Wrote Dr Hale earlier this week:
“Hale is not usually an Irish name (unless originating from MacHale) but since I don’t live a million miles away from the South Side of Boston, I could hardly be unaware that it’s Saint Patrick’s Day on Saturday. So should you end up publishing this email, I wish a happy St. Pat’s to all readers with any drop of green blood.
“The obvious flashpoint between our two countries is the brutal protectionism slapped on metal imports by Donald Trump but while not underestimating this potential game-changer in any way (my fear is that it could prove to be the Smoot-Hawley of the 21st century), I’d prefer to wait and see how it plays out between the two Trade Secretaries Miguel Braun and Wilbur Ross (nominally counterparts although hardly peers since Ross is fully ministerial), not to mention how this falls into place with the rest of the world. Yet no other question seems obvious. Between Brazilian recovery and the drought and between pockets being drained by public service charges in the first half of the year and refilled with wage increases in the second, I do not see the economy moving clearly either up or down. About the only novelty I’ve spotted is the increasingly frequent Central Bank intervention in the dollar market – would it not be more honest to admit to a ‘dirty float’ instead of maintaining the claim to a floating exchange rate? Anyway have you observed any significant trends and if not, would you have any fake news to fill the gap?”
“One general answer to your perception of nothing really happening would be that once a government decides to stick to gradualism, that gives the perfect excuse for everybody else to be gradualist, not least investors.
“You doubtless know far more than I do about Trump’s initiative and its global ramifications but while much bigger sums are involved with the likes of Brazil or China, it’s important here too – the exports losses could be around a quarter of the huge damage to soy earnings estimated from the drought. Strangely enough, even if the new steel duties are 25 percent while aluminium duties are 10 percent, and even if Techint is arguably Argentina’s main claim to a multinational while Aluar is basically Puerto Madryn, the latter could stand more to lose – some US$550-million worth of aluminium goes to the United States while Techint sells around US$220 million of its seamless pipes and tubes (the world’s fracking superpower has no lack of oil technology). I’d just like to add a conceptual rejection of Trump’s zero-sum thinking. He reasons that if a third of US steel is imported while nearly 30 percent of capacity is idle, he reactivates the latter by blocking the former. But when Stephen Hawking has just died in Cambridge on Albert Einstein’s birthday, Trump should be reminded that we live in an expanding universe which should apply to economic theory too – he threatens to take it back to the days of mercantilism.
“Since you ask me for fake news, I’d be strongly tempted to place the shadow boxing between the Mauricio Macri administration and the business community in that category, seeing no reason to change the way I downplayed it in our communications last week. To be sure, the complaints about imports are real enough but are nothing new to this month – they go back to the very start of the Macri presidency, even its first year when imports actually fell. If the government chose to play up this running sore, it is because they seek to distance themselves from the image of a ‘country club cabinet’ (in the words of the Kirchnerite deputy Axel Kicillof during the Congress grilling of Cabinet Chief Marcos Peña on Wednesday). But if manufacturers continue to whine about imports, what arguments can they produce against Trump’s protectionism?
“If inflation is uncomfortably high so far this year, one obvious culprit is updating public service charges (as you mention) and another is the dollar (hence the Central Bank interventions which also draw your attention) but inflation and growth are not automatic opposites, as Argentine economic thinking tends to assume – in fact both are occurring now, even if one seems much more visible more than the other. And if both are occurring, this would suggest that a lax fiscal policy talks louder than a tight monetary policy, which fights inflation via peso appreciation (or rather devaluation at half the pace of inflation) as much as anything else, thus leaving the economy less competitive. Some might blame the fiscal laxity rather than the growth it encourages but it is not so simple – thus Brazil has a higher fiscal deficit than Argentina but less than five-percent annual inflation, even when slowly returning to growth (as you mention). More decisive is the level of public spending than the size of the deficit because when the state accounts for 45 percent of the economy, as in Argentina’s case, there is only half the motor to generate growth (i.e. a higher gross domestic product to reduce the negative percentages at the top of the dividing-line). But nor is the deficit unrelated to inflation, which also reflects decades of a country living beyond its means (especially in the last decade when public spending increased by an average of almost 10 percent annually, thus outstripping even the most ‘Chinese’ growth rates of the pre-2008 years).
“Finally, you ask if the frequency of Central Bank interventions has not turned the exchange rate into a ‘dirty float.’ The frequency is more striking than the volume – only a few hundred million dollars when Central Bank reserves top US$62 billion. Moreover the Central Bank aim is not so much a lower dollar (many government economists would like to see it higher almost as dearly as their manufacturer critics in order to make the economy more competitive, being keenly aware of the dangers of peso appreciation) as a less bumpy ride since it is the volatility which fuels prices rather than the actual exchange rate. Both the dollar and inflation have been on the move since December and it’s easy enough to see why the two are linked. Meanwhile it remains to be seen who calls monetary policy since it is no accident that the weeks of volatility followed the political wing’s ‘recalibrations’ at the end of last year – watch this space.”