Argentinian Depression

by Serban V.C. Enache

Leaving aside Venezuela for a moment, I thought we’d focus on the situation in Argentina. This article will contain a lot of graphs, so please bear with me. We will look at the symptoms and then formulate a diagnosis.

When looking at the inflation rate, we see that things started going erratic with 2014. And with 2016, it went from bad to worse.

Next, we’ll look at the Unemployment Rate and the Labor Force Participation Rate. These two graphs paint a contradictory picture. The latter went up a bit, which is good, while the former went up as well, which is bad.

How about Industrial Production? Nightmare stats for 2018 and the beginning of 2019.

Let’s get a wider view on Industrial Production. It’s a nightmare.

What about overall capacity utilization? Monstrous.

What about Monetary Policy? The Central Bank’s key interest rate is in the double digits and its highest peak in 2018 was at about 75 percent.

The interbank rate, the rate at which banks lend reserves to each other short-term, is similar to the previous graph, as is normal.

Argentina’s minimum wages graph also sheds important insight, as we see the reactive picture to the economic and financial ailments outlined previously. Labor Unions in Argentina are very powerful, and often strike during negotiations. We see that between 2010 and 2012, and between 2012 and 2014, minimum wage growth follows the same speed, more or less, but it accelerates between 2014 and 2016, and it goes even faster in the next years.

Let’s look at Argentina’s foreign exchange reserves. FX reserves have been going up dramatically compared to the 2014-2016 period. In January this year, Argentina had 60.3 billion US dollars in reserves. This situation is due to the Government obtaining money from the IMF.

Household debt to GDP tells us that from 2017 it started to grow, reaching a peak of almost 7.5 percent of GDP in 2018.

How about gasoline prices? Not what you’d expect. It actually went down by a bit in recent years.

Tax-wise, things have stayed the same. The company tax, the personal income tax, the sales tax, and social security taxes have remained unchanged. Exports remained relatively stable, while imports grew between 2017 and 2018. Argentina’s imports tend to decrease on the heels of each year.

Can’t find faults in the macros here. The Argentinian Domestic Private Sector has been building equity year-after-year since 2011. In 2017, it incurred a slight deficit of 0.9 percent. Unfortunately, the macro numbers for 2018 aren’t available yet.

Was the weather different? If you suspected something like a drought, you nailed it. During the 2017-2018 season, the country experienced drought-level moisture and high temperatures. The national average yield was almost 30 percent worse than in the previous year, with losses calculated at about 3.4 billion dollars.

Conclusion

We have a bad harvest, a collapse in industrial production and overall capacity utilization, rising unemployment, a financial bottleneck due to high interest rate monetary policy, households taking on 2 extra percentage points of GDP in debt, the negative current account almost doubling in size in one year [2017], and the minimum wage rising faster than usual due to the high inflation. Note: changes in the minimum wage impact the entire wage structure at varying degrees according to specific circumstances. Note: we should take the official stats with a grain of salt, particularly the labor figures. My friend from Buenos Aires, Diego Lattes, would be first to say so, and I’d say the same about Romania.

The Government of Mauricio Macri is an outright disaster. Inflation and economic contraction made Macri turn to the IMF. Last year his Government agreed to a 56.3 billion dollar loan, accepting in turn strict [arbitrary] targets set by that vulture institution. Mauricio Macri is center right, so that tells you all you need to know about his policies; ditto if he was center left. I reiterate, Macri’s Government is a disaster. Argentinians should reject his so-called reforms and plan to balance the budget, and should vote him out at the next election. This mess can only get worse with him in office.

Argentina requires investment. And it needed it yesterday. The mainstream media and alternative media, outlets like Zerohedge, all like to invoke the Government printing money and corruption as the cause for Argentina’s ailments. Most countries on earth print money [a crude way of saying they run fiscal deficits]. Most countries on earth are corrupt, including the developed ones, including the super powers. But how did they develop? Surely they didn’t develop by “abolishing” corruption, for lack of a better word. No. They developed through investment, through credit – they didn’t first make the output and then come up with money for it, but vice-versa. Argentina needs better policies and better people in Government.

For more information on the inflation problem, see The Cure For Hyperinflation. Solutions are found at the end of that article.

The Cure For Hyperinflation: Weimar and Venezuela

by Serban V.C. Enache

We frequently hear people bemoan the dreaded phenomenon of hyperinflation. We often hear only one explanation for it – the government printed money like crazy. We rarely hear the reasons behind the overuse of the currency press, which are: loss of output capacity [human and material] as a result of natural disasters or loss of a war, unfair war reparations, political instability, brazen corruption, the end of a fixed exchange rate with a strong currency. In this article I’ll focus on the cure for the phenomenon of hyperinflation – and this cure won’t entail brutal fiscal austerity that halts inflation by condemning much land and capital [buildings and machinery] to idleness and a great many souls to involuntary unemployment, poverty, and sickness.

The Weimar Republic. Background.

After WW1, life in Germany became hell. The political and economic burdens the creditors of the Versailles Treaty [Woodrow Wilson especially] imposed on the Germans created the conditions for the hyperinflation which soon followed. These impositions were highly unjust and impossible to meet. Meanwhile, the Ruhr Valley, Germany’s industrial heartland was occupied by the Allies. Workers responded to the occupation by organizing strikes. Crashing economic activity led to falling tax revenues and higher welfare payments. The Government, deprived of gold reserves and output capacity, had no choice but to print money to cover its costs plus the war reparations. Hyperinflation ensued. Farmers and manufacturers more and more refused to sell their output for the increasingly devalued Papiermark. This is the context of the phenomenon. Those interested in the facts will verify them, those interested solely in confirming their preconceived notions will dismiss them.

The Plan To Fix The Problem

Finance Minister Hans Luther, working together with Hjalmar Schacht [later head of the Central Bank], using Karl Helfferich’s idea of a currency backed by real goods, formulated a scheme to contain the rampant inflation of the Papiermark. In 1923, Berlin, the Rentenbank was created. The institution provided credit to agriculture, industry, and commerce.

The term “Rentenbank” stems from “annuity bonds”, fixed-income securities [bearer bonds] issued by the first pension banks during the 19th century. Since the Middle Ages the peasants were forced to provide easements to their landlords – various hand services and the like. In the early 19th century, though, agrarian reforms started in Prussia and other German states aimed to disband these obligations. The effort initially failed owing to a lack of a proper credit system.

To accelerate the agrarian reforms, pension banks were established as state-owned mortgage banks. They gave state-guaranteed, freely tradable and fixed-rate bonds (annuities) as money compensation for the expired privilege of the landlords. On the other hand, the peasants paid fixed income to the pension funds over a long period of time, from which the banks were able to service the principal and interest on the bonds. These reforms and the liberation of the peasants gained traction and agricultural productivity rose dramatically.

Enter the Rentenmark

Returning to the 1920s, November 1923 to be precise, the Rentenbank issued its own currency, the Rentenmark, which was covered by mortgages on the grounds of holdings. Total amount of mortgages and land imposts was valued at over 3.2 billion gold-marks. The Act creating the Rentenmark ensured twice yearly payments on property, due in April and October. In return for the real estate, Rentenbank issued interest-bearing bonds with a value of over 500 gold marks or a multiple thereof. The exchange rate between the Rentenmark and the Papiermark was set at 1:1 trillion, and with the US Dollar at 4.2:1.

The Rentenmark didn’t have legal tender status, so there was no legal obligation for private agents to accept it as a means of payment, however, all public institutions had to accept it. Even without legal tender status, the citizens embraced it right away. The Rentenmark’s value was relatively stable, while its quantity remained fixed, Shacht insisted on it. On August 30th, 1924, the newly-introduced Reichsmark became legal tender and was given equal value to the Rentenmark. It’s very important to note that this exchange rate was applied to two fiat currencies over which the Government had power of authority. It retained the right to alter the exchange rate if it wanted or needed to. The issued Rentenmark nominal remained in circulation up until 1948.

Tight Money Policy

In charge of the Central Bank, Hjalmar Schacht implemented a tight monetary policy, the institution ceased discounting Papiermark bills and, despite political pressures, he kept the volume of Rentenmarks strictly limited. As for fiscal policy, Finance Minister Hans Luther went on the austerity route, the correct choice given the circumstances. He brought forward due dates for taxes, increased prepayments of assessed taxes, raised the sales tax, and readjusted the fiscal burden between the regional governments [Lands] and the Reich [the Central Government]. Spending-wise, Luther shrank the number of Reich bureaucrats by a quarter over four months, froze bonuses and reduced their wages. These measures accompanying the issuance of the ‘land-backed’ Rentenmark succeeded; hyperinflation was brought to an end immediately. People spoke of the ‘miracle of the pension mark.’

Between 1926 and 1929 inflation hovered below 2 percent. In the early 30s, however, in reply to the Great Depression, the Government of Heinrich Bruning imposed harsh austerity measures needlessly [tightening credit, cutting wages, cutting public assistance, and increasing taxes], which exploded unemployment and poverty levels in the country and, in the process, made the once marginal Nazis incredibly popular with the people. The National Socialists opposed Bruning’s Government from the beginning, unlike the other right wing parties. Bruning and his policies became widely hated.

See the graph below.

The reader will rightly ask, why did fiscal austerity work for Schacht and Luther, but not for Bruning’s Government? Schacht and Luther applied counter-cyclical fiscal and monetary policy, while Bruning applied pro-cyclical policy. Excess demand relative to supply is eliminated via taxation [draining income from the private sector]. But during the Great Depression, there was too little demand relative to what was actually on the shelves. Bruning’s reforms collapsed aggregate demand levels even further.

Thoughts On Venezuela

The geopolitical aspect is very important, for it can greatly amplify minor or general problems very fast [See Turkey], or it can spark them. The State Central Bank’s dollars in non-cash form reside in accounts at the Federal Reserve, which are beyond Maduro’s control. The Government can’t access these funds. Recently, the US and the UK stole Venezuelan oil and bank assets worth about 30 billion dollars. More so, the US has imposed an outright embargo against Venezuela [trade sanctions levied since 2013 got harsher and harsher, depriving the country of hundreds of billions of dollars in economic activity]. Lastly, belligerent statements coming from Europe and Latin America [Brazil and Colombia especially] and Washington threatening with ‘all options on the table,’ which includes assassination, sabotage, coup, and invasion.

Footage from supermarkets in the capital, stores filled with produce, reveal that a shortage of goods isn’t the problem, but high prices. If it’s true that Maduro’s Government kept public spending high without re-adjusting it to falling prices of crude, then his policy is a key contributor to the bolivar’s dramatically reduced purchasing power. Currency pegs and indexation of wages and pensions with anticipated inflation feed the vicious loop. The Venezuelan Government announced that it’s accepting payments in Euros. In my opinion, this is a big mistake, because the ECB can pull the same stunt on Venezuela that the FED pulled. Maduro is much better off negotiating an entry into the Petro-Yuan with Beijing. Why? You can purchase virtually anything from China. China has made numerous investments across the developing world without asking for political concessions in exchange, in stark contrast to the likes of the IMF. Beijing doesn’t seek regime change or privatizations in exchange for its money. It does business with whoever is interested and it offers advantageous rates too. Trade-wise the Chinese are interested in two things: securing raw material imports and securing demand for their factories. It’s a win-win for both sides.

In my opinion, Venezuela will become Syria 2.0, because there’s no sign that Washington is going to accept any other outcome. The satanic crowd around Trump, the Deep State, and their servants in the corporate media are all pushing the same old hypocritical, war-mongering narrative. They spew it as if it’s a new dish too, not the same rotten thing, teeming with slime and worms. And before we blame it all on the Republicans, remember that 85 percent of journalists in the US are registered Democrats. Since this issue is bipartisan, we know it’s outright devilry. Bolton, Pence, Trump, and the rest – they want to cover up their failure to dismember Syria and Iran by picking on Venezuela, a more vulnerable target closer to home.

If I were in Maduro’s shoes, I’d escalate things ahead of my rivals. I would invite in Russian and Chinese troops and war-gear. Washington doesn’t like to cooperate or negotiate with sovereign regimes. For many decades now, the logic has been, you do as we say, otherwise we treat you as a rogue state. Against a rival who doesn’t wish to bargain and who has threatened [euphemistically or not] violence and murder, you’ve no choice but to take all measures required. Maduro has to choose the 2nd most extreme of defence options [2nd only to the preemptive strike, which doesn’t apply here] because in this context, it’s the wisest step.

If mainstream commentators are fine with US gangsterism, with countries purchasing protection from Washington and the Military Industrial Complex, then they should be fine with Venezuela purchasing protection from Russia and China. They can’t oppose it without being hypocrites and without being Monroe Doctrine apologists, defenders of imperialism, oppression, and mass-murder; not that that’s gonna stop them. Let’s not be naive, US hegemony is shaking. The 2nd Cold War is on.

So What’s The Cure, Dammit?

The recipe for a return to price stability is contingent on the factors which spawned the instability. This list of measures will hopefully cover all eventualities: 1) Counter-cyclical fiscal policy [drain excess money in circulation via taxation, while cutting superfluous spending.] 2) Land-value capture to replace taxation of buildings, labor, sales, and enterprise [taxing natural monopolies, the rent of location; the site-value tax carries negative dead weight – it brings efficiency to the marketplace]. 3) Buffer stock policies [the public authority buys seminal commodities during periods of excess production and sells these commodities domestically during times of dearth]. 4) Allow the national currency to float freely according to demand [drop any fixed exchange rate, whether it’s to gold or foreign currencies, and embrace a sovereign fiat regime]. 5) Negotiate with rival political factions to settle differences and produce a national accord that appeases all sides to a reasonable extent. 6) Ration basic resources to ensure no section of the population starves [hands and minds are precious and must be kept alive and functional to create goods and services for another day; there’s no sense in killing off one section of the population to feed another extra rations]. 7) Bring in a second or third great power in your region, in order to decrease the bargaining power of the established one/s and strengthen your own position in the process. 8) Link up the country’s regions through a comprehensive system of infrastructure, high speed rail especially [the points of resource extraction with the manufacturing centers, the latter with the marketplaces]. 9) Restrict bank lending for speculative purposes [do not permit banks to accept financial assets as collateral for loans, or to mark their assets to market prices.] 10) Discourage private and public agents from borrowing in foreign currency [always ensure loans in domestic currency are cheaper than in foreign currency; never subsidize the latter type of loans]. 11) Employ all available labor to achieve maximum output [Depending on the situation, participation in public works programs would be mandatory or voluntary. In case of emergency, working hours could be increased and holidays decreased.] 12) Don’t lose a war [or better said, don’t lose peace negotiations concerning your fate]. 13) War Bonds [While the role of War Bonds is to allegedly fund a war, in practice what they do is drain liquidity from those who purchase them. They can be denominated in foreign currency, domestic currency, or both. That being said, liquid or illiquid purchasing power is still purchasing power. People can still purchase things on credit, contingent on their own financial situation. War Bonds may have a psychological effect on the populace, reminding households that they must tighten their belts, deferring consumption to the future, so more supplies can be allocated to the troops in the now. The promise is that, after the war is won, bond holders get paid at a profit. 14) Retiring the currency and replacing it with another [Brazil did it several times in the last 77 years; the Government announces taxes and fines payable in a different currency. This method involves burning away people’s cash savings. To escape hyperinflation, Zimbabwe gave several foreign currencies legal tender status.]

Say “Welcome To Recession,” Great Britain

by Mike Goodman

We’re Not In Recession!

Not officially. But we soon will be. The government are congratulating themselves on reaching a so-called budget surplus for the last quarter (October to December) of 2017, which was the third quarter of the fiscal year just ended. They have done this, regardless of the state of the economy, as a deliberate policy target since that was first set by George Osborne. Continue reading “Say “Welcome To Recession,” Great Britain”