pregnant neighbor got out of her vehicle with her daughter, a gang of teenagers stole her purse. Several blocks away an elderly couple opened the door to thugs disguised as cable guys who tied them up and emptied them out; another home invasion around the corner; a hold up at the vegetable market; a handgun to the head in a sandwich shop. And a bullet through a boyfriend’s back as scooter driving “chorros” sped off with his girlfriend’s purse. This all happened within a year, then our duplex was robbed for the third time, so we left.

Slums dot the cities. The young and old beg in the streets, while others go from café to café selling what they can. Families trot by in horse-pulled carts collecting cardboard, while gangs of squeegee people wait at stoplights washing windows with dirty river water. Orange-vested parking attendants, “naranjitos” – the parking mafia, lie in wait around hospitals and plazas, charging vehicle owners to park on “their” streets.

Graffiti decorates walls from frustrated youth and streets and plazas fill with litter from people who no longer care. The “social contract” is in peril.

Infrastructure is constantly at its limit with overflowing sewers, potholes and cracks pocking streets and sidewalks. Billboards stand empty and buildings in mid-construction loom like skeletons – casualties in inflation’s wake.

My wife has worked at the same telephone company since she began university as does her mom and stepfather. And like many middle class Argentinians she has two professions. Among her co-workers are part-time lawyers, doctors, and designers that owing to inflation have to bring as much income in as possible. And even at work many sell things on the side, such as my mother-in-law who sells walnuts, olive oil and knock-off perfumes.

But not all Argentines feel the need to work. Inflation also leads to idleness and loss of work ethic, such as for public servants. Unmotivated police officers chat on corners or stare at their cellphones. Earlier this year I watched the small figure of a city worker sweeping beside the river. While he made ineffective piles of dirt on the bank of the cemented culvert, the banks were festooned with plastic bottles and debris – his effort ineffectual.

On the 29th of the month Argentine families make gnocchi (ñoqui). Gnocchi is also the nickname for a civil servant, doing little or no work, only showing only up at the end of the month for their paycheck.

Logically, you would expect Argentines to save, but many don’t. They spend what little they’ve got knowing that their pesos will devalue. Those with the future in mind, try to buy properties with cash. Lights are turned off, air conditioners used sparingly and if you own a vehicle you install a propane tank to avoid high gasoline prices.

The effects of high inflation and general economic disorder permeate all aspects of Argentine society from psychology, to social consciousness to crime. Last year I watched a well-dressed middle-aged man step out of his new sedan with a knife in his hand to over a dispute with an adolescent. Argentines are on edge.

Even my resolute wife has her breaking point. With tears in her eyes and a look of helplessness she cried how she had wandered between several butchers comparing prices of chicken. Upon reaching our apartment she discovered it was rotten, washed in bleach to keep its colour.

“In the 2001 crisis, vendors would their put their fridges on minimum or turn them off at night to save money. I guess they’re doing it again”.

What’s the future? If history’s any indication, this is just another stage in an endless cycle. But optimistically, if the government maintains its focus, and Argentines can withstand the growing pains, then the day might we return when Argentines have the country they cry for, and can pay seven pesos for a latte.

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