By Alejandro A. Tagliavini *
‘Stagflation’, stagnation with ‘inflation’ – rise in the CPI, strictly speaking – is a term coined by a British politician, Iain Macleod, in 1965, when many economists doubted that an economy, with little or no growth and rates of «Inflation» higher than normal was possible. The worst stagflation on record in the United States occurred during the 1970s.
In 1971, Richard Nixon reacted to balance of payments pressures by taking the US off the gold standard. Obviously, the immediate result was the lack of control in the issuance of currency, that is, strong inflationary pressures to the point that Nixon tried to impose price and wage controls to combat the rise in the CPI, without much success and showing that the conservatives were never «friends of the free market” as they have been presented.
In the late 1960s, the American economist Arthur Okun created a simple statistic to reflect the impact of stagflation and called it the Misery Index, which added the unemployment rate to «inflation», the rise in CPI. In 1975, this rate reached 19.9%, and in 1980 it peaked at 22%.
Now, stagflation looms in the US During October, the CPI rose 6.2%, while it was expected 5.8% -5.9% and well above the 5.4% rise in September, the highest rise high since 1990. Thus, real wages -adjusted according to the rise in the CPI- fell 2.2% since the first of January. BY the time being, the sharp rise in the CPI is more than offset by the fall in the unemployment rate, leaving the poverty index above 10%, according to Bank of America analysts who expect that by the end of 2022 the index of misery drops to 6.3%, with an unemployment rate of 3.5% and inflation of 2.8%. Too optimistic in my opinion.
Another trendy term to disguise the real causes of inflation is «Transitory Inflation» with which the Fed tries to wash its hands of the problem it has caused with an astronomical emission. The objective of the monetary authority is 2% and the October data was 6.2% and rising …
Ironically, the dollar is at a high in 2021, compared to other currencies, given that the behavior of the rest of the Central Banks is even worse since, by cases, neither the ECB nor the Bank of Japan foresee an adjustment in their monetary policy in the immediate future. By contrast, rising “inflation” – the US CPI, strictly speaking – has raised expectations that the Fed will start raising interest rates relatively soon. The dollar index, which tracks the evolution of this currency against a basket of six other currencies, is at its highest level since June 2020:
The movement of the currency has also been supported by an increase in the yield of the US Treasury bonds; thus, for example, the difference between the yield of US 5-year bonds and their equivalents in Japan and Germany has grown as it has not since the beginning of 2020.
And, of course, this inflation – the excess of currency in the market – marks, in part, the rhythm of Bitcoin like that of all equities. By cases, the Swiss ETF WisdomTree Bitcoin (SIX: BTCW) or the Grayscale Bitcoin Trust (OTC: GBTC), exceeded 200% profitability in 2020.
In the world of cryptocurrencies, according to the number of bitcoins owned, Shrimp are those with less than 1 bitcoin, Crab those with between 1 and 10, Octopus between 10 and 50, Fish 50-100, Dolphin 100 -500, Shark 500-1,000, Whale between 1,000 and 5,000 and, finally, Humpback whale that exceeds 5,000 bitcoins. The cryptocurrency market is dominated by 10 great whales, and the 10,000 largest bitcoin investors control more than a third of the cryptocurrencies in circulation. And, according to a NBER study, 0.1% of the world’s largest miners, control 50% of bitcoin mining capacity.
Bitcoin and Ethereum have made new all-time highs last week and it is clear that whales are a determining driving force. Now, a series of bad news has caused a drop to below $ 60,000. But in this fall, there are also those who take the opportunity to buy, and the third largest Bitcoin whale has bought 207 Bitcoin tokens at $ 62,000, according to Cointelegraph, which has returned the uptrend.
And not to forget Tesla, which «is the market …» according to The Market Ear, or at least follows it closely as can be seen in this Refinitiv graph:
Meanwhile, Argentina does not seem to be an exception to this trend of stagnation and that will achieve the so-called «Multiannual economic program for sustainable development» with the invaluable help of the statal, ergo, statist IMF that collaborates in financing unviable states.
Some USD 1,900 million are due in December and the Government discounts the payment with the remainder of the SDR sent by the Fund in August. But then, the maturities as of March exceed the government’s payment capacity since USD 2,855 M must be canceled and with the SDR depleted.
Thus, an agreement with the IMF is imposed unless the Argentine State decides to transform itself into an efficient body, with a very strong cut in expenses and the sale of deficit properties. This is something that it does not intend to do and, therefore, it negotiates an Extended Facilities program, which generates a maximum repayment term of 10 years. Which reveals the true nature of the IMF: it finances and refinances failed states so that they do not become efficient and depend on them forever.
The government made it very clear and the plan to agree with the IMF will be done «without renouncing the principles of economic growth and social inclusion.» Read, they do not intend to leave the political clientele but to obtain financing to continue with the party of state inefficiency.
The deficit forecast in the budget for 2022 stands at 3.3% of GDP and the multi-year plan sets a downward trajectory, something that will surely not be fulfilled as the GDP does not grow as expected by the Government. The fresh funds of the IMF, in addition, will allow to control the gap between the parallel dollar and the official one. Otherwise, the exchange rate gap would continue to widen and the BCRA’s net reserves would soon run out. Let us remember that last week the BCRA sold almost USD 650 M, 20% of its stock of net reserves.
Of the 100% difference with the official dollar rate, it should be reduced to 60% according to the Fund’s aspirations. In other words, nothing to open up the exchange market so that it works efficiently by supply and demand and encourages exports and balances imports. The Government is expected to accelerate the pace of the crawling peg, with devaluations that accompany the rise in the monthly CPI and recover some of what was lost in recent months, that is, to go towards a crawling peg faster than the 1% per month that has been occurring since May so that the real exchange rate – which has fallen 12.5% since May – stops falling behind in the face of a rise in the CPI that rose again and closed at 3.5% in October and under an annual forecast of 50% .
Obviously, one of the first points where an agreement was reached with the IMF is to have a tax structure «fairer, more efficient and that gives less room to evasion and avoidance», that is, to continue charging abusive taxes to finance the party state and its partners in the IMF, who cares that the poor end up paying taxes because the rich derive them downwards by raising prices, lowering wages, etc.
In other words, the rise in the CPI will probably moderate as a consequence of a moderation in inflation – the exaggerated monetary issue – but even so, combined with a weak or even negative growth of GDP given the abusive State in collecting taxes and suffocating regulations that destroy to the market – the 45 million Argentineans – stagflation is assured.
* Senior Advisor at The Cedar Portfolio and Member of the Advisory Council of the Center on Global Prosperity, de Oakland, California