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Original source: AHORA PLAY
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Is economic history repeating itself in your country? Understanding these cyclical patterns can help you anticipate the challenges and consequences of current policies on your finances and future.
Warnings Issued on Recurrent Economic Crisis Pattern in Argentina and the Region
An economic analyst, drawing on research into Argentina's and Chile's experiences in the 1980s and 1990s, describes an economic cycle that begins with a disinflation program and an overvalued exchange rate. This cycle starts with an expansionary phase but inevitably leads to a deteriorating balance of payments, depleted reserves, rising interest rates, and ultimately a financial crisis resolved by a maxi-devaluation. This pattern has been common in Argentina, Mexico, and Chile.
This analysis highlights the importance of learning from regional economic history to avoid repeating cycles of instability. The recurrence of these crises, characterized by fixed or semi-fixed exchange rate policies that lead to currency overvaluation, underscores the persistent challenges in macroeconomic management in Latin American countries and the severe social and economic consequences these devaluations entail.
Devaluation and Wage Adjustments: The 'Easy Formula' to Close Fiscal Deficits
The 'initial success' of an economic program is achieved through a maxi-devaluation that causes a supply shock, accelerating inflation, an expert explains. By allowing wages, pensions, and other public sector expenses to adjust below that accelerated inflation, the fiscal deficit can be closed quickly. This method, described as 'the easiest thing in the world,' is comparable to that used after Argentina's convertibility exit, when export taxes also helped balance public accounts.
While this strategy allows the government to present an improvement in public finances, it does so at a significant cost to the population's purchasing power. Devaluation, followed by an adjustment in real incomes, directly impacts citizens, especially pensioners and workers, demonstrating how fiscal solutions can generate a strong social impact and a reduction in the quality of life.
"It's the easiest way to make fiscal adjustments... you adjust salaries, pensions, and other public sector expenses below inflation, and you close the fiscal deficit. It's the easiest thing in the world."
Insufficient Trade Surplus: The Need for Current Account Surpluses for Genuine Reserves
For a country to accumulate legitimate Central Bank reserves, a trade surplus is not enough; it is essential to generate a current account surplus, according to an expert. The current trade surplus is insufficient to ensure a country's own reserves, forcing reliance on increased debt or foreign direct investment (FDI). However, FDI, even with projects approved for billions of dollars, takes years to materialize and is not guaranteed, creating 'enormous uncertainty' both in Argentina and globally.
This technical distinction between trade surplus and current account surplus underscores the fragility of a country's financial position. Relying on debt or uncertain FDI to sustain reserves implies continuous vulnerability to external shocks and speculation, which can undermine market confidence and affect long-term economic stability for all citizens.
"You need a current account surplus to accumulate reserves, to accumulate your own reserves, not reserves from debt."
The Political Dilemma of Correcting the Exchange Rate: More Inflation vs. Government Promise
Technically, the current exchange rate should be corrected, which would imply an increase in inflation, though not to 'extremely high' levels due to the significant contraction in demand in key sectors like commerce, industry, and construction. However, this move would represent an 'enormous political cost' for the government, whose 'only asset' is the promise to reduce inflation. An analyst points out that the current program 'has not yielded results' and, in their opinion, has left the country in a worse situation.
This conflict between technical recommendation and political feasibility highlights the government's crossroads. Prioritizing the promise to lower inflation, to the detriment of a necessary exchange rate correction, could prolong an economic imbalance with negative consequences for growth and general well-being, directly affecting the recovery of economic activity and employment.
"if it weren't for the fact that it's the government's only asset... I'd say, well, you have to raise the exchange rate, that will increase inflation, so it's a program with an inflation target, with an independent Central Bank, as it should be done."
Criticism of Government Economic Approach for Deviating from Global Practices
The current government does not follow global macroeconomic practices of 'inflation targeting' and Central Bank independence, opting instead for an 'Austrian perspective' that 'no one has implemented for stabilization,' according to an expert. The analyst criticizes the belief that a devaluation does not increase inflation or that falling demand due to tariff hikes lowers prices, arguing that this ignores 'price inertia' and the need for a comprehensive stabilization program.
This divergence from the global economic consensus raises concerns about the effectiveness of current policies. By dismissing price inertia and the impact of devaluation on inflation, the government might be underestimating the complexity of economic stabilization. This unconventional approach could prolong uncertainty and hinder market predictability, affecting confidence and the investments needed for the country's recovery.
"What we have now is crazy... the essential thing for macro management worldwide is to have inflation targeting, an independent Central Bank. And here we are going in another direction, we are going in another direction. It's not a path invented here, so to speak, it's an Austrian path. Nobody has done an Austrian stabilization until now."
Economic Opportunities and the Challenge of Social Sustainability in Argentina
An analyst highlights two crucial differences in Argentina's current economic situation: the possible intervention of the U.S. government in balance of payments problems, something historically unprecedented, and the development of the agricultural, oil, and gas sectors. The latter could generate a current account surplus even with an overvalued exchange rate. However, the expert expresses serious doubts about the social sustainability of a model with an 'Arabian Saudi exchange rate' that does not generate employment for the population, especially in the Buenos Aires metropolitan area, where millions of people reside.
This analysis poses a key dilemma for the country's future: how to balance new export opportunities with the need to generate employment and well-being for a broad majority. A model excessively dependent on primary sectors that fails to boost decent job creation in urban areas could exacerbate inequalities and social instability, compromising long-term national cohesion.
"it's a very strange situation because we will end up with an 'Arabian Saudi' exchange rate, but without jobs for the people, because with that exchange rate we don't produce anything here, that is, except oil, minerals, copper, and agriculture."
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- Se discute la convertibilidad como plan de estabilización, mencionando la… (4:06)
- Se cuestiona si el plan de estabilización del gobierno de Milei, con ajuste… (5:19)
- El plan es exitoso temporalmente, como el de Martínez de Hoz, al bajar la… (7:32)
- La crisis ya ocurrió con la corrida cambiaria antes de las elecciones debido al… (8:12)
- El equilibrio fiscal actual es insostenible porque los salarios y servicios… (11:36)
- Se discute la anécdota de Colombia, donde se decidió bajar la inflación… (14:02)
- Para bajar una inflación del 200% con dólar atrasado y cepo, se necesita un… (17:02)
- Para una estabilización se necesita un tipo de cambio alto con una cuenta… (22:50)
- La situación actual de la economía argentina, con su balance de pagos sostenido… (25:01)
- Se mantiene el riesgo de una crisis histórica con un salto enorme del tipo de… (28:28)
- Si bien es posible que la situación se sostenga hasta que haya un superávit de… (31:30)
- Se recuerda el éxito inicial de la convertibilidad de Cavallo para bajar la… (32:09)
- Aunque en 1992 se pudo haber devaluado, Menem se enamoró del uno a uno por su… (35:24)
- Una salida ordenada del esquema actual implicaría un costo político alto, ya… (37:11)
Summarised from AHORA PLAY · 40:18. All credit belongs to the original creators. Streamed.News summarises publicly available video content.
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