Tag: inflation

Dollarize Argentina Now

Argentina is once again wrestling with its long-time enemy, inflation. Now, it appears history may soon repeat itself, as Argentina teeters on the verge of another currency crisis. As of Tuesday morning, the black-market exchange rate for Argentine pesos (ARS) to the U.S. dollar (USD) hit 9.87, meaning the peso’s value now sits 47.3% below the official exchange rate. This yields an implied annual inflation rate of 98.3%. For now, the effects of this elevated inflation rate are being subdued somewhat by Argentina’s massive price control regime. But these price controls are not sustainable in the long term. Indeed, the short-term “lying prices” only distort the economic reality, ultimately leading to scarcity. There is, however, a simple solution to Argentina’s monetary problems: dollarization. I have advocated dollarization in Argentina for over two decades, well before the blow up of their so-called “currency board.” To put the record straight, Argentina did not have a true currency board from 1991 to 2002. Rather, as I anticipated in 1991, the “convertibility system” acted more like a central bank than a currency board. This pegged exchange rate system was bound to fail—and fail, it did. The 2001-02 Argentine Crisis could have easily been avoided if the country had simply dollarized. Argentina had more than sufficient foreign assets to dollarize their economy even late into 2001. But the Argentine government, through a series of policy blunders, ended up “floating” the currency. Not surprisingly, Argentina is now back to where it was in the late 1980s. So, how can Argentina dollarize? In short, the Banco Central de la Republica Argentina (BCRA) would take all of the assets and liabilities on its balance sheet denominated in foreign currency and convert them to U.S. dollars. The Central Bank would then exchange these dollars for all the pesos in circulation (monetary base), at a fixed exchange rate. By my calculation, the BCRA would need at least $56.36 billion to dollarize at the official exchange rate (as of April 23, 2013).

Price Controls: A Troubling Trend in Latin America

Argentina, Venezuela, and now even Ecuador have all embraced an unfortunate, if familiar, economic craze currently sweeping the region – price controls. In a wrong-headed attempt to “suppress” inflation, the respective governments have attempted to fix prices at artificially low levels. As any economist worth his salt knows, this will ultimately lead to scarcity.

Consider Venezuela, where the government sets the price of a number of goods, including premium gasoline, which is fixed at only 5.8 U.S. cents per gallon. As the accompanying chart shows, 20.4% of goods are simply not available in stores.

While price controls ostensibly keep the prices of goods on official markets low, they ultimately lead to empty shelves, depriving many consumers access to essential goods (such as toilet paper). This, in turn, leads to “repressed” inflation – given the price controls that exist, the “true” rate of inflation is held down, or repressed through Soviet-style government intervention. As the accompanying chart shows, the implied annual inflation rate for Venezuela (using changes in the black-market VEF/USD exchange rate) puts the “repressed” inflation rate at 153%.

Likewise, Argentina is facing a similar dilemma (see the accompanying chart).

In addition to scarcity and repressed inflation, price controls can lead to unintended political consequences down the road. Once price controls are implemented it is very difficult to remove them without generating popular unrest – just consider the 1989 riots in Venezuela when President Carlos Perez attempted to remove price controls. 

Hopefully, Ecuador – which, thanks to its dollarization, is experiencing an annual inflation rate of only 3% – will see this folly and abandon its expirement with price controls.

If countries like Venezuela are really interested in keeping inflation under control, they should follow Ecuador’s lead – simply junk their domestic currencies and “dollarize”.

Iran’s Inflation Statistics: Lies, Lies and Mehr Lies

The Mehr News Agency is now reporting that Iran’s annual inflation rate has reached 31.5%. According to the Central Bank’s official line, Iran’s annual inflation rate has bumped up only 1.3 percentage points from February to March.

Never mind that this official inflation statistic is well below all serious estimates of Iran’s inflation. And yes, Iran’s official inflation statistics are also contradicted by the overwhelming body of anecdotal reports in the financial press.

Since September 2012, I have been estimating Iran’s inflation rate – which briefly reached hyperinflation levels in October 2012 – using a standard, widely-accepted methodology. By measuring changes in the rial’s black-market (read: free-market) U.S. dollar exchange rate, it is possible to calculate an implied inflation rate for Iran.

When we do so, a much different picture of Iran’s inflation emerges. Indeed, Iran’s annual inflation rate is actually 82.5% – a rate more than double the official rate of 31.5% (see the accompanying chart).

As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. And, in some cases, such as Zimbabwe and North Korea, the government simply stops reporting economic data altogether.

Iran has followed a familiar path, failing to report inflation data in a timely and replicable manner. Those data that are reported by Iran’s Central Bank tend to possess what I’ve described as an “Alice in Wonderland” quality and should be taken with a grain of salt.

Deficits and Inflation, from the Fed to the Cartoon Page

You know you’ve arrived when your name starts showing up in cartoons. Here’s the Wall Street Journal’s legendary “Pepper … and Salt” cartoon from last Thursday:

Of course, most inflation obsessives are deficit scolds, so it’s not clear that host is going to get much debate. 

One person who might be called both an inflation obsessive – that is, a person who objects to the robbery of savers through the erosion of the value of their money – and a deficit scold is David Stockman, former budget director for President Ronald Reagan. He has a new book out, The Great Deformation: The Corruption of Capitalism in Americawhich he summarized in the New York Times on Sunday. He’ll be speaking about his book at the Cato Institute on Wednesday. Don’t miss it.

North Korea’s Economic Outlook: Cloudy with a Chance of Statistics.

During the past few weeks, North Korea has been the subject of outsized news coverage. The recent peacocking by Supreme Leader Kim Jong Un – from domestic martial law policies to tests of the country’s nuclear weapons capabilities – has successfully distracted the media from North Korea’s continued economic woes. For starters, the country’s plans for agricultural reforms have been deep-sixed, and, to top it off, I estimate that North Korea’s annual inflation rate hit triple digits for 2012: 116%, to be exact.

Unfortunately, the official shroud of secrecy covering North Korea’s official information and statistics remains more or less intact. But, some within North Korea have begun to shed light on this “land of illusions”. For example, a team of “citizen cartographers” helped Google construct its recent Google Maps’ exposition of North Korea’s streets, landmarks, and government facilities.  In addition, our friends at DailyNK have successfully been reporting data on black-market exchange rates and the price of rice in North Korea – data which allowed me to conclude that the country experienced an episode of hyperinflation from December 2009 to mid-January 2011. 

Yes, things may be getting a bit brighter in North Korea. According to recent reportage by Carl Bialik of the Wall Street Journal, statisticians from the U.S. and Europe are bravely making their way into North Korea to teach students basic statistical methods. These lessons may only represent material from an introductory stats course, but they are a step in the right direction, because they force students to at least think about analyzing data. Unfortunately, in North Korea, reliable data continue to be a scarce commodity.

While these developments in North Korea have hardly shaken the dismal economic status quo, one can only hope that they will start to bring about some much needed change . But, don’t hold your breath. If flamboyant basketball hall-of-famer Dennis Rodman’s recent “basketball diplomacy” mission to Pyongyang is evidence of anything, it’s that North Korea is more interested in scoring cheap headlines than it is in turning around its economy. Until North Korea begins to open up its markets and make transparency a priority, its economic prospects will be cloudy, at best.

Whip Illegitimacy Now (WIN)!

You just know a David Brooks column featuring the refrain, “my dream Obama would…” is going to be exasperating. And it is: especially when he suggests that his “dream Obama” could and should:

… talk obsessively about family structure and social repair. Every week we get another statistic showing how social and income inequality is dividing the nation. …. while childhood obesity is falling among kids whose parents graduated from college, it is still rising among kids whose parents have a high school degree or less.

Because of his upbringing, President Obama is uniquely qualified to talk about family structures. Traditional values are an investment in the young, and he could do what he can to restitch the social fabric.

It’ll be tough to “restitch the social fabric” when you need at least one hand free to bend the arc of history, but no doubt President Obama believes he’s up to the task. Still, why does David Brooks think it would help to have the president “talk obsessively about family structure and social repair”?

Barack Obama has been talking obsessively about capital-‘h’ Hope for nearly a decade, and during his administration, as with his predecessor’s, many more Americans think the country’s on the “wrong track” than think it’s moving in the “right direction.” (.pdf).

The evidence that the presidential “bully pulpit” reliably sways the public’s policy preferences is weak enough, as Ezra Klein documents here. What evidence is there that presidential jawboning about family structures changes anyone’s behavior? Birth rates for unmarried women went down in the era of Monica Lewinsky and Gennifer Flowers, resuming their upward trend under family values president George W. Bush. Do people really make their choices about marriage and family under the influence of presidential rhetoric or with an eye toward the example he sets?

The campaign Brooks envisions would be about as effective as Gerald Ford’s little Whip Inflation Now (WIN) buttons. Maybe it’s time for a little less magical thinking about our presidents. 

Value of the Iranian Rial Hits an All Time Low

For months, I have kept careful tabs on the black-market exchange rate between the Iranian rial and the U.S. dollar. This is the metric I used to determine that Iran underwent a brief period of hyperinflation, in October 2012. And, using these data, I calculated that Iran ended 2012 with a year-end annual inflation rate of 110%.

Since the start of the new year (on the Gregorian calendar), the rial has displayed new-found weakness. Indeed, its value reached an all-time low of 38,450 rials to one dollar, on Saturday, February 2. As the accompanying chart shows, it is now trading at 38,250, moving the implied annual inflation rate to 121%, from its year-end value of 110%.

How can the IRR/USD rate be so volatile? After all, both the rial and the dollar represent nothing more than fiat currencies, without any defined value. At the end of the day, the value of a fiat currency is whatever value that fluctuations in the supply of and demand for cash balances accord to a scruffy piece of paper.

The markets for both the rial and dollar respond to conjectures about the ability of the respective governments to deliver on their stated “good” intentions. When it comes to Iran, these conjectures understandably generate sharp fluctuations in the value of the rial. Indeed, it is clear that Iranians do not trust their government to deliver economic stability. In consequence, the rial continues to tumble with increasing volatility, and inflationary pressures continue to mount.