Sadly, the world is full of failing welfare states. One of them is Argentina, where the out-of-control welfare state is causing runaway inflation. This, together with bad GDP growth numbers, has led to a credit downgrade that expels Argentina’s treasury bonds from the reliable end of the market, confining it to shady backstreets together with other C- and CC-rated bonds.
As if this was not bad enough, the government of Argentina is engaging in a macroeconomic form of accounting fraud byt trying to conceal its 30-percent annual price increases in manipulated data. This has rightfully caused a confrontation between Argentina and the IMF, whose credit line is in part dependent on the debtor country complying with certain statistical standards.
Aside some real yelling and screaming from Buenos Aires, the IMF demands seem to have a little bit of an impact on the Argentine government. It is not all for the better, but at least the Fund has caught president PMS Kirchner’s attention. From MyFoxNY:
Argentina announced a two-month price freeze on supermarket products Monday in an effort to break spiraling inflation. The price freeze applies to every product in all of the nation’s largest supermarkets — a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies’ trade group, representing 70 percent of the Argentine market, reached the accord with Commerce Secretary Guillermo Moreno, the government’s news agency Telam reported.
This is pure cosmetics. You don’t do away with inflation by banning the last agent in the chain from compensating himself for price increases further back in the process. Wal-Mart and the other supermarket chains are still going to have to compensate their suppliers for higher costs of production and transportation.
There are only two possible results from this: empty shelves in the stores or product reconfiguration. The former is the Soviet solution, the latter the Venezuelan version. After Hugo Chavez caused 30-percent inflation in Venezuela he went after the retailers and food producers when they reconfigured their products. His aggressive policies actually escalated the crisis to the Soviet level, causing food shortage in Venezuela.
It remains to be seen what the outcome will be in Argentina. But one thing is clear: you cannot escape the devastating consequences of inflation by banning people from raising prices.
Polls show Argentines worry most about inflation, which private economists estimate could reach 30 percent this year. The government says it’s trying to hold the next union wage hikes to 20 percent, a figure that suggests how little anyone believes the official index that pegs annual inflation at just 10 percent.
The underlying problem is that the government has been flooding the economy with borrowed funds and printed money, paying for all sorts of work-free entitlements. When more and more spending in the economy is based on work-free income, you open up an imbalance between production and consumption.
This is one of three transmission mechanisms from reckless monetary and fiscal policies to consumer prices spiraling out of control. The second has to do with banks being flooded with cheap liquidity. This can encourage banks to start lending without due attention to the credit strength of their borrowers, simply because they are faced with tempting interest margins, ultimately created by a reckless government.
A third transmission mechanism involves the exchange rate, where a surge in domestic money supply causes a depreciation of the currency.
Which one of these transmission mechanisms has had the strongest influence thus far is yet to be determined. Preliminarily, it looks as though the first one is a major culprit, simply because of the perpetually bad government finances and the lavish nature of Argentina’s entitlement systems.
Argentina offers yet another example of how a runaway welfare state can bring devastation and destitution to a country. It is about time that policy makers in Europe and America pay attention – and start working on Ending the Welfare State.