Argentina’s Inflation Model

Okay, it’s one thing to say that economies need inflation… Indeed, one economist says the Federal Reserve’s not doing enough.

Ken Rogoff, former chief economist at the International Monetary Fund (IMF) told NPR, “They need to be willing, in fact actively pursue, letting inflation rise a bit more. That would encourage consumption. It would encourage investment. It would bring housing prices into line.”

From the article:

Inflation would push up the price of houses, meaning more people would actually have equity in their homes again. And the rising prices would bring both buyers, who’ve been waiting for prices to fall more, and sellers, who don’t want to sell at a loss, back into the market. In addition, Rogoff says, higher inflation would help debtors, by allowing them to pay back their debts with cheaper dollars.

But does this really work? Or does it just knock our economy back to the 1970s, as Rogoff says people make the mistake of thinking?

Let’s look at a model: Argentina.

This Inside Investing Daily article written by my colleague Justice Litle hammers the point home.

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.

Read the full article here.

VISTAs not BRICs?

When people were first introduced to emerging markets on a large scale, some of the most promising countries for investors were Brazil, Russia, India, and China – or BRIC nations.

With China looking like it’s topping out, rampant inflation in Brazil, and underperformance in Russia and some could argue India, are BRICs where investors should still be putting their emerging market money? Maybe not, though I would say I still like India of the four.

Interestingly, some analysts are starting to lump South Africa in with the BRICs

Well, I travelled to South Africa a few years ago, and got to sit with a businessman (and VIP subscriber) to talk about the South African economy and why he just sold his business to an Indian company. The S.A. rand was killing exports – plain and simple – and the government wasn’t doing much about it.

The government wasn’t doing much about the infrastructure and power needs, either, or the soaring unemployment. Official statistics had put unemployment at between 16% and 20%, but unofficially that figure could be as high as 40%.