Midterms and the medium term

When (or should I say if?) Donald Trump pays his flying G20 visit here at the end of the month (curtailed in order to make it to the inauguration of Andrés Manuel López Obrador on the summit’s second day – Washington to Mexico City via Buenos Aires might seem as wayward a route as a Trump hairstyle but that is the explanation), he might like to consult his host Mauricio Macri‘s experience in dealing with a hung Congress – even if serious impeachment bids and an interest in his tax returns are largely beyond Macri’s ken. Anyway Tuesday’s midterm elections in the United States gave the New England economist Dr Hale a long night’s journey into day. He writes:

“Bad hair day for The Donald on Tuesday. Plenty of food for analysis there – how can the same electorate pick a Republican Senate and a Democratic House? Anyway such paradoxes are for the political scientists and I’m an economist. But one paradox on the economic front was how a booming economy could backfire against Trump. An unemployment rate of 3.7 percent might seem to justify bragging rights as the lowest in almost half a century but there is another way of looking at it – it can also mean that all too many people are having to work two jobs or more in a losing battle to maintain the living standards from what used to be the American way of life from also almost half a century ago. Anyway I’m not supposed to be the one answering the questions any more than I am a political scientist – that’s your baby. So what’s been happening down in Argentina during this week in which I’ve been distracted by the midterms? That budget of yours budging at all? Any positive indicators for a change? And anything else I should know?”

My reply:

“Must admit to having shared your distraction somewhat. The budget passes to the Senate next Wednesday so perhaps best leave it until then – there have, of course, been intense talks but there will doubtless be more this week so their final outcome should be awaited. These are shifting sands – thus the gubernatorial front to restore the Soy Fund for provincial and municipal governments was not as solid as initially appeared. To use that inelegant expression, there is more than one way to skin a cat.

“Maybe it’s the imminence of the G20 or maybe it’s the shock from Brazilian President-Elect Jair Bolsonaro’s apparent contempt for the Mercosur bloc but perspectives seem to be broadening from beyond a fiscal and monetary focus, realising that the problem is not just the budget deficit but also the balance of trade and payments. A painful belt-tightening only increases the appetite for export dollars, which are only threequarters of what they were six years ago (almost 12 digits then), despite a populist government so addicted to consumer-led as opposed to export-led growth at that time. The less painful alternative has been for decades an artificial exchange rate to boost purchasing-power beyond the country’s means, for which the preferred antidote has long been import substitution rather than competitive exports.

“Yet despite this evident need, policy seems to be moving in the opposite direction to the Mauricio Macri administration’s professed preference for export-led growth – to the extent of restoring that Kirchnerite aberration of export duties while the labour and tax reforms already on Brazil’s agenda have moved to the backburner. Yet monetary policy could end up favouring the exporter more than usual – nothing new about a major devaluation in Argentine experience but instead of the gains being rapidly devoured by the subsequent inflation, every effort is being made to halt the latter via a frozen money supply and ferocious interest rates, even at the price of recession. If those policies are maintained and if that muchvaunted 2019 bumper harvest does materialise along with booms for other commodities such as Vaca Muerte shale and lithium, then there would be more genuine export earnings less harassed by costs (although there is always aggressive taxation).

“Meanwhile, there is the need to overhaul Mercosur in the light of its chronic flaws and the challenge now posed by Bolsonaro – here Trump has shown the way by revamping NAFTA (which has not hurt him for that Mexican inauguration since the populist AMLO seems to rather like that US$16 hourly wage floor imposed from Washington). Both Mercosur and NAFTA have a similar vintage from three decades ago so both need adapting to the 21st century. Without Trump NAFTA might have stayed much the same through the sheer volume of its trade but an increasingly dysfunctional Mercosur has been little more than an auto pact for years.

But ahead of reinventing Mercosur, the immediate objective had been to give the trade bloc a giant booster by using the G20 summit to announce a framework agreement with the European Union (almost a third of global economic output, at least until Brexit), ahead of a complete free trade agreement. But Brazil’s lame duck President Michel Temer will lack the authority to sign anything while the Chilean fixations of future Brazilian economy minister Paulo Guedes would seem to indicate that the Bolsonaro administration will be looking in different directions with bilateral agreements across the globe replacing regional multilateral pacts.

“Finally, you request some more upbeat news to offset half a year of recessive doom and gloom. The dollar has been pretty tame so far this month at August levels while last month’s tax haul was more or less keeping up with inflation with a year-onyear 42 percent increase – neither of them necessarily positive items if viewed in terms of peso appreciation and the tax burden. Country risk dropped below 600 points in midweek – this is more unambiguously good news.

“Given the incessant hikes at the service stations, one of the most persistent questions of recent times is: Why do the supposedly dollarised fuel prices keep rising if the dollar is falling? The answer lies in an incomplete ‘pass through’ of devaluation which also applies to other prices. Not only has the dollar doubled in value this year but world oil prices have risen 50 percent between the two Octobers (a trend which Trump’s sanctions against Iran will presumably not help) – it will take more than the two to five percent tweaks every now and then to compensate this.