Rich Brazil disdains Argentina’s collapse – 09/13/2023 – Vinicius Torres Freire

The richest Brazilians are having fun with the Argentine crisis, literally. Everyone knows that, given the devaluation of the peso, it has become cheap to do tourism in the neighbors. Otherwise, not much attention is paid to what goes on there.

Javier Milei caused fire in the news. The crisis appears more in the form of chorizo ​​steak and wine made cheaper by the collapse of the currency, or what passes for that in Argentina.

The Argentines, however, are running towards the precipice in the bush, without a dog. The most apparent part of the crisis, superinflation, could spiral into hyperinflation. A macroeconomic adjustment would initially cause a new and major recession, with more unemployment, more devaluation, cuts in social subsidies, etc., to begin with. It’s hard to imagine how the economy can escape these two fates (that is, rotting in the woods, without a dog).

Monthly inflation in August was 12.4%, two and a half times the inflation forecast for this entire year in Brazil. In 12 months, accumulated inflation is 124.4%. The most optimistic forecast is for a 160% increase in consumer prices by the end of 2023. The worst, for now, are in the 200% range.

The country has not suffered from such high inflation since 1990. Even in the 2002 crisis, after the end of parity, peso/dollar convertibility and everything else, the price increase was 41%.

The inflationary acceleration has been occurring since 2017, when the rate was 25%. Last year, 95.2%. Of the largest countries in Latin America, besides Venezuela, off the map, it is by far the largest. Chile and Colombia had bad inflation last year, around 13%, but it passed.

Since the beginning of the most recent cycle of economic degradation in the region, in 2014, Argentina has had one of the worst performances, even worse than Brazil. GDP (income) per capita fell 6.2%. Brazil’s, 4.4%. Colombia’s grew 16.2%. Chile, 7.9%. Two bigger countries, it was just not worse than the late Venezuela and the dollarized Ecuador. This year, Argentine per capita income is expected to shrink another 3.5%, further hampered by the grain harvest disaster.

In order to start thinking about what to do with her life, Argentina needs to make repairs to the house’s foundation. It needs to have a currency, for which the government needs to stop financing itself through inflation, which implies a much greater settlement of public accounts than in Brazil. It needs to stop controlling the flow of capital (although some so-called heterodox economists in Brazil disagree), fixing the dollar, controlling prices — it needs to allow a large adjustment in relative prices, which will hurt. Even if it does all this, it is not known whether it will regain the basic economic confidence necessary to have a currency and a domestic market for public debt, defaulted left and right.

It needs a package from the IMF or something.

Argentina is so broke that not even dollarizing its economy could be achieved now. Of course, it is always possible to try to issue a lunatic decree about it, which would be like diving into the sea with an iron ball tied to your feet.

This is all somewhat known. But, around here, people shrug their shoulders. Decades of recurring and deep crisis have led 30% to 40% of Argentines to take a risk with Milei. Another collapse, whether due to inaction or the effects of the correction, will have some economic effect here, albeit smaller, as we are partly detached from our neighbors. There is more, however.

The region’s political-economic climate could become cloudy. This is Argentina, the second largest economy in South America, still with a better average standard of living than Brazil, with so many possibilities for civilizational advancement. But the risk of something even worse there is great.

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