Banco Credicoop banker Carlos Heller, currently a deputy for the City of Buenos Aires, breaks down the reasons for accelerating inflation, pointing to distributive tussle and speculation as the main causes of price increases, along with the failure of businessmen to keep to their agreements with the government.
Heller, 82, revives the eternal controversy between the market and state but does not lose his optimism, despite the “atypical” Argentine economy.
What did not work out in the budget forecasting 60 percent inflation for this year when everything points to over 100 percent? And what went wrong with that bet made half in jest with [fellow-deputy Luciano] Laspina in Congress that inflation would not reach 100 percent when it finally has?
First of all, thanks for this opportunity for this dialogue. Two things, a budget is always an administrative plan, not a balance but the product of a number of interrelated variables with which we aspire to achieve determined objectives, in this case for the year 2023 when we approved it in 2022. We established an objective of trying to make this year’s inflation 60 percent to initiate a gradual downward path which would avoid falling into those classic recipes of recessive measures against inflation which are habitually applied.
Regarding the bet, it’s still on because it’s for this year and we’ll see if it ends up above or below 100 percent – I still leave that open. Laspina and I are probably both expressing wishful thinking, in his case because he is imagining scenarios favouring his political expectations which make him crave as much runaway inflation as possible and in my case because I aspire to contributing towards a reduction of this inflationary phenomenon, I insist, without falling into those recessive measures which worsen the situation of our population, above all the most vulnerable sectors.
It has always been said that the archer aims above his target because he is also calculating the force of gravity and I understand that every forecast has a component of wishful thinking because if you say that inflation is going to be higher, you might end up with a self-fulfilling prophecy. I can understand 60 percent as an objective and 80 percent might have been pretty good but if we project 120 percent, then the difference is really big.
That has to do with action. The government is trying out a number of things to modify expectations because there is an issue here – what produces inflation? We could spend hours talking about that but to sum it up, none of the things habitually used to explain the inflationary phenomenon permit us to understand it in Argentina. That’s why I say, it is not driven by the exchange rate nor is it wage-push inflation since only a handful of trade unions can keep up in the best of cases nor is it driven by utility billing or printing money. That is to say, it tears up all the manuals from the viewpoint of the traditional definitions of the causes of inflation.
Your people have sent me a synthesis of the relationship between inflation and the printing of money during the Alberto Fernández government. In 2020 inflation was 36 percent while 40 percent more money was printed because that was the year of the pandemic. In 2021 inflation was around 50 percent while again 40 percent more money was printed.
Less than inflation.
And in 2022 a monetary expansion of 40 percent and 94 percent inflation.
So it would seem that it was not the money printed.
Last year would be the big difference since inflation doubled the expansion of the money supply.
We would also need to add what’s needed for trade but it has not been demonstrated that printing money naturally triggers inflation.
But it is one of the elements.
Always one of the elements and when it comes accompanied by the money printed reaching the people, they consume more with greater demand, thus triggering more production and economic activity, which makes prices go up. But if money is simply printed to cover deficit and pay debts, etc., it remains to be seen to what degree it is automatically inflationary. Something to discuss in depth. I’m putting that forward as a question-mark.
We might say that during the Macri government, gross domestic product fell and there was recession...
...and at the same time an iron policy of not printing money yet there was increased inflation because he ended up with 50-plus percent inflation.
There was a nine percent slump in the year of the pandemic, followed by 10 percent growth the next and five percent last year so, combining those three years, the economy grew almost six percent. Is there some relationship between increased inflation and increased consumption?
But why should that have to go to the prices unless somebody or some sector is expropriating a bigger slice of the cake, which would have to be entered into the prices? Because we might think it the other way around. If there is more consumption, unit profitability should go down, not up, if managed logically.
But worldwide recession is used to lower inflation.
Because in the middle is that tool of the distributive tussle, an issue which is omitted but which is fundamental in my judgement. I insist, if I have a company which manufactures 10 cups a day with fixed costs, rental, electricity bills, etc. and I advance to manufacturing 20, the incidence of fixed costs would have to go down so that a price increase cannot be justified because I’m producing more.
Your argument is that in these last three years the distribution of total income in Argentina has moved in favour of capital and in detriment of labour. Do you find that to be one of the elements of inflation?
Yes, that’s what I call the distributive tussle and also speculation because when somebody imports a cup with a 200-peso dollar and then prices it at 450 pesos on the supposition that this is what it would cost if the import had to be substituted, they are expropriating a profitability which does not correspond or belong to them and which is absurd. And that, of course, is inflation, the sum measuring that price variation. What we should be discussing is why prices increase, not the increase as such. We Argentines have naturalised inflation as an autonomous phenomenon, which it is not in my view. We might discuss the product of what and how much each factor weighs. We have inflation so the problem of inflation must be resolved.
How much to the inflation of 2024 will the drought add with the increased rate for non-official dollars from the lack of dollar reserves?
To say that the drought does not complicate matters would be impossible. The drought is a serious situation with grave consequences because to the lack of dollars the reduction of tax revenue should be added, thus affecting the fiscal situation because no exports means no export duties and hence a loss of fiscal revenue. So the drought is significant, beyond doubt. But I believe that there are other factors making the calculations more complex. The less Argentina imports this year as a result of the drought, for example, fuels, probably the more different the situation from last year. Freight costs will be less with less imports so you have to see what the final balance is.
Last September, when you had that discussion regarding inflation being below 100 percent, with [Economy Minister Sergio] Massa bringing monthly inflation down to 4.9 percent, the government’s possibilities of being re-elected might have been presumed. With inflation now over seven percent and drought, government chances of electoral success are less and those of an opposition proposing a unified exchange rate are greater. So many people are thinking that, come December, that free dollar you call speculative will end up being official.
First of all, I would have to say that strictly following your line of thinking, you have just said that it is very probable that the opposition will do everything possible to create tensions with the exchange rate, tax collection, etc., supposing that this would make their chances of electoral success more probable.
Yes, and that would make the above more probable.
Yes, and I would link that, for example, with certain opposition figures being said to contact International Monetary Fund officials to make Argentina’s negotiations more difficult. I tend to believe that when I recall [former economy minister Domingo] Cavallo doing that in the presidency of [Raúl] Alfonsín. I remember many similar episodes when the opposition installed or boosted negative expectations in order to favour their political interests. That’s not an economic fact, that’s politics with a negative impact on the lives of Argentines.
I’m trying here to sum up analytically the effect of the exchange rate phenomenon on inflation, independently of the money printed since this is simply a consequence, not a cause.
Exactly, this is one of those cause-and-effect, chicken-and-egg questions. Argentina is a country with its own currency and has to elaborate policies permitting the costs of production and the prices of the products reaching the citizenry to be compatible with people’s incomes – that is the key to economics. If that is not resolved, everything else becomes theoretical or lab discussions serving only to justify why people are impoverished, something I could never endorse. I don’t want to assume that we are discussing a monetary phenomenon. We must proceed from assuming the phenomenon of the distributive tussle and how to change it in favour of the people. With one addendum, always improving the purchasing-power of the people. The small and medium-sized companies (PyMEs) who live for the domestic market have always done well. We have to accentuate our import substitution to improve our trade balance.
Assuming that with high inflation the distributive tussle gives more tools to the owners of capital, what happened when the government could not control it?
A lot, very difficult, a succession of negative situations. Argentina at the end of 2019 was an inventory which the government should have faced instead of saying: “The problem is that we had debts.” You already knew that when you took office and when you ran in the elections. What nobody could have presumed in the March of 2020 is that what happened was going to happen and that it was going to have the implications it did. Nor could anybody have presumed that it would be followed by a war and a phenomenal drought, the worst I don’t know in how much time.
That is a sum of major factors. In a country with a strong need to export farm products, to have a drought like we had, plus all the above we have mentioned, should at the very least bring some recognition of the enormous difficulties in resolving those problems, along with those already accumulated such as meeting debt payment deadlines all the same, despite drought, pandemic and all the rest of it, which is Argentina’s claim with the international organisations: “Che, boys, the war cost us US$5 billion more in freight, fuel, etc., why are we being made to pay? Let us compensate for these questions because if there is an organisation for the world economy, the linear transfer of the costs of those global phenomena to countries without the capacity to absorb them is absolutely arbitrary.” Why should we pay the costs of Russia’s war with NATO? Why is it not assumed by the concert of nations as a cost which should be projected otherwise? So the ordinary citizens of our country end up paying for all this and what does it have to do with us?
So you would not buy a lottery ticket in the company of Alberto Fernández.
Let’s say he’s been unlucky.
No doubt about that.
The combination of all those negative factors of an enormous magnitude which cannot be attributed to his administration. Now you are going to tell me: ‘Do you mean that everything was well administered?’ Surely not, I believe that there were and are things. Let’s take one: if we’re saying that inflation is one of our fundamental problems, inflation is all about prices. So price action is inevitably necessary and the efficiency of such action determines the success of anti-inflationary policies. If everybody had complied with the Precios Justos [price-control] agreement, assuming that 70-plus percent of the products consumed by people are produced by 20 companies and those 20 companies pledged themselves to three percent monthly price increases, and if afterwards they increased everything by seven percent, then we have a problem. Voluntary agreements are voluntary until you enter into them when they become obligatory. Not complying with these agreements is not an option yet we see it as absolutely natural that there was no compliance. If the established price agreements had been respected, we would not have the levels of inflation we now have.
Somebody might say that it is obvious that they were not going to comply because of what previous experience demonstrates about those 20 companies and their capacity to perform.
You’re on about that again.
We’re almost into that discussion between [Karl] Marx and [Adam] Smith as to whether man is good or evil.
About the expropriation of income, whether by the market or the state, and here we are indeed entering into an in-depth discussion which we must deepen yet further. Between those who say that everything will function better if the market is freed, that everybody gets what they deserve and that success is an individual phenomenon and those of us who believe that all that is fiction and an idealisation of equal possibilities which do not exist so collective interests should be represented by the state and public policies establishing regulations and sanctions for those who do not comply so that the collective interest is respected above the individual.
It could be said that the errors come from those who, while trying for the best, do not achieve it by trying out forms of state intervention because they proceed from tools which are already proven failures – that has nothing to do with justice.
What happens is that those other forms require accumulations of force. For example, I’m a deputy and we are a parliamentary minority which does not have the capacity to pass the laws which we believe should have been approved.
How is economic activity coming on? Will 2023 be a recessive year? How does it look from the thermometer of the real economy you have via your bank?
Beyond doubt the drought affects Argentina as a country where the farming sector weighs heavily, whether for its primary produce or its added value. Furthermore, it’s not just the drought, other sectors like the vineyards have been affected by hail and plagues.
Stripping two or three percent off the GDP.
That is what is said.
Or rather beforehand you were forecasting two or three percent growth and now zero.
We are still expecting positive growth in the region of one or two percent. We’ve come from two years of growth because Argentina also has an enormous capacity for reaction, a very unusual phenomenon.
But what’s your hunch after 44 years at your bank?
In fact 60 [years] since I started as a cashier.
What’s your hunch? What’s going on with the economy or what could happen in the next six months?
What a nice question. Argentina is a strange country, let’s start there, really strange. A couple of weeks ago Cristina requoted that phrase about the world being divided into developed and undeveloped countries, Japan and Argentina.
Simon Kuznets, 1971 Nobel Prize for Economics.
Exactly. Argentina is an atypical case because if you fix consumer levels, they rise. We’re not just talking about all the visible things we share because we live in this beautiful city. I talk to people inland and it’s the same everywhere. We are still at very high consumer levels. That also has to do with having a very large middle class – that analysis is complex when trying to be objective and not declamatory. I do not perceive today the daily situations of deterioration but I assume that an economy which has to adjust seven percent monthly cannot function well because that is a disruption on a scale which alters everything, including mood first of all. It puts everybody in a bad mood, even if their pay is being raised at the same pace. When a person goes to the supermarket and sees the changes from the previous week, that annoys them or when they have to catch a bus or pay the electricity bill.
Does your hunch tell you something is wrong, even if not reflected by consumption?
That’s right and it puts society in an enormously bad mood. If I went to a restaurant and paid X before and am now paying double, even having twice as many banknotes in my pocket, that irritates me, it’s crazy. When the Central Bank pays me 91 percent on a fixed-term deposit, it’s giving me an enormous incentive to protect myself from the risk of devaluation but afterwards it goes to the other side of the economy and pushes up the price of sneakers so we continue to have problems. Lowering inflation is indispensable for any project and if that cannot be achieved, no successful project is possible. I say that must be absolutely clear. That’s why this issue of inflation is so important and that’s why it’s not the same for inflation to move from one to two percent as from three to seven percent.
Production: Melody Acosta Rizza and Sol Bacigalupo.