Argentina Government Threatens Jail Terms for People who Question Inflation Data

Inflationism and interventionism are intertwined. When governments resort to inflationism, the next step is to shift the blame on the public in order to justify price controls. The ensuing feedback loop between inflation and price controls would mean throwing in many other forms of social controls or interventionism, specifically wider trade controls, foreign exchange and capital controls, wage and labor controls, border and travel controls, controls on population and household activities as well as censorship and media control. 

In Argentina, those who question the government’s inflation data have been at risks of landing in jail

From Yahoo/AP (hat tip Zero hedge)

Argentina is trying again to criminally prosecute people who publish independent inflation data, just as Congress opens debate on a 2014 budget that assumes economic good times next year.

The government is predicting strong annual economic growth of 6.2 percent, inflation of just 10.4 percent and a peso dropping only 10 percent against the dollar.

Independent economists call these numbers wildly optimistic, and say that Argentina's growth prospects are troubling and inflation is actually running more than twice as high. They maintain that illegal currency trading reflects much greater pressure to formally devalue the currency than the government has acknowledged.

As Economy Minister Hernan Lorenzino proposed the budget to Congress, Commerce Secretary Guillermo Moreno went to court, accusing four different consulting firms of criminal "speculation" for publishing inflation data that contradicts official reports.

And why price inflation has been expected to balloon

The proposed budget calls for roughly $162 billion in national government spending, which is a 29 percent increase in peso terms on revenues of roughly $192 billion.

The plan also says Argentina's central bank will spend $9.8 billion in foreign reserves on bond payments in 2014, a number that does not include U.S. court-ordered payments of $1.4 billion to holders of defaulted debt that has gone unpaid since the country's 2001 economic crisis. Lorenzino defended this gamble — which risks pushing Argentina into another default if it refuses to pay the plaintiffs — saying Argentina "has lowered its debts while growing the economy and maintaining political autonomy and sovereignty."

Never mind if Argentine officials recently admitted that price inflation is higher than official figures. Since they are in power they are excused to do so, let the private sector be damned.

Yet in an interview with a Greek TV last April, Argentina’s economic minister made a booboo defending official inflation numbers by blatantly eluding repeated queries on them

Here is Argentina’s official inflation rate.

Here is the unofficial inflation rate. Contra official figures, Argentina has been in the throes of hyperinflation.

Reason? As pointed above, Argentina’s government has been in a spending binge and these are being manifested in the dramatic collapse of the Argentine peso (both charts from Cato Institute’s Troubled currency Project)

Take note, Argentina’s Merval equity benchmark have been reflecting both the Peso and unofficial inflation rates.

The Merval index peaked in May a month after the unofficial inflation rates soared beyond 100% (hyperinflation), and declined as the Peso rallied and when the inflation numbers dropped to the 30% levels. 

Apparently the new record highs of Merval suggests that inflation numbers have been rising and that the Peso has been tanking again. The Merval has been up 50% year to date.

In a world dominated by inflationism, stock markets have hardly been driven by real earnings and by the real economy, instead stock markets have been manifestations or symptoms of inflationary policies via inflationary credit and monetization of debts.

Argentina's case partly represents what has been a global phenomenon (except on the price inflation part yet).

But don’t worry says Argentine officials, official data debt (debt to GDP) has hardly been a problem.

But again that’s not how markets or creditors perceive them. 

Premium on Credit Default Swaps CDS have soared and have remained at levels indicative of a large risk from a credit event.

The bottom line is to never trust government statistics.

The Argentina Government Plays a US Dollar Con Game

Running out of US dollar reserves, the increasingly desperate regime of Argentina President Cristina Fernandez de Kirchner plans to tap on the US dollars held by their informal economy by issuing US dollar based IOUs

From Bloomberg: (bold mine)

President Cristina Fernandez de Kirchner’s wish of being able to print dollars is coming true as the central bank begins issuing dollar-denominated certificates today that trade in pesos.

Argentina is issuing the certificates, known as Cedines, as part of a tax amnesty plan to attract undeclared cash back into the economy. The nation’s foreign reserves have fallen at the fastest pace in more than a decade to a six-year low of $37.2 billion, as Argentina uses the money to pay debt instead of borrowing dollars at interest rates that are more than double the 5.95 percent average in emerging markets.

Fernandez, who said last year that it was unfortunate she didn’t have a “little machine” to print dollars, is trying to tap some of the estimated $160 billion held by Argentines under mattresses or in bank accounts abroad, to ease dollar demand stoked by more than 30 measures that she has imposed since 2011 to restrict access to foreign currency. While the measure is designed to provide individuals dollar-backed claims that can be used for real estate and energy projects, Empiria Consultores says Argentines will just exchange them back for U.S. currency.

More from the same article:

The reference value for every $100 of Cedines, is 90 for purchase and 93 for sale, for an implied exchange rate of 7.2 pesos per dollar, according to a recently created website called Cedin Trading.

That rate would be weaker than the official rate of 5.3903 and stronger than the black market where Argentines pay as much as 8 per dollar. A fourth rate used for financial transactions by swapping bonds and stocks was 7.8257 at 4:26 p.m. in Buenos Aires….

Fernandez is seeking to reverse a rout in property transactions after her ban on buying foreign currency almost paralyzed the dollar-based market.

Undeclared dollars can also be traded for a government-issued bond maturing in 2016 that will pay a 4 percent annual interest rate that will be used to finance the energy industry and state-run YPF SA.

First the Argentine government prevents her constituents from transacting in US dollars, so the public kept them outside of the grasp of the government and from the government controlled banking system.

Now that such confiscatory policies has backfired, the Kirchner regime hopes to usurp people’s savings held in foreign currency via unfunded US dollar based IOUs or certificates which is why this program looks like a sting or a con game.

Yet Argentina’s fiscal intemperance will only mean higher inflation and economic stagnation ahead.

As Simon Black of the Sovereign Man expounds: (bold mine)

Inflation here is completely out of control. The government figures say 10%, but the street level is several times that.

Curiously, even Cristina acknowledges that prices are way too high. But rather than rein in spending and stop the money printing, she’s digging her high heels in even further by launching a new clothing line.

This new brand– NYP (Nacional Y Popular) will be owned and run by the government, selling everything from jeans to shirts to shoes at prices below 100 pesos (less than $20 officially).

In every instance, they just keep going further down the rabbit hole of more government control, more central planning. It’s like living inside the pages of Atlas Shrugged.

In a world where capital seems to be shrinking as evidenced by the ongoing bond market rout, the global governments appear as likely to increasingly resort to political, economic and financial repression measures in order to fulfill the whims of their political leaders and to preserve the status quo or the privileges of the political class.

Developments in Argentina and Venezuela seem as the proverbial writing on the wall.

Argentineans Find BMWs, Bitcoin and Gold as Inflation Hedges

The Argentine Peso continues to massively devalue to the point that they have become symptoms of hyperinflation. 

In barely a few days the peso has sunk to its weakest level ever at 10.45 pesos vis-à-vis the US dollar. As of last week, the implied annual rate of inflation, based on 9.87 pesos/USD, is at 98.7% as estimated by Cato’s Steve Hanke. In short, the peso fell by whopping 5.9% in less than a week. 

Yet Argentines don’t just hold cash and see their savings erode, they have sought refuge partly through purchases of luxury cars.

From the Bloomberg:

Argentines are buying more BMWs, Jaguars and other luxury cars as a store of value as inflation decimates their deposits and pummels the nation’s bonds.

Purchases of cars from Germany’s Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, owned by India’s Tata Motors Ltd. (TTMT), jumped the most in April among brands sold in Argentina. The sales were part of a 30 percent surge in car sales from a year earlier that was the biggest increase in 20 months, according to the Argentine Car Producers Association. While used-car prices rose in line with inflation last year, or about 25 percent, peso bonds tied to consumer prices fell 13 percent. The drop was the biggest in emerging markets.

Car sales in Argentina increased by the most in almost two years last month as a ban on buying dollars made Argentines turn to vehicles to protect savings against the fastest inflation in the Western Hemisphere after Venezuela. Luxury models are becoming more attractive because they are imported at the official dollar rate, said Gonzalo Dalmasso, vehicle industry analyst at Buenos Aires research company Abeceb.com. Argentines with savings in dollars are able to purchase cars at half the cost by trading in the unofficial currency market.

It is not clear how the operations of these high end car merchants remain viable considering the wide disparity between currency rates from which such trade has been conducted. The blackmarket rate is nearly about 50% below the official rate, this should translate to significant economic losses for these firms.

On the other hand, used car sellers appear to be losing money as selling prices has only been expanding at the statistical inflation rate of 25% when real inflation rate has been above 90%. 

The unevenness of returns suggests of something fishy behind the surge in luxury car sales.

Though barter has reportedly been one of the options taken by these firms. From the same article:

The decree prompted BMW to export rice and Porsche Automobil Holding SE to begin exporting olives and Malbec red wine. Shizuoka Subaru Motor Co. agreed to export chicken feed, Hyundai Motor Co. began sending soy flour to Vietnam and Mitsubishi Motors Corp. (7211) started shipping peanuts.

These reports are really questionable.

Rather I suspect that these luxury car dealers are cronies or political allies, who are subsidized by Argentina’s politicians through the government. In turn, Argentina’s political elites and their allies could have been the major buyers of these high end cars.

In short, subsidies to exotic car traders are really transfers or subsidies to the political class and their cronies in disguise.

Yet the average Argentinean seeks gold and bitcoins as refuge.

More from the same article:

Argentines are buying cars, gold and even virtual currency such as bitcoin as they look for ways to preserve their savings as the peso is forecast to fall 17 percent this year.

It's pretty obvious that Argentina has gone into a debt default route via inflation. Again from the same article:

Argentina’s dollar-denominated bonds aren’t a better alternative as a U.S. legal dispute on repayment of the nation’s defaulted debt caused average yields to soar to 13.92 percent, almost three times the average in emerging markets, according to JPMorgan Chase & Co.

The notes have plunged 10 percent his year.

The rate banks pay for 30-day deposits of more than 1 million pesos was 15.38 percent on May 10….

The cost to insure Argentine debt against default within the next five years through credit default swaps rose 107 basis points to 2,770 basis points, according to data compiled by CMA Ltd.

While inflation and a gap in the exchange rates is fueling sales, the same reasons are also deterring investment in the car industry, said Cristiano Rattazzi, President of Fiat Auto Argentina SA.

See what I mean? The gap in inflation and exchange rate has simply not been consistent with soaring sales for the toys for wealthy class unless they have been subsidized. 

Unfortunately for the political elites, when hyperinflation will hit critical levels enough to spur social violent unrest, these luxury cars will easily become objects of agitation and consequently will be transformed into junk.

Inflation and Price Controls: Latin America Edition

I have been saying that price controls functions as the alter ego or the twin sibling of inflationism where both operates under the umbrella of financial repression (euphemism legal plunder of people's resources via social policies). 

I have also been pointing out that depending on statistics (historical data) to establish a theory can hardly be relied on because statistics does not capture real human events, and can be manipulated to serve political goals.

Here is how it works. First government inflates money supply via credit expansion. Next, the resultant higher prices will be blamed on “greed” on the private sector, thus, justifying price controls. Then government imposes price controls and other related restrictions.

Price controls effectively mutes statistical inflation. But on the other hand, price controls provides disincentives for producers to produce, thereby leading to goods shortages, and thus, leads to social deprivation and hardships.

At the end of the day, inflationism-price controls brings about economic crises and social unrest.

Cato’s Steve Hanke says the spreading use of price controls in Latin America, while reducing statistical inflation, has been depriving the public access to goods. (italics original)

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.

This only proves my observations that Venezuela and Argentina, as enduring episodes of hyperinflation (the new generation of Zimbabwes), although at different stages; Venezuela is at a more advanced state relative to Argentina’s incipient phase from earlier stagflation.

I expect stagflation-hyperinflation to occur in many parts of the world as governments rely on the printing press and financial repression to advance their interests.

Argentines Flee to Gold on Financial Repression, Devaluation

Escalating financial repression implemented by the Argentina government has been prompting its citizenry to seek gold as safehaven. 

From the International Business Times:

Argentines are utilizing gold to hedge their savings as economists forecast the peso will lose more value than any currency in the world, and President Cristina Fernandez de Kirchner forbids dollar purchases.

The nation’s inflation rate of 26% is also eroding Argentina’s peso- denominated bonds to fall 5.5% ytd.

With Argentina printing pesos to finance itself, the growth of pesos in the economy has rose 38% in the past year, leading analysts to predict that the currency will depreciate 12.9% through year-end, the highest of currencies tracked by Bloomberg.

Banco Ciudad is the only bank left that trades in gold after Fernandez  banned the purchase of certified 99.99% pure gold for savings in July. The bank sells it at 99.96% purity, according to Carlos Leiza, who oversees the lender’s gold trading.

There is a 35% gap in the prices to buy and sell physical gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE.

Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said.

Watch Bloomberg’s news video on this here

I must say that Argentina’s inflation rate must have been severely understated by the mainstream. Price controls have been distorting real conditions in Argentina. The Argentine government even recently banned advertising as part of price controls.  Official inflation rates are way below private estimates. Argentina’s government has also been censoring private sector economists from making inflation forecasts.

Argentina’s “blue dollar” or the nickname for the US dollar based on the black market rate has fallen to a new low yesterday, at 8.27 from 8.07 last Monday or a decline of about 2.4% in just a few days. The Peso is far from the official rate of about 5.1. The gap between the black market rate and the official rate continues to widen.

The increasingly desperate government has imposed more capital controls through a 15% tax hike on the use of credit cards abroad aside from new 20% levy on airline tickets.

Unlike Venezuela, so far, Argentina’s stock market has yet to manifest symptoms of hyperinflation. The Merval index has been up 22.23% year to date, as of Friday’s close, and nears a milestone breakout.

We should not confuse rising stock markets with prosperity or even bubble cycles, when they serve as evidence of worsening monetary disorder. Nonetheless a breakout of the Merval along with increased panic buying on gold will could mean a tipping point towards hyperinflation and a crisis.

Argentina Expands Price Controls By Banning Advertisement

From the Economist

Not content with the harassment and the persecution of private sector economic profession for making estimates on price inflation, which widely departs from government's figures, Argentina’s government has embarked on banning advertising.

From the Washington Post

Argentina’s newspapers say supermarket and appliance companies have been told to stop advertising during a price freeze the government imposed to stem inflation.

The government denies this: Consumer protection official Maria Colombo calls it “an invention” of the daily newspaper Clarin.

This is simply a showcase of how intervention begets intervention, i.e. from price controls to censorship.

Yet the sustained pursuit of the policy of price controls translates to incremental expansion to cover a bigger or wider sphere of the economy until the government entirely replaces the private sector.

Warned the great Austrian professor Ludwig von Mises, (bold mine)

If this unpleasant experience does not teach the authorities that price control is futile and that the best policy would be to refrain from any endeavors to control prices, it becomes necessary to add to the first measure, restricting merely the price of one or of several consumers' goods, further measures. It becomes necessary to fix the prices of the factors of production required for the production of the consumers' goods concerned. Then the same story repeats itself on a remoter plane. The supply of those factors of production whose prices have been limited shrinks. Then again the government must expand the sphere of its price ceilings. It must fix the prices of the secondary factors of production required for the production of those primary factors. Thus the government must go farther and farther. It must fix the prices of all consumers' goods and of all factors of production, both material factors and labor, and it must force every entrepreneur and every worker to continue production at these prices and wage rates. No branch of production must be omitted from this all-around fixing of prices and wages and this general order to continue production. If some branches were to be left free, the result would be a shifting of capital and labor to them and a corresponding fall in the supply of the goods whose prices the government has fixed. However, it is precisely these goods which the government considers as especially important for the satisfaction of the needs of the masses.

But when such a state of all-around control of business is achieved, the market economy has been replaced by a system of centralized planning, by socialism. It is no longer the consumers, but the government who decides what should be produced and in what quantity and quality.

Argentina has embarked on a slippery slope towards totalitarianism. And this is likely to lead to crushing hyperinflation that would result to dystopia.

In the world of politics, politicians fervently hope and desire that they can legislate away the law of demand and supply.  They fail to heed the lessons of King Canute (or Gnut the Great) who, according to a legend, futilely ordered the ocean waves to stop advancing. King Canute only wanted to prove to the courtier- sycophants that he was not omnipotent or that his power was limited.

Hubris at the expense of society.

Inflation is Good: Argentina Imposes Price Controls Amidst Spiraling Inflation and Shortages

Some people argue that inflation is necessary. 

Well we will take the validity of such claim based on the current Argentinian experience

From Businessweek/Bloomberg

Argentine supermarkets, including local units of Wal-Mart Stores Inc. (WMT), Carrefour SA (CA) and Cencosud SA (CENCOSUD) agreed to freeze prices for 60 days amid inflation that accelerated last year to the highest in the hemisphere.

The United Supermarkets Association agreed to keep prices unchanged in their stores until April 1 during a meeting today with Interior Trade Secretary Guillermo Moreno in Buenos Aires, according to a statement from the Argentine Chamber of Commerce.

President Cristina Fernandez de Kirchner has defended her government’s official data that shows consumer prices rose 10.8 percent last year compared with private estimates of 25.6 percent. The government’s alleged underreporting of inflation, which began under Fernandez’s predecessor and husband, Nestor Kirchner, prompted the International Monetary Fund to censure the South American nation on Feb. 1 for the first time in the Washington-based organization’s history.

“They’re trying to hold down inflation, but we’ll see what happens once the agreement ends,” said Susana Andrada, director of Buenos Aires-based consumer watchdog Center for Consumer Education in a telephone interview. “They may be able to control prices of 300 goods, but then we may face some shortages as retailers keep goods off the shelves.”

I am reminded by the great Ludwig von Mises who wrote of the semantic maneuvering by officials and their apologists to redefine inflation to justify price controls.  [italics original, bold original]

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase.

They put the responsibility for the rising cost of living on business, This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices. While the Office of Stabilization and Price Control is busy annoying sellers as well as consumers by a flood of decrees and regulations, the only effect of which is scarcity, the Treasury goes on with inflation.

And that price controls function as mechanical responses by political authorities on inflation. Again the great Mises:

The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be…

The real danger does not consist in what has happened already, but in the spurious doctrines from which these events have sprung. The superstition that it is possible for the government to eschew the inexorable consequences of inflation by price control is the main peril. For this doctrine diverts the public's attention from the core of the problem. While the authorities are engaged in a useless fight against the attendant phenomena, only few people are attacking the source of the evil, the Treasury's methods of providing for the enormous expenditures. While the bureaus make headlines with their activities, the statistical figures concerning the increase in the nation's currency are relegated to an inconspicuous place in the newspapers' financial pages.

I expect such twin political reaction (inflation-price control) to become a global phenomenon.

Argentina Politics: Biggest Protest Rally in Decades

The president of Argentina’s Central Bank (BCRA), Mercedes Marcó del Pont, recently declared

it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sector’s behaviour

Add to this the Argentine government’s statistical manipulation to suppress inflation measures, currency controls (banning of the US dollars), and other political controls (such as ban on imported books), as well as cronyism, the result has not only been intensifying capital flight but growing social instability which has been ominous of mounting social crisis.

Writes the London Evening Standard, (hat tip Bob Wenzel)

Tens of thousands of Argentinians blocked the streets of Buenos Aires in the country’s largest anti-government protests in more than a decade.

Demonstrators marched against rising inflation, crime and corruption under President Cristina Fernandez de Kirchner, whose popularity has plummeted since she was re-elected last year as the economy wobbles.

Argentina’s etatism or a combination of both socialism and interventionism (fascism) only validates the admonitions of the great late Professor Ludwig von Mises,

State interference in economic life, which calls itself "economic policy," has done nothing but destroy economic life. Prohibitions and regulations have by their general obstructive tendency fostered the growth of the spirit of wastefulness. Already during the war period this policy had gained so much ground that practically all economic action of the entrepreneur was branded as violation of the law. That production is still being carried on, even semi-rationally, is to be ascribed only to the fact that destructionist laws and measures have not yet been able to operate completely and effectively. Were they more effective, hunger and mass extinction would be the lot of all civilized nations today.

Our whole life is so given over to destructionism that one can name hardly a field into which it has not penetrated. "Social" art preaches it, schools teach it, the churches disseminate it.

The consequences of destructionism has now become evident in the streets of Buenos Aires.

Argentina's Government Openly Promotes Poverty

Poor Argentinians. The Argentine government does not only want to subtly confiscate savings of ordinary folks through inflationism, their government openly promotes poverty for the Argentina’s population through economic fascism and political repression.

From Nasdaq.com 

The president of Argentina's central bank has affirmed the government's policy of eliminating the U.S. dollar as a transaction and savings medium in the South American economy.

"De-dollarizing the economy is a challenge" and Argentines "have to save in local currency like [people] do everywhere else in the world," Mercedes Marco del Pont said in a speech late Friday night.

Argentines have long viewed the U.S. currency as a haven in times of economic uncertainty because of their country's long history of high inflation and periodic devaluations.

Mrs. Marco del Pont wants Argentines to save in pesos amid a backdrop of one of the highest rates of inflation in the Americas.

Annual inflation, which most economists say hovers around 25%, has eroded faith in the peso and fueled demand for dollars. The interest rates banks pay on deposits are well below inflation.

The government's data--which has been widely criticized by economists and the International Monetary Fund--put 12- month inflation at 10% in August.

Inflationism has only been part of the overall strategy of financial repression which has been coursed through fascist policies of nationalization, currency controls, strangulating regulations, civil liberty proscriptions (e.g ban on imported books) and more…

Since late October 2011, the government has severely restricted the public's access to the foreign-exchange market to stop capital flight that was slowly draining the central bank's international reserves.

The currency controls have dented economic activity, especially in the real estate sector where most transactions were done overwhelmingly in dollars.

Property sales in the capital city Bueno Aires plunged 35% on the year in August.

Argentina, aside from Venezuela, are likely or potential candidates to join Iran as models for modern day hyperinflation.

How Argentina’s Class Warfare Policies Promotes Poverty

Argentina’s politics serves as an example of how the minority (political class) exploits the majority (voting poor) to perpetuate themselves into power.

In the attempt to redistribute wealth, Argentina’s government has engaged in the tightening of currency controls that has only exacerbated capital flight.

First the unintended consequences

From the Telegraph, (bold emphasis mine)

The new regulations required anyone wanting to change Argentine pesos into another currency to submit an online request for permission to AFIP, the Argentine equivalent of HM Revenue & Customs. To submit the request, however, you first needed to get a PIN number from AFIP, either online or in person. Having finally obtained your number, submitted your online request and printed out your permission slip, you could then present it at the bank or official cambio and buy your dollars. Well, that was the theory.

In practice, the result was chaos. The online system quickly folded under the onslaught of applications, while a personal visit to an AFIP district office meant bringing a camp bed and picnic hamper.

The reason for this tidal wave of requests, and indeed for the introduction of the restrictions in the first place, was the ferocious rate of capital flight from the Argentine economy that had started in 2010, when many could already see the writing on the wall. Which brings us to that thumping electoral victory in October.

Argentina’s politicians implemented class warfare policies to gain hold of political power.

Again from the same article,

When Mrs Kirchner first came to power in 2007 she inherited the social reform programme of her predecessor (also her husband), Nestor Kirchner. Hefty tax demands on the country’s wealth base were liberally redistributed to the disadvantaged, but with little investment in longer-term projects that would deal with the causes of poverty.

From the point of view of the middle-classes, the Kirchners were using taxpayers’ money to buy themselves a constituency of dependents that would keep them in power, a tactic vindicated by that 54 per cent majority last October. Anyone with moveable assets started shifting them out of her reach by transferring them abroad or converting them into dollars.

The nasty economic effects from despotic redistributive policies and a culture of dependency: capital flight, inflation and economic stagnation as investors scamper for safety elsewhere.

In 2010 the flight of capital started gathering speed, totalling $11 billion by the end of the year. In 2011, as the election approached and signs of a probable Kirchner win emerged, this figure more than doubled to $23 billion. Hence the great slamming of the fire exits as soon as her victory was in the bag.

The months since then have seen an almost weekly tightening of restrictions to close any remaining loopholes, to the extent that it has now become almost impossible to buy foreign currency anywhere apart from the black market.

Which is, of course, exactly what the government hoped for, and in that respect at least the policy has been a success. In the first six months of this year dollar flight has been reduced to $3.5 billion. But damming the flood has come at a huge cost to the economy, especially since the currency restrictions were coupled with another set of regulations that effectively imposed a near-total ban on any imported goods. 

Apart from the minor inconveniences this has caused to shoppers, such as no longer being able to buy breakfast cereal not composed of shredded carpet, the measure has also backfired on Argentine industry itself because so many of the products manufactured in Argentina still need component parts and raw materials from elsewhere. Hence, for example, the 1,600 workers laid-off from the Renault car plant in Cordoba last June, while the parts they needed to finish the job languished in a container on a Buenos Aires quayside. But you do not need to be an economist to imagine the consequences when a G20 nation suddenly adopts North Korean-style siege-economy tactics, which does make you wonder about the quality of advice the government is getting.

Eventually there will be no one else to squeeze but the gullible and manipulated poor, and signs are becoming evident…

It’s not that significant, but set alongside the downwardly spiralling prospects and the upwardly spiralling inflation (25 per cent), the frantic hunt for hard currency and the bland ministerial assurances that there is nothing to worry about, it is just another little ripple of déjà vu permeating life in Argentina.

This reminds me of all the free stuffs given by local governments in the Philippines which most people think are without costs.

Nevertheless Argentina’s politics serves as a grim reminder of the evils of democracy.

As the great libertarian Henry Louis H.L. Mencken once warned,

The state — or, to make matters more concrete, the government — consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can’t get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting ‘A’ to satisfy ‘B’. In other words, government is a broker in pillage, and every election is a sort of advanced auction on stolen goods.

Bottom line: There is no such thing as a free lunch

Argentina’s Snowballing Capital Flight

This should be another slap on the face for inflationistas or people who myopically advocate inflation as economic elixir.

From Reuters,

Argentine banks have seen a third of their U.S. dollar deposits withdrawn since November as savers chase greenbacks in response to stiffening foreign exchange restrictions, local banking sources said on Friday.

Depositors withdrew a total of about $100 million per day over the last month in a safe-haven bid fueled by uncertainty over policies that might be adopted as pressure grows to keep U.S. currency in the country.

The chase for dollars is motivated by fear that the government may further toughen its clamp down on access to the U.S. currency as high inflation and lack of faith in government policy erode the local peso.

"Deposits keep going down," said one foreign exchange broker who asked not to be named. "There is a disparity among banks, but in total it's about $80 million to $120 million per day."

U.S. dollar deposits of Argentine banks fell 11.2 percent in the preceding three weeks to $11.5 billion, according to central bank data released on Friday. The run on the greenback has waxed and waned since November, after President Cristina Fernandez won a second term on promises of deepening the state's role in the economy.

From May 11 until Friday, data compiled by Reuters from private banks showed $1.9 billion in U.S. currency had been withdrawn, or about 15 percent of all greenbacks deposited in the country.

Feisty populist leader Fernandez was re-elected in October vowing to "deepen the model" of the interventionist policies associated with her predecessor, Nestor Kirchner, who is also her late husband.

Since then she has limited imports, imposed capital controls and seized a majority stake in top energy company YPF.

Earlier, Argentina’s central bank President Mercedes Marcó del Pont even mocked at the laws of economics and haughtily declared that printing money does NOT lead to inflation.

Like in the Eurozone, what governments and their minions say and what people do always clash: The prospects of intensifying devaluation worsened by concerns over capital controls and other forms interventionism have been prompting people to turn to black markets, take refuge on foreign currencies and flee the Argentine banking system altogether

Joel Bowman at the Daily Reckoning has a nice take on this…

The Argentinean government’s policy of theft via inflation has created a demand for the relative safety of US dollars. Obviously, a massive flight from pesos would create considerable headaches for the Argentine State and its efforts to control “its” people…and their taxable income. And so, even though there is no official rule preventing the purchase of US dollars (or any other foreign currency), Argentina’s equivalent to the IRS, AFIP, has made it virtually impossible to do so through regulated channels (i.e., banks).

Therefore, the informal exchange houses do a roaring trade responding to a very real and honest demand for US dollars. And there’s still enough business left over to maintain a vibrant market for the “green rate.” This exchange rate is even less official than the unofficial “blue rate.”

The “green rate” is offered by los arbolitos — i.e. “little trees” — who stand along Florida Street waving their arms (like little trees) and offering their exchange services. That rate, currently at 6.20 pesos to the dollar, is quite literally the “street price” for dollars.

The nearby chart shows the wide — and rapidly widening — gap between the official exchange rate and the blue rate, the most often quoted parallel dollar rate.

Exactly as you would expect, the more money the government prints, and the tighter the capital controls they impose, the greater the urgency to swap pesos into dollars…and the higher the unofficial exchange rates soar.

Clearly, this is a trend that cannot continue indefinitely.

The Argentine State is scrambling to outlaw the consequences of its own recklessness. For years now, Argentina’s Central Bank (BCRA) has brought forth freshly inked fiat notes by the billions to pay for unaffordable election promises. Our North American readers will recognize this crafty monetary prestidigitation as “money printing.”

The practice is nothing new, of course — neither here nor in any country where the tyranny of the mobjority — democracy — enjoys the power to decide the cost to be levied on the minority.

What seems peculiar about Argentina’s case is the government’s Herculean effort to ignore the immutable laws of economics in their pursuit of grand larceny. The country has seen five currencies in just the past century, averaging a collapse every twenty years or so. In 1970, the peso ley replaced the peso moneda nacional at a rate of 100 to 1. The peso ley was in turn replaced by the peso Argentino in 1983 at a rate of 10,000 to 1. That lasted a couple of years, and was then replaced by the Austral, again at a rate of 1,000 to 1. To nobody’s surprise, the Austral was itself replaced by the peso convertible at a rate of 10,000 to 1 in 1992. During the past four decades, when all was said and done, after the various changes of currency and slicing of zeroes, one peso convertible was equivalent to 10,000,000,000,000 (10¹³) pesos moneda nacional.

Obviously Argentinians haven’t learned, yet they are adversely responding to such policies via capital flight. Nevertheless sustained capital flight should help starve the beast.

While stock markets have functioned as to flight to safety against governments going into a maximum inflation overdrive, apparently Argentina’s worsening capital controls has been sending their benchmark index the Merval into a steady downhill as Argentinians seem fearful that their savings could be seized anew like in 2001.

Inflationism constitutes part of, or a mixture of the many other repressive measures from an increasingly despotic government such as higher taxes, price controls, capital controls, nationalization, protectionism and other forms of anti-market interventions. So whatever interim gains will be offset by lower real economic growth.

Argentina seems likely headed for for another sordid chapter of hyperinflation.

The other hyperinflation candidates are neighboring Venezuela, communist North Korea or any European crisis affected nations who will severe ties with the EU.

The Anatomy of Economic Fascism: Argentina Edition

Following the Repsol’s discovery of huge Shale oil and gas deposits under the "Vaca Muerta" ("Dead Cow") basin of Neuquen province, the cash strapped Kirchner regime decides to nationalize the embattled Spanish energy company.

Here is a graphic narrative of Argentina’s economic fascism from the ever eloquent Wall Street Journal columnist Mary O’Grady…

Nationalizations, particularly in the energy sector in Latin America, are nothing new. But the circumstances surrounding the Argentine grab of YPF may be. They demonstrate the special nature of kirchnerismo, an economic model that enriches friends of the government while driving the nation toward poverty.

Repsol won ownership of YPF in a 1999 privatization. It seemed like a good idea at the time. But then the 2001-2002 peso collapse hit. The economy contracted sharply and a political crisis followed. In 2003, Néstor Kirchner, husband of Cristina and a former governor of the province of Santa Cruz, was elected president—with a mere 22% plurality.

Kirchner needed to shore up support. He did so by demonizing business and promising to redistribute wealth to the have-nots, whose numbers had swelled due to the crisis. He denounced entrepreneurs, condemned profits and stirred up class warfare. To hold back inflation after the peso devaluation, he imposed price controls on food and fuel. Utilities got hit with rate freezes. But wages and taxes kept going up. Companies referred to the slow strangulation by government diktat as "asphyxia."

Repsol was trapped. The government set the price of a barrel of oil at $42 and mandated that YPF oil output could not be exported until Argentine demand was satisfied. The natural gas business was even more difficult. Repsol says that the price controls combined with subsidies drove demand through the roof, taxing the company's resources.

The relationship between the government and the Spanish company became strained. But having made a sizeable investment, Repsol did not want to exit. According to press reports supported by my own sources, the company agreed to allow Nestor Kirchner to broker a deal in 2008 to bring in an Argentine partner that he chose. That partner, the Petersen Group, was headed by banker and construction magnate Enrique Eskenazi, a long-time Kirchner ally.

According to published accounts in the Argentine press and in The Wall Street Journal, the Petersen acquisition of almost 25.5% of YPF was completed with almost no money down. Repsol agreed to finance the majority of the shares and loans from banks financed the balance. Repsol says that the Petersen Group still owes it $1.9 billion.

Repsol also agreed to increase YPF's dividend payout to 90% of earnings. Using those dividends Petersen was to pay back its loan to Repsol over time along with some $680 million in bank loans, according to Bloomberg. The company also paid one extraordinary dividend from retained earnings to help in paying down the loan.

Was this an attempt to avoid "asphyxia"? I asked Repsol why it agreed to such a deal and if it went along with the arrangement because Kirchner, who died in 2010, had been strong-arming the company. Repsol declined to comment.

Petersen's no-money-down acquisition was a sweet deal and some Argentines wonder if Kirchner set it up out of the goodness of his heart. This is a pertinent question since both Kirchner administrations have been notorious for a lack of transparency and have been plagued by corruption scandals. It is hard to answer because it is not clear who are the owners of the shares of Australian-based Petersen Energy. One Argentine source told me those shares are in bearer form, which would mean that there is no record of ownership. But when I asked Petersen if that is true and also how it financed the purchase of the YPF shares, it declined to comment. The Argentine government did not respond to requests for comment.

Read the rest here

At the end of the day, economic fascism is about cronyism and corruption through repressive laws.

Argentina’s Road to Serfdom: Book Import Bans

From Cato’s Juan Carlos Hidalgo,

The Argentine government has severely restricted the importation of books due to “human health concerns” [in Spanish]. That’s right. According to the government, it can be dangerous to “page through” a book that has high lead quantities in its ink. “If you put you finger in your mouth after paging through a book, that can be dangerous,” said Juan Carlos Sacco, the vice-president of an industrialist organization that supports the measure.

The government claims that this is not a ban. However, since each buyer has to demonstrate at the airport’s customs office that the ink in the purchased book has lead quantities no higher than 0.006% in its chemical composition, the result is that all book imports into the country are stalled.

The measure has a lot to do with the increasing efforts of the Argentine government to stop the flight of dollars out of the country. Capital flight in 2011 reached $21.5 billion, and it accelerated after the reelection of Cristina Fernandez de Kirchner in October. Facing increasing fiscal pressures, and after seizing private pension funds and raiding the Central Bank’s reserves, many people expect the government to go after their bank savings.

The government has reacted with increasingly ridiculous measures. Sniffing dogs are being deployed at airports and border check points to detect the ink used to print U.S. bills, so Argentines cannot take out of the country more than $10,000 without declaring it to the government. The Fernandez administration is also requiring major importers such as automakers to match the price of their imports with that of goods they must now export. As a result, Porsche is exporting Malbec wine and Mitsubishi is now selling peanuts.

Desperate governments will resort to any measures to advance their interests. And to stem capital flight from the private sector in reaction to their spendthrift ways, the Kirchner government now attempts to curtail freedom of speech through policies that promotes ignorance and illiteracy. Talk about ‘noble intentions’.

And of course, part of these mind control measures, imposed through propaganda and censorship, has been for the President of Argentina’s central bank to declare that printing money does not lead to inflation, as well as, to ban the private sector from making public estimates of statistical inflation which went against the government’s data.

As Benjamin Franklin once said,

A nation of well-informed men who have been taught to know and prize the rights which God has given them cannot be enslaved. It is in the religion of ignorance that tyranny begins.

Any government cannot simply wish away the laws of scarcity, which in fullness of time will be vented over the marketplace and eventually would incite a tempestuous political response.

Argentinians have yet to slough off their tolerance for despots which has brought about a cycle of political and economic crisis since the 20th century (as previously discussed here)