Versión Español
EspañolAs the end of President Cristina Fernández de Kirchner‘s term approaches, it becomes more apparent what kind of legacy she’ll leave behind after eight years in office.
The multiple problems that the next administration will face include inflation, currency-exchange controls, the holdout investor problem, a lack of currency reserves, an energy crisis, problems in the education system, and rampant corruption, to name a few.
Analysts studying changes in the general consumer price index have warned of current elevated levels of 30 to 35 percent, emphasizing that the next administration’s agenda must feature efforts to bring prices down.
For anyone purchasing goods with this level of inflation, the situation is obviously critical. Still worse off are the inhabitants of Venezuela, who face the the largest price increases in the region. However, high inflation in itself is not the most important point.
If, for example, the price index and salaries doubled simultaneously there would be no loss of purchasing power as consumers would be able to purchase the same amount of goods. For a long time in Argentina, despite increased inflation, changes in salaries were equal or greater to it. But no longer.
The problem of printing and distributing more currency is not only that prices will increase, but that relative prices will change, sending the wrong signal to the public
Now, the problem is much more complex than simple price increases. The most alarming problem is the variation in relative prices, which confuses consumers as much as it does business owners.
By definition, economics is the social science that analyzes how to distribute ever limited resources to those requiring them. Because resources are limited, mankind is naturally predisposed to make choices that satisfy its more urgent needs. In other words, human nature is such that individuals make decisions to move from a situation that is less satisfactory to one that is more satisfactory.
One is likely to wonder how an individual can know what decision to make with so much information in the world. The answer is simple: relative prices. They’re a signal to both consumers and business owners, showing which products are more in demand than others. For the products that are more in demand, there is a tendency for the price to increase, changing the relative price and showing that the particular good or service is in higher demand than others.
The problem of current government policy in printing and distributing more money is that this signal is disrupted: prices will still increase, but relative prices will also change, sending the wrong signal to the public.
For example, suppose that the government injects AR$100,000 into the economy by way of issuing new banknotes. The money will be accessible to some people first, and then others later.
This currency doesn’t have an impact on all people equally. Those who have first access to that currency would benefit because they would have more money to purchase more goods. This would cause the prices for the goods purchased by these individuals with the currency injected to increase, which would affect relative prices.
Then when the currency circulates and reaches other people, they would have this extra money, but the prices of consumer goods have already increased. Of course, the last people to receive this extra money would be the ones who benefit the least, for the simple fact that they were last in line.
The challenge for the next administration is to halt the distortion of relative prices: they should depend on the workings of the free market.
The price increase of goods purchased by those who received extra currency first sends false signal to business owners about the demand for their product. For example, if consumers spent the money on shirts, they would make shirt producers mistakenly believe their product is in higher long-term demand.
Guided by this false signal, they run the risk of increasing the price and potentially harming their business, since in reality, there’s not a significant increase in the demand for the product they are selling.
This change in relative prices makes the already bad Argentinean situation even worse, more than the increased general price index, which cannot allow us to analyze which goods are more in demand and which ones are not.
The printing of currency in Argentina has been of such magnitude (including a 40 percent increase in liquidity between 2014 and 2015) that consumers and producers have been left blind.
The challenge for the next administration is to halt the distortion of relative prices. In a healthy economy, they should depend on the workings of the free market, which would send the correct signals to both consumers and producers, and prevent them from making disastrous and costly decisions.
Translated by Thalia C. Siqueiros. Edited by Laurie Blair. Update: 2 p.m. EDT, April 12, 2015.
Discussion about this post