A demonised demon

If in last Saturday’s column overlapping with the 40th anniversary of the South Atlantic war I underlined that I was not strictly qualified to comment, having been 11,800 kilometres away in Hamburg at the time (or 13,280 kilometres distant from the disputed islands, none of which prevented me from writing about it anyway), I cannot say the same about inflation – a constant during my four decades here and probably the biggest area of concern at the moment.

My first annual inflation figure in Argentina after arriving for the last nine weeks of that grim war year of 1982 was 210 percent with its pace doubling in the second half. Considering that the United States is currently aghast over an annual inflation rate of seven percent, which might well not be that much more than our inflation here just for March (we should have the exact figure next Wednesday), also sending the alarm bells ringing, that 1982 figure should logically have sparked a panic rivalled only by a nuclear war, but no – this serves to underline just how relative inflation figures are.

The reason why most people then viewed inflation pretty philosophically as one of the many things sent to try us was that it took the form of a plateau rather than a spiral – weighing in at around a monthly 25 percent almost without fail during most of my first 30 months in Argentina until it started moving up to 30 percent in the autumn of 1985 (hence the Austral Plan) but 90 percent or more of that figure was simply index-linking.

To explain how 25 percent monthly inflation can be considerably less frightening than seven percent annual inflation, we might take an example from the apparently unrelated area of mountaineering. Everybody knows that Mount Everest is the highest mountain in the world – or is it? Any search engine or encyclopaedia will tell you that it has a height of 8,878 metres but if that Himalayan peak is measured from its base camp as its starting-point, it has a “net altitude” of only 3,514 metres whereas the El Teide volcano in the Canary Islands arising straight out of the ocean is 3,715 metres. By the same token inflation needs to be measured against its starting-points, looking at the film of its dynamics rather than the photograph of any single number.

Perhaps the most common fallacy in the analysis of inflation is to assume that it is synonymous with price rises. In my youth I lost count of the old men who would tell me about those good old days when you could buy a new suit, eat a swank meal in the best restaurant, get dead drunk and still have change from a farthing – an exaggeration, of course, but annual inflation in Britain has never topped seven percent in the last three decades and yet memories need not stretch back that far to recall times when several items were within reach of the “pound in your pocket.”

Paradoxically it could be argued that there is so much inflation in Argentina because there are less rather than more price increases. In market economies there are any number of price adjustments conditioned by seasonal or cyclical factors and an often arbitrary demand, all of which serves to head off broader surges but these more specific and minor increases are constantly suppressed in Argentina, leaving relative prices out of whack and making for more general and violent lurches.

Vaccines against the coronavirus pandemic were discovered within a year but antibodies against inflation are still being sought after almost eight decades. The traumatic hyperinflation of 1989 (almost 5,000 percent and still over 1,300 percent the next year) seemed to have inoculated the country for good with an uneven acceptance of the disciplines of convertibility but forever ended up being a decade, culminating in the 2001-2002 meltdown which seemed to convince most people that the cure was worse than the disease. That conviction in turn is fading with the ongoing escalation of inflation (which price controls have done little or nothing to halt in the six months since Roberto Feletti became Domestic Trade secretary). So if inflation is so constantly and rightly described as a “tax on the poor,” who in turn are close to becoming a majority, why cannot successive governments do all that it takes to put the genie back in the bottle out of their own electoral self-interest?

The main reason is that despite punishing most people, inflation has too many powerful beneficiaries, starting with the government. Inflation goes a long way towards making the fiscal deficits helping to cause it self-financing because the taxman collects in real time while wages and pensions are updated at the end of months or quarters – in this sense inflation becomes a virtuous circle for budget numbers while a vicious circle for the population at large. But the government is not the only beneficiary because inflation wipes out debt across the board, reprieving the insolvent in the public and private sectors alike.

Next year will mark the centenary of the German hyperinflation of 1923 – which remains the iconic example in history despite strong Venezuelan competition and far more astronomic rates in Zimbabwe with the exchange rate reaching a trillion marks per dollar. Its origin lay in the unpayable reparations inflicted on Germany after World War I and the Weimar Republic’s wholly unexpected response of the “fulfilment policy” urged by Gustav Stresemann and Walther Rathenau, who reasoned that Germany stood more to gain from paying these impossible reparations than not. The reparations were paid by printing the money necessary to honour them – in such epic quantities that inflation reached 30,000 percent with prices doubling twice a week before the “miracle of the Rentenmark” (based on pension fund) abruptly brought the economy back to normal. Alongside the obvious problems this hyperinflation had the virtue of wiping out not only the reparations owed abroad but also company debt at home, thus equipping the industrial powerhouse to enter the roaring twenties.

Penalising savers and the poor, inflation and the underlying insolvency resemble hard drugs in being as addictive as they are noxious with the difference that while many argue prohibitionist laws against drugs are as counterproductive as they were against alcohol and should be lifted, no such logic can be advanced against inflation.