Who is to blame for the high inflation in Argentina

Most of the opinion polls tell us that after government corruption high inflation is the public’s Number One worry shortly followed by insecurity. We shouldn’t need the pollsters to tell us that. We can listen to the complaints in the lines at the supermarkets, read the headlines in newspapers, or hear the pronouncements of business leaders and political candidates. Inflation is terrible cancer that must be brought under control, we are constantly warned, or we face a bleak future and perhaps an economic disaster.

But what causes inflation? Many economists tell us that inflation is a very complex problem with neither a single cause nor a single solution. Few economists would dare deny that arbitrary government expansion of money and credit produces inflation. Yet, there seems to be a universal desire to bring in other alleged causes: the greed of unions and businessmen, government regulations, rising oil prices, and even such matters as lowered worker productivity and reduced capital investment.

What is behind all this confusion about inflation? It grows out of the same character defect that causes inflation in the first place. That character defect is dishonesty, and it has seduced a whole nation. But events may eventually force them to accept inflation as a dishonest human action that can be avoided if people have the will and the understanding to do so. Nor is inflation a complex problem when one is prepared to see it as a moral issue rather than simply as political or social phenomena.

The moral problem of inflation is “The need for a Dependable Currency.” Inflation distorts business calculations and makes future business planning a nightmare.,

Corruption and lack of moral judgement get in the way of efforts to stop inflation.  Dishonest money is produced by dishonest people who are trapped by greed, fear, and weakness.

This would be seen as a very strong statement, but the facts bear it out. Inflation begins with an expansion of the money supply which immediately produces benefits for certain people while causing losses for others. In general, people on fixed incomes and holders of bonds, loans, and savings accounts are cheated, while borrowers, property owners, and inflation-wise speculators show gains.

Lying and Cheating

Lying and bland promises are an essential part of the inflation program. The public is constantly told that inflation will be brought under control, for it is important that most of the victims be unaware of what is going on. Still, a student of inflation is finally forced to believe that the public wants to go on believing in the inflation game. The old saying, “You can’t cheat an honest man,” may have some relevance to the way they are cheating and being cheated by inflation. In Argentina this is attempted by the government controlled INDEC which produces false information to ensure that investors with inflation adjusted bonds and workers looking for fair wage adjustments are cheated.

It would be unfair to say that the current generation of Argentine’s is less honest than earlier generations that somehow were also unable to maintain an “honest” or “dependable” currency.  And for that matter, it would even be unfair to say that Argentine’s are more dishonest, say than the Germans or Swiss who have been able to maintain the strength of their currencies. The problem, as Argentine’s have been practising selective dishonesty. While often insisting on rigorous honesty in other matters, they have accepted the dishonest practices that produce inflation. Then they have gone further in this deceit and have attributed the shrinkage of their currencies buying power to conditions that are really the effects of inflating. This tends to deflect attention from the actions that dilute the market value of money and ought to be stopped.

 Needed: An Acceptable Definition

One of the most disturbing problems is that professional economists do not agree in their definitions of inflation. One of the most widely accepted definitions of inflation is that it is a rising general level of prices. Another popular definition of inflation is “too much money chasing too few goods.” Actually, more honest and precise than either of these definitions would be an explanation of the actions that cause prices to rise generally or bring “too much money” into existence.

The public should understand that a widespread drought may result in temporarily higher prices for food, relative to prices of other things. But that is not the same as a government action that arbitrarily produces more paper money and credit and results in a persisting general increase in prices.

Why do professional economists employ such deceptive and misleading definitions of a condition that could prove to be a terminal illness for their way of life? One reason for this dishonesty is that the need to maintain “sound” or “honest” money was badly ridiculed and discredited in the early 1930s and since then has never been defended except by a few economists. There is also something about inflation that promotes demands for centralized government control, which many socialist economists advocate. Finally, the Keynesian deficit spending programs endorsed by many economists make inflation unavoidable

Effects Seen As Causes

In the general dishonesty about inflation, most experts make the error of blaming inflation on conditions that are really the effects of expanding the money supply. Business leaders like to focus on “cost-push” inflation, for example, with unions as the villains. According to this argument, monopolistic unions are able to impose increased costs on business which must eventually be passed through as price increases. If unions would only be less greedy, cost-push inflation could be kept under control.

Union leaders and their staff economists seize on the same argument, usually with the twist that inflation is caused by unwarranted price increases, excessive profits, high executive salaries, and monopolistic or oligopolistic enterprises. Both unions and management, in making such arguments, play directly into the hands of politicians who would like to institute wage-price controls. Despite the fact that wage-price controls are virtually unworkable and result in a bureaucratic nightmare, the demand for them is kept alive by the persistent belief that unions cause inflation by raising wages or managements cause the same condition by increasing prices.

Professional economists could perform a great service by rooting out the fallacies in these beliefs. They could show, for example, that raising either wages or prices without a corresponding expansion of the money supply will result in unemployment; there is less demand for either labour or goods if wages and prices go up with no equivalent increase in available money. With no expansion in the money supply, workers who demand too much or businesses which raise prices above the market would merely lose out to competitors.

 Blaming Government Regulations

The economic effect of government regulation is exactly the same as a wage increase or any other cost, including higher oil prices. It is something that must be included in the prices of the goods or services being offered by the company. Taxes are in the same category. And if the firm’s customers will not accept the increased prices, the company either will go out of business or will divert its production to lines that can be marketed profitably.

But regulations in themselves do not cause inflation. They do cause higher prices of certain products. These higher prices are mistakenly called inflationary when they really reflect higher costs. The customer who must pay these higher prices will make equivalent reductions in other purchases.

Is Low Productivity a Cause of Inflation?

Low productivity is still another suspect in causing the inflation mess. There is increased concern about conditions that adversely affect productivity. One of these conditions is the high cost of wages and benefits which raises unit costs of local goods. There is also deepening concern about the decline in capital investments. It is alleged that their plant and equipment capacity due to import restrictions has become obsolete and inefficient in comparison with the plants of foreign producers. Meanwhile, prices of most manufactured goods are going up. But with higher productivity, prices would tend to stabilize, or at least the increases would not be so large.

Here again, low productivity is blamed because it supposedly increases the unit costs of certain products. Productivity itself has nothing to do with causing inflation, nor can it stop the process. The best spur to productivity is the producer’s desire to capture a larger share of the market and to increase his overall productivity. Few producers are likely to increase their efforts simply to fight inflation.

But there is a very serious deception in the effort to use higher productivity as an inflation-fighter. This deception comes from defining inflation as a general rise in prices. Theoretically, an annual increase of four per cent in the money supply would not result in a general price rise if there also was a four per cent improvement in productivity. Prices would probably remain at the same level.

This would not mean, however, that inflation had been stopped. It would only mean that its effects had been concealed. For, without an arbitrary expansion of the money supply, the four per cent improvement in productivity would have gone to certain workers, owners, and customers, as wages, dividends, or lower prices. So increased productivity only makes inflation less visible, and perhaps more acceptable politically. But it is not the answer to inflation.

 The End of Dishonesty

We can probably expect more dishonesty about inflation until events force them to change our ways. There is reason to believe that the Argentina people have become very worried when inflation passed the double-digit level. While this does not lead to a complete understanding of the problem, it does cast doubt on some of the glib explanations and solutions being offered.

Yet, honesty or truth about money must always have its day and even the inflationists know that. Inflation cannot go on endlessly. “If one does not stop in time the pernicious policy of increasing the quantity of money and fiduciary media, the nation’s currency system collapses entirely. The monetary unit’s purchasing power sinks to a point which for all practical purposes is not better than zero.

Note: This article was first published in 2013 whilst Peronist Christine Kirchner was in power and oversaw eye watering levels of corruption, inflation and illegal activities. Now she is back in power as a Vice President almost guaranteeing that Argentina will be put back in the freezer by local and foreign investors.