Thursday, April 18, 2024

OP-ED | 17-02-2024 06:14

The summer of our discontent

There is every reason to fear a vicious circle of devaluation and inflation continuing.

President Javier Milei constantly comes across as a walking quotation of those famous Walt Whitman lines: “Do I contradict myself? Very well then, I contradict myself/I am large, I contain multitudes,” not least in his warm encounter with the previously reviled Pope Francis in Rome earlier this week, and the January inflation of 20.6 percent announced on Saint Valentine’s Day would be a case in point – the love story between Milei and his multitudes celebrating another milestone in government eyes but a Saint Valentine Day’s massacre 95 years later for the millions living on shrinking wages, pensions and social welfare benefits.

The worst inflation in three decades coinciding with two months in which the money supply has been frozen poses a supreme contradiction confounding orthodox economic theory but the paradox is more apparent than real. Monetary causes and their inflationary effects never overlap in real time – the January inflation clearly reflects the maxi-devaluation of the previous month, accompanied by the lid being taken off prices frozen for months or even years by a new government bent on not wasting any time of its honeymoon. The euphoria of some government supporters over last month’s inflation might seem incomprehensible to millions of wage-earners, pensioners and social welfare beneficiaries and to the inland provinces which mostly voted for Milei in far greater numbers than the metropolis last year, but it has grounds beyond being five percent lower than the December figure – the biggest percentages were for services like transport and communications (mobile telephones, lnternet, etc.), not food and beverages, thus permitting optimism that updating these regulated services might be a one-off factor like devaluation rather than a chronic problem.

Nevertheless, even accepting this logic leaves no room for complacency. The government cannot be so sure of devaluation being a one-off factor because there is a mismatch between fiscal and monetary policy similar to the imbalance which doomed the 2015-2019 Mauricio Macri administration with shock on the one front and gradualism on the other. Not much of the latter in the virulent Javier Milei style except for the crawling peg of a monthly two percent devaluation stubbornly maintained by the Central Bank, which is totally out of sync with inflation. There is thus every reason to fear a vicious circle of devaluation and inflation continuing.

Nor can there be any complacency with the zero fiscal deficit achieved for January at all odds with its inflation figure. This deficit is the result of methods which are socially and politically unsustainable. Without going to Milei’s extremes, both the main economy ministers of the Alberto Fernández administration were able to achieve fiscal progress (or at least stop the rot) by allowing inflation to do their work for them, swelling revenues in nominal terms while shrinking spending in real terms – in this sense Economy Minister Luis Caputo has not invented any magic new method but merely accelerated the old with no art or science about it. Recession might tame inflation but there will be no growth without the infrastructure whose ministry the government has just abolished. Real wages, state employee pay and especially pensions are being squeezed beyond endurance – the latter are hopelessly adrift with all alternatives to the dysfunctional updating scheme inherited from the Alberto Fernández Presidency gridlocked in Congress while the ANSES social security administration in charge of retirement and welfare benefits has lost all direction now that its competent head Osvaldo Giordano has been blown away by a burst of spite from Milei against provincial governors frustrating his omnibus law.

There is every reason to fear a major socio-economic crisis with real wages torn to shreds without any income policy to plug the gap or any real communication effort to convince the citizenry of any promised land (which Milei has just visited but is not on anybody else’s horizon) and yet such a crisis is not inevitable. Whatever the legislative mishaps, Milei and Caputo have successfully placed their core issue of eliminating inflation by ending the fiscal deficit on the agenda and there is still a broad social consensus that this is the path, despite the hardships. Nor do they lack either the means or the will to move against the fiscal deficit, even after the Congress setbacks – the discretionary basis of federal payments to the provinces installed by Kirchnerism to maximise their control makes it easier to turn off that tap, for example.

Yet it remains a tightrope inviting pushback – Newton’s third law of action and reaction being equal and opposite applies here too.       


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