Inflation and trap, a cocktail with aroma stop-vu

Inflation, exchange rate arrears, exchange rate parallel and country risk seemed to topics that were destined for the Hall of memories. However, they resumed today force, they have become the Centre of the concerns of the Argentine economy and already seriously affect growth and investment.

Behind most of these problems is the fact that the Government tolerated inflation during many years and minimizing the detrimental effects that would have, that generally they are not immediately and only come to light after a few years.

This tolerance was perhaps based on economic theories from the 1960s that argued that a higher inflation rate helped lower the rate of unemployment (the Phillips curve call). Later it was demonstrated that these theories were wrong, since increases in the inflation rate in the best of cases can only lower unemployment for a short period.

What has happened is that the long term has become the Argentina and inflation far help lower the unemployment rate begins to have negative effects on growth and employment (see article by Federico Sturzenegger of last week).

The first symptom that the long term already reached is the exchange rate, which started to become evident by the end of 2011 and backwardness led to risking fears a devaluation and an increase in the purchase of dollars. The problem arose as a result of many years in which prices and wages went up elevator and staircase exchange rate. This process at some point had to hatching and coincided with the electoral period.

The Government responded with the introduction of strict exchange controls, called stocks, arguing that if it were not for the controls would be a sharp decline in international reserves, which was true, since no controls and no depreciation reserves of the Central Bank, no doubt, were to fall.

Of course that exchange controls were not the only alternative. Could have done what they did other countries in the region when they faced similar exchange rate pressures or what did Argentina face the international financial crisis in 2008; or accelerate the rate of devaluation and maintain some higher interest rates. But that alternative was discarded and opted for the controls, which over time were ever more restrictive and that have not been able to avoid a fall in international reserves.

The road to an exchange rate gap

Initially, they provided relief and managed for a time to stop the drain of foreign exchange, but also opened a gap between the official and parallel exchange which was increasing over time, and which recently came to almost 60 percent.

The increase in the exchange rate gap is explained in large part because controls allowed a greater monetary emission, since the weights that were issued from that moment no generated a fall in reserves. A kind of playpen where the weights were trapped in the economy and that, therefore, they sought refuge in assets or financial assets (mainly dollars) was created. Or the increased demand for dollars is balanced through the price (parallel exchange rate) and the quantities (reserves) not.

The big problem has been the monetary issue, now increasing at a rate of almost 40% a year. This rise in the amount of money not only affects the parallel exchange rate, but it also has an effect on prices.

This is a second symptom that the long term already arrived. While there was excess capacity in the economy, the policy of encouragement of demand (such as monetary emission) had a positive effect on the level of activity and employment, but also some impact on prices. But once bottlenecks began to spread to more and more sectors of the economy the greater issue already had success in expanding the level of activity and instead only fogoneaba inflation. She is clear that the economic situation today is complex, and the big question is how it is possible to watch this film.

The answer will depend largely on economic policy. If there is a change in monetary policy hard to think that it can fall in the exchange rate gap or inflation. The argument that the rise of the parallel exchange rate was due to seasonal factors is losing strength as days pass and no narrows the gap. The problem seems to be on other side.

In terms of inflation, all indications are that it will be difficult to stop it if the amount of money grows 40% annually. In fact, you don't need more than look at the history of the southern or spring plans to understand that isolated as the price control policies are not enough to curb inflation.

For those who studied the Argentine economy in the 1970s and 1980s, the current situation has a déjà-vu flavour. Time will tell if, as the title of the book by Reihnhart and Rogoff says, this time is different.