Will America Model Argentina (and 25% Inflation)? (GLD, SLV, TLT, TBT, TNA)
Justice Litle: Argentina’s president was re-elected in a landslide — even presiding over 25% inflation. Will American politicians follow suit? Cristina! Cristina! The chants are as loud today as they were four years ago.
Cristina Fernandez de Kirchner, the president of Argentina, was re-elected by one of the widest margins in history on Sunday. Her landslide victory gave her 54% of the vote — the biggest since elections were re-established in 1983 — while her nearest challenger took a mere 17%.
Cristina begins her second term basking in the glory of an economic boom. The IMF (International Monetary Fund) says that Argentina’s real GDP, or gross domestic product, grew at 94% between 2002 and 2011. That is the fastest rate in the Western Hemisphere, and twice that of Brazil.
Cristina is even being heralded as a champion of equality. “Since she and her predecessor as president, her husband Néstor Kirchner, first moved into Argentina’s presidential palace in 2003,” the Associated Press reports, “the income gap between the country’s rich and poor has been reduced by nearly half.”
It sounds like an economic miracle. But there is a catch… inflation.
Official rates for Argentine inflation have run as high as 11%. But more accurate private estimates say inflation has been running as hot as 25%… second only to Venezuela’s.
Earlier this year, Bloomberg Markets magazinehighlighted the everyday struggles of Argentine inflation (emphasis mine):
As an immigrant to Argentina in 1992, Zheng Jicong had to learn Spanish and adapt to local customs. As he’s built a chain of three supermarkets in Buenos Aires, he’s still adapting to inflation that’s about six times the rate in his native China.
Zheng, 35, says he has to change prices in his stores daily as suppliers send him new lists, with increases on some products ranging from 5 percent a month to as much as 5 or 10 percent in a single week.
“If I didn’t change the prices, maybe I’d end up selling goods at a price below the new costs,” Zheng says. “In Argentina, you have to get used to this.”
For Cristina’s second term, Credit Suisse analyst Carola Sandy predicts inflation will decline, from a range of 20-25% to 15-20%. (Oh, is that all?)
This Argentine model is very different from what’s taking place in the Northern hemisphere.
In the U.S. and Europe, wages have been stagnant. Argentina, in contrast, has chosen to directly and aggressively boost wages, at the cost of fierce inflation… more than double that which the official statistics report.
This sounds dangerous. Out-of-control wage spirals can lead to inflationary meltdowns. Keeping double-digit inflation in check is a hard thing to do. But for Argentina, the move appears to have worked — at least in the short term, and at the ballot box.
Were Cristina to provide advice to politicians in the United States, she might say: “Stop worrying about inflation… and forget about ‘austerity’ completely. Get wages up. Get real incomes rising. Sort the rest out later.”
And given her success in the polls, one might expect U.S. politicians to listen — especially as the “Occupy Wall Street” voices get louder, and the jobs problem drags on.
The simple portfolio implication is that, if U.S. politicians get desperate enough… and underpaid, underemployed Americans get angry enough… then Argentine-style inflation could migrate from Southern hemisphere to North.
As the powers that be weigh the option of dropping austerity in favor of a new Hail Mary plan, President Cristina’s success will not be overlooked.
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Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor of the free financial market news e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.
Article brought to you by Taipan Publishing Group, www.taipanpublishinggroup.com.