The curses, the blessings, the confusions, the “deflation” of 2020 and the inflation of 2021

The Minister of Economy of Argentina, Martín Guzmán.

The price index for food and food raw materials produced by FAO is at its maximum compared to the last three years, but very far from the values ​​it reached at its peak in 2011.

It is curious to hear Christian economists consider this situation as a “curse”, taking into account that, in addition to the political conditions, this record in the price of food raw materials (soft commodities for friends) “helped” and much to last electoral triumph of Cristina Kirchner. For an exporting country, rising sales prices for its products is clearly a blessing.

On the other hand, the rise in the prices of food raw materials is a big problem for the importing countries of these products. In fact, the now frayed “Arab Spring” was triggered in that period (again in parallel to socio-political conditions) by protests originating from the rise in domestic food prices in North African countries (net importers ).

The variation in the prices of food commodities, like that of other commodities, is linked to supply and demand problems, but also to issues related to the strength or weakness of the dollar, the currency in which these products are traded. Strong dollar means that this currency can buy more product (low prices), weak dollar is the opposite. We are in a stage of weak dollar, derived from the need for the Federal Reserve to moderate the economic-financial consequences of the pandemic, to which are added, as I said, supply issues (droughts, for example) and demand (the China’s recovery, and its internal problems in food production). Weak dollar, in turn, has a very low international interest rate, which leads many investment funds (even with regulatory limitations) to speculate in commodities to gain from price variations. This explains the current favorable cycle of commodity prices in general and of food in particular.. Incidentally, the record 2010-2012 cycle was also related to Federal Reserve policy, in that case, as a remedy for the 2008 financial crisis.

But this topic of commodity price cycles is not new, far from it. Some exporting countries try to cushion the influence of these fluctuations in their domestic prices, “saving” in an Anti-Cyclical Fund, in the rises, and spending in the bad ones (oil in Norway or copper in Chile). Others, such as Canada, Australia, New Zealand and more recently some Latin American countries, preferred to be “neutral” in this regard and created a system of “commodity currency”(Pardon the words).

I explain. The external prices of the goods that are exported and imported are transformed into internal prices through the exchange rate. Those countries decided to “float” with their currencies to the rhythm of the price of commodities. When the international price rises, they receive more dollars for their exports, (and more capital inflows due to favorable expectations) there is more supply of foreign exchange and their currency appreciates (the dollar is cheaper), and therefore domestic prices are maintained low, because the increase in the price in dollars is “offset” by the fall in the exchange rate. On the contrary, when the price of commodities falls, fewer dollars enter these countries, the exchange rate rises and internally balances the fall in the international price. Of course, this exchange rate policy is only possible in open economies, with stable tariffs and taxes, with an “independent” monetary policy and a balanced fiscal policy.

In our country, which has refused these policies for decades, when the price of commodities increases and more dollars come in, domestic prices also rise, because they are multiplied by an exchange rate that does not “float”, but rather increases by price versus weight. This rise, then, is seen, from the State, as an “extraordinary income of producers” that must be appropriated and redistributed. But when commodity prices fall, as there is no countercyclical fund, a bad year.

In other words, in the Argentine agricultural market “extraordinary gains are socialized, extraordinary losses are privatized.”

The socialization of profits is implemented in different ways and is called “decoupling” of domestic prices from international ones. In most cases, the mechanism is export taxes (withholdings). The government keeps part or all of the rent and then “distributes it”. In other cases, exports are prohibited, so that those who use these raw materials as inputs, buy them cheaper and they are the ones who “distribute”. Many times both measures are used at the same time, taxes and prohibitions. Obviously, producers try to circumvent these “takedowns.” When they can, they substitute products (soybeans instead of corn, or meat). When they can, they will invest elsewhere (oil and gas).

The interesting thing behind this policy is that it assumes that the State “distributes better” this extraordinary income than the private sector, which is not trivial, and it should be proved. For politics, it is better to create public patronage, than to encourage private investment and employment.

The second interesting thing is the great confusion of believing that these “decoupling” mechanisms give rise to internal prices that protect the Argentinean table. But it turns out in countries where international prices rule, the inflation rate is 4% per year and here, where “other prices” rule, the inflation rate is 4% per month. What proves once again that the problem is the monetary, exchange and fiscal policy, that is to say the macro, and not the micro sector.

And that brings me to the other topic I wanted to share today, with the kind reader and the kind reader.

As I have already mentioned many times, a large part of us Argentines have a currency that is the dollar, while the sectors with fewer resources receive and spend with a quasi currency that is the peso (including the recipients of public spending). In Argentina in 2020, those who use the dollar as their currency did not have inflation, but “deflation”. Argentina, measured in dollars, is much cheaper than it was at the end of 2019. On the other hand, those that can only be handled in pesos have lost with 36% average inflation, and with the acceleration of inflation in recent months . The 2020 recession was softened, because those who have the dollar as their currency took advantage of deflation to buy “cheap” goods, while those who only receive the quasi-currency in pesos lost in real terms, because their income increased less than the prices of the goods they consume (and that they were “decoupled” with respect to their efficient costs, energy, transportation, and other regulated services, in addition to food). Again, the “Hood Robin cast.”

Looking at 2021, the electoral year, if more commercial dollars were to enter due to the improvement in international prices, which would allow a little more imports of inputs and certain goods, the rebound of the economy could be financed (pandemic, protocols, and vaccines through). But the key to achieving a recovery in real wages, and “dollar inflation” will be the ability to reduce the exchange rate gap and recover the value of debt bonds. Regarding the first, they play against monetary policy, with the “decoupling” of the interest rate with respect to the expected inflation rate, the need to continue issuing pesos aggravating the current excess and an inflation rate at cruising speed higher than 3 % monthly, which makes it difficult to “anchor” something. Regarding the second, improvements in the price of Argentine debt, the international scenario of super liquidity plays in favor, and against the aggressive policy of the government against the “friendly” renewal of provincial and corporate debts, and the little desire of the global funds to have an illiquid Argentine bond in their portfolio, which does not pay interest in the short term, but only accrues. To this is added: the negative prospects of a “compromise agreement with the IMF”, relative prices against investment and employment and, above all, the expectation that, after the elections, whatever their outcome, at least two more years of Cristina’s government will remain.