By Alejandro A. Tagliavini *

                   The prominent economist, investor and «best seller» Doug Casey says that the «Modern Monetary Theory» (MMT) focuses on the notion that the economy in general, and money in particular, should be creatures of the state and that «wise and incorruptible” politicians should create as much currency as they think necessary, spend it in areas they like, and solve whatever problems occur with more laws and regulations: “a more radical version of economic fascism that has dominated America for at least the days of the New Deal ”, says Casey.

                   “Politicians are now talking about the supposed benefits of MMT. The pseudo economists are doing their abstruse and incomprehensible mathematical calculations on how it could affect the economy” this best seller continues. These schemes not only have never worked in all of history, but they end up lowering the standard of living and increasing social conflicts.

                   “Money represents the hours of your life that you spent earning it. When these people destroy the value of money, they are destroying part of your life”, Casey sentence, and it is that inflation is the depreciation of the currency due to excess monetary creation, excess emission over demand in real time.

                   Mind you, some people will get a lot more out of that increased emission: “absolutely every government meddling in the economy, be it taxes, regulations or inflation, always benefits the people in and around the government. And it harms society as a whole”, concludes this prominent economist, despite demagoguery affirming otherwise.

                   For example, Fred Hickey, editor of The High-Tech Strategist, gives as an example of the irresponsible lowering of interest rates – which leads to more issuance – by the Fed, the fact that Amazon borrowed USD 18,500 M, that does not need, in part to buybacks and so inflating the company’s shares so that its CEO, Jeff Bezos, then sells shares, thus worsening the «wealth inequality» as it gets richer against the inflation that hurts, mostly, the poor.

                  Doug Casey has no doubt that money printing is about to accelerate, by the Fed, which has already injected huge distortions into the economy and inflated an «everything bubble». The next round of currency printing is likely to bring the situation to a breaking point. We are on the cusp of a global economic crisis that could overshadow anything we’ve seen before, says this best seller and legendary investor.

                   Partly for this reason, because of this inflation is that things like the one that Ramiro Marra tweeted a few days ago happen: “… Mercado Libre that is revolutionizing the electronic market in Latin America is worth USD 77 billion per market. Dogecoin was created as a meme and it is also worth USD 77 billion per market. What value does $ DOGE bring to humanity? «

                  Even with this excess of money, stocks fall – as we anticipated in a previous column: “Is the stock market crash coming?” – because risk aversion rises and capital flows, above all, to commodities, gold, and Treasury bonds, among other investments.

                 That there is global inflation only MMT fans don’t see it, otherwise how can be explained why a 30% per year food prices have risen in the world as seen in the following graph. And so global hunger increases as a consequence – and I hope they assume their responsibility! – of the confinements that paralyzed the economies, and the extremely exaggerated issues of currency to “alleviate” the crisis that these confinements brought:

             No doubts that this is inflation. The Department of Agriculture (USDA) projects that the demand for grains will not increase substantially – justifying a rise in real prices – and, therefore, the supply will not grow substantially either. In particular for the exporting powers of South America, the USDA expects a Brazilian soybean harvest at 144 M tons and an Argentine oilseed production at 52 M tons in the next agricultural season. The soybean production forecasts for 2020/2021 remained unchanged for both nations.

               Meanwhile, in Argentina – as in most of the world – as I have already pointed out in a previous article (“How is the dollar doing?”) – inflation is wrongly defined as the rise in the CPI. Although it is impossible to measure inflation accurately, since it is a devaluation of the peso due to excess issuance, the best thing to do is to take as a reference the “blue” dollar, which is the most representative of the market since it is the freest. And so, as we have seen in previous notes, is how porf. Steve Hanke has estimated year-on-year inflation as of May 16 at 27.49%:

              Meanwhile, the INDEC estimated the official «inflation» – the rise of the CPI, according to its calculations, strictly speaking – at 4.1% per month -46.3% year-on-year – accumulating 17.6% so far in 2021.

               The reason why inflation falls, obviously, is because the emission decreases in real time and this emission contracts because the government has strongly liquefied spending, which can be seen in the loss of purchasing power of retirements and pensions, which it lost more than 6% compared to the first quarter of 2019 and due to public sector wages, which are contracting more than 10% in real terms, according to Invecq calculations.

               The government could keep inflation under control – achieving the promised 29% per year – if it manages to continue liquefying spending in this way, which will not be easily given the pressures in favor of increasing «social» spending, subsidies that grow at an annual pace rhythm of 65%, and the debt maturities that the government has achieved so far to «roll them», the commitments in pesos by an average of 117%.

               By the way, global inflation is a Pyrrhic victory for the Argentine government since, by increasing the price of grains, good news reaches it: with prices and the current harvest, the inflow of foreign currency will exceed USD 10,000 M with relation to the previous campaign.

                To the pirouette because, although it serves to pay current bills, ironically that inflation will be transferred to domestic prices if the price of the dollar remains fixed by the government – since more “inflated” dollars will be needed, ergo, more pesos at an exchange rate fixed- promoting the rise in the CPI, that is, increasingly liquefying the standard of living of Argentines with the same fiscal pressure that does not decrease proportionally, nor do the regulations and prohibitions that prevent the economy from taking off. Thus, in the medium and long term, tax collection will fall even more than what is collected from this increase in the international price of grains.

                       As can be seen from the Hanke curve, the extremely high emission levels in 2020 caused inflation – if not hyper – which then fell at the same rate as the fall in excess emission – over demand – in real time. Speaking of issuance, due to the whim of not wanting to print higher denomination banknotes and, therefore, having to print more banknotes for the same amount of money, according to Nicolás Gadano, the 2021 BCRA budget reaches $ 33,700 M, 153% nominal of what was spent in 2019 basically due to the costs of making banknotes.

                        If this inflation took time to transfer to prices – and that is why the CPI is now skyrocketing – it is due to the government’s repression on the exchange market and many prices – some subsidized – repression that, ironically, produced a drop in the increase of the production given the lack of profitability, ergo, a decrease in the demand for money, that is, a real inflation boosted.

                         The 4.1% rise in the CPI in April complicates the official goal of 29% per year, although it is not impossible – despite what many analysts who confuse inflation with CPI think – if the government manages to keep the issue at bay and, better yet, if it frees the economy so that it expands and increases the demand for money.

                         Many analysts expect a slight drop in the CPI climb, «inflation» according to them. LCG, for example, estimates that the price of food rose in the two first weeks of May by 0.8% and 0.4%, respectively, bringing the carryover for the remainder of the month to 2%. Meanwhile, the last REM carried out by the BCRA estimated an «inflation» of 3.9% for April (it was 4.1%), 3.2% for May, 3% for June, 2.8% for July, 2.6% for August, 2.5% for September and 2.6% for October, while 47.3% is expected for the whole year.

*Senior Advisor, The Cedar Portfolio 


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