Economy What Is Inflation?

[Droooped]

If authorities decide to increase the money supply by 30%, leading to a corresponding 30% rise in both prices and wages in pesos, some might question whether this truly constitutes inflation. In this scenario, where the increase in money supply is matched by an equivalent increase in wages, it might appear as if there is no net inflation, at least in terms of purchasing power.

However, the key issue arises when considering the consequences of not printing additional money. Without such an increase, wages would likely remain stagnant, and any rise in prices would be reflective of actual inflation, estimated by some to be around 5%. Therefore, the decision to print money seems to be a strategy to maintain the equilibrium between wages and prices, preventing a decrease in purchasing power. The challenge, as you point out, lies in the potential devaluation of peso savings, as the currency's value diminishes by 30%.

On a side note, the practicality and convenience of large denomination bills like the 100 pesos note could also be a concern, making transactions more cumbersome compared to smaller denominations.

 

[MarianoCc]

This presents a complex situation. In essence, inflation stems from the dynamics of supply and demand. When there is a significant demand for a currency, both domestically and in the foreign exchange market, the currency tends to appreciate in value compared to other currencies and a basket of goods. Conversely, when the demand is low, the opposite reaction occurs.

Addressing inflation in Argentina proves intricate. However, the primary explanation points to the policies of the Kirchner governments, both of them, and their inclination towards printing money due to socialist preferences. This led to an expansion of the money supply, resulting in an increased circulation of pesos in both domestic and foreign exchange markets. The surplus of Argentine pesos in circulation caused a depreciation of its value concerning other currencies and various goods and services.

Macri is endeavoring to fortify the Argentine peso. Unfortunately, reducing the money supply has proven challenging due to inflation and extensive socialist subsidies in Argentina for various constituencies. Instead, Macri has opted to elevate government interest rates to unprecedented levels, reaching 71% recently – the highest globally. The objective is to stimulate demand for the peso, encouraging investors and currency traders to acquire pesos and peso-denominated assets. This, in turn, is intended to elevate the peso's value against the dollar and other international currencies. However, as of now, this strategy has not yielded the desired results.

 

[RinderHerts]

Argentina doesn't operate in isolation; it is impacted by global inflation affecting certain goods, influencing local prices irrespective of domestic inflation or wage trends. Moreover, wage disparities exist among various job sectors in Argentina, with some experiencing increases while others remain stagnant – not everyone is part of a union. The interplay of taxes, duties, and demand further complicates the economic landscape.

The peculiar phenomenon of people hoarding physical dollars and the real estate industry, functioning as a de facto banking system without mortgages, adds a unique dynamic. Illegal movements of cash in and out of the country contribute to the complexity. Additionally, government-backed artificial price supports in some sectors contrast with invisible price hikes driven by monopolies or near-monopolies in crucial industries.

Entities like Edenor and Edensur, serving as effective monopolies, are theoretically "regulated" by the government but lack transparency in their operations. Economists often construct theoretical models assuming "all things being equal," yet the Argentine economy defies such simplifications. In reality, all things are seldom equal, and the idiosyncrasies of the Argentine economy exacerbate this discrepancy.

Despite these challenges, there is agreement on the practicality of 500 peso and 1000 peso bills.

 

[Droooped]

Conversely, no Argentine relies on peso savings; instead, their savings predominantly exist in real estate or in U.S. dollars. The notion of a 30%, 40%, or 50% inflation rate is unfelt by any Argentine; these figures appear as mere abstract numbers on paper. If such inflation were genuine, reminiscent of the turmoil in 2001, the streets would be engulfed in chaos.

The act of printing pesos contributes to these inflated numbers. The perplexing aspect is why this printing persists when, simultaneously, wages are raised by equivalent amounts. It would be more logical if printing occurred without a corresponding increase in wages – that would signify true inflation.

To articulate this concept, I propose (bogus inflation - wage increase = 5% true inflation), give or take. The reality is not the purported 30%, 40%, or 50%. Such levels of inflation would inevitably lead to riots and social unrest. The lingering question pertains to the motive behind currency printing and its desired outcomes. What does this printing endeavor achieve in the broader economic landscape?

 

[MarianoCc]

Conversely, no Argentine relies on peso savings; instead, their savings predominantly exist in real estate or in U.S. dollars. The notion of a 30%, 40%, or 50% inflation rate is unfelt by any Argentine; these figures appear as mere abstract numbers on paper. If such inflation were genuine, reminiscent of the turmoil in 2001, the streets would be engulfed in chaos.

The act of printing pesos contributes to these inflated numbers. The perplexing aspect is why this printing persists when, simultaneously, wages are raised by equivalent amounts. It would be more logical if printing occurred without a corresponding increase in wages – that would signify true inflation.

To articulate this concept, I propose (bogus inflation - wage increase = 5% true inflation), give or take. The reality is not the purported 30%, 40%, or 50%. Such levels of inflation would inevitably lead to riots and social unrest. The lingering question pertains to the motive behind currency printing and its desired outcomes. What does this printing endeavor achieve in the broader economic landscape?

You're on the right path, but there's a crucial variable in the equation that needs adjusting. Inflation isn't merely the comparison of price increases against changes in salaries or consumer purchasing power. It specifically denotes the rise in prices concerning a basket of goods within a domestic economy. While you correctly note the continuous wage raises in Argentina, these are implemented as measures to counteract inflation for the recipients' benefit.

Instead of juxtaposing inflation with wage rates, consider pesos in relation to a kilo of ice cream. The key question is: how many pesos are required today to purchase a kilo of helado compared to a year ago, assuming constant ingredients? This approach measures inflation more accurately.

If inflation persists at 55% annually without corresponding wage increases, the anticipated riots you mentioned could indeed materialize.

Governments resort to currency printing for various reasons. In a socialist economy, a prevalent motive is to settle bills the government lacks funds to cover. Picture having a printing press at home capable of producing legitimate pesos. If your salary falls short of meeting your monthly desires, you might crank up the press, print more pesos, and make your purchases. Presto! You seemingly have "unlimited" purchasing power. However, this practice enlarges the money supply, diminishing the value of each peso relative to domestic goods, thereby causing prices to rise—a simplistic explanation of how inflation occurs.

In the context of socialist governments like Venezuela and Argentina, currency printing is also employed to garner votes. When the government lacks funds but desires to distribute handouts, it cranks up the printing press, produces pesos, and distributes them—a parallel to having a peso press at home. On a large scale, this process diminishes the value of each peso, leading to price increases, i.e., inflation. This aligns with Cristina's economic strategy.

 

[Droooped]

I believe I've grasped the concept now.

What I previously labeled as "bogus inflation" actually aligns with the conventional understanding of true inflation. Meanwhile, what I referred to as "true inflation" is more accurately described as purchasing power.

Addressing my earlier question about why print 30% and increase wages by 25%, as opposed to printing only the 5% difference without a wage increase, it becomes evident that the time lag between printing money today and facing higher bills in the future, irrespective of wage increases, creates a complex and interconnected scenario. The picture is now clearer – a cyclic situation emerges.

Moving forward, I find myself pondering whether purchasing power is genuinely decreasing. From my perspective, Argentines appear consistently better off and more prosperous today than yesterday. It seems that their wages, equivalent to dollars, are on an upward trajectory. The city itself exudes a vibrancy that surpasses previous levels. What am I missing that gives me a different perspective?

On a side note, I couldn't help but notice the subtle introduction of the capitalism vs. socialism argument. While intriguing, perhaps that's a discussion for another day.

 

[MarianoCc]

I believe I've grasped the concept now.

What I previously labeled as "bogus inflation" actually aligns with the conventional understanding of true inflation. Meanwhile, what I referred to as "true inflation" is more accurately described as purchasing power.

Addressing my earlier question about why print 30% and increase wages by 25%, as opposed to printing only the 5% difference without a wage increase, it becomes evident that the time lag between printing money today and facing higher bills in the future, irrespective of wage increases, creates a complex and interconnected scenario. The picture is now clearer – a cyclic situation emerges.

Moving forward, I find myself pondering whether purchasing power is genuinely decreasing. From my perspective, Argentines appear consistently better off and more prosperous today than yesterday. It seems that their wages, equivalent to dollars, are on an upward trajectory. The city itself exudes a vibrancy that surpasses previous levels. What am I missing that gives me a different perspective?

On a side note, I couldn't help but notice the subtle introduction of the capitalism vs. socialism argument. While intriguing, perhaps that's a discussion for another day.

Indeed, you've captured the essence.

Your observation on the challenge of aligning wage increases with the reported 55% inflation over the last 12 months resonates well. While theoretically, a 55% boost in wages could offset the loss in purchasing power, convincing employers or entities to implement such substantial increases is an arduous task. It's reasonable to assume that many Argentines are grappling with diminished purchasing power due to wages lagging behind inflation, albeit I lack specific figures.

As you rightly point out, a more modest wage increase, say 45%, might mitigate the impact of a 10% inflation gap on a family's purchasing power and lifestyle. However, sustaining such discrepancies over time proves to be unsustainable.

You shed light on an interesting strategy for the affluent to combat inflation, involving investments in peso-denominated Argentine government bonds like the Leliqs. Your suggestion aligns with the logic that, given their peso-denomination, the risk of default is minimal, especially in the context of the observed currency printing. Currently yielding 71% annually, this investment offers a substantial 16% real yield, surpassing inflation rates worldwide. The term "real" yield, measuring the difference between nominal rates (71%) and inflation (55%), underscores the attractiveness of such an investment.

In considering the purchase of Leliqs today, the underlying assumption is that inflation over the next 12 months won't surpass 55%. You express confidence in taking that bet.

 

[Droooped]

Indeed, you've captured the essence.

Your observation on the challenge of aligning wage increases with the reported 55% inflation over the last 12 months resonates well. While theoretically, a 55% boost in wages could offset the loss in purchasing power, convincing employers or entities to implement such substantial increases is an arduous task. It's reasonable to assume that many Argentines are grappling with diminished purchasing power due to wages lagging behind inflation, albeit I lack specific figures.

As you rightly point out, a more modest wage increase, say 45%, might mitigate the impact of a 10% inflation gap on a family's purchasing power and lifestyle. However, sustaining such discrepancies over time proves to be unsustainable.

You shed light on an interesting strategy for the affluent to combat inflation, involving investments in peso-denominated Argentine government bonds like the Leliqs. Your suggestion aligns with the logic that, given their peso-denomination, the risk of default is minimal, especially in the context of the observed currency printing. Currently yielding 71% annually, this investment offers a substantial 16% real yield, surpassing inflation rates worldwide. The term "real" yield, measuring the difference between nominal rates (71%) and inflation (55%), underscores the attractiveness of such an investment.

In considering the purchase of Leliqs today, the underlying assumption is that inflation over the next 12 months won't surpass 55%. You express confidence in taking that bet.

Very much like your picture clear explanations. Thanks for taking the time. I learned something new.

 

[earlyretirement]

The Donald has some excellent points. I get the same question from many of my friends that go down to Buenos Aires. They are puzzled as the economy is supposed to be really bad but they see restaurants/bars always full. I explain that because the currency is depreciating so fast, the locals have NO incentive to save and they spend their money as fast as it comes in.

Also, you have to remember there are many wealthy locals. So even if 10% of the Capital is affluent that is a lot of people spending a lot of money going out. As well, many millennials live at home much later in life compared to first world countries where everyone is itching to move out as quickly as possible.

The situation in Argentina and inflation is a pretty hopefulness situation. There will continue to be severe economic instability between relative periods of calm. So you can either stay and learn to cope with it (which many do) or leave Argentina for greener and more stable pastures (which many have done as well).