How to live with inflation
It’s like a picnic on a volcano: relax and enjoy it, but be ready to run
As we move on from our ranch in Argentina to our home in Ireland, let us reflect on what we learnt in our two months in a country with 100% inflation. The most surprising thing, as a friend said, “is that it doesn’t seem to matter”. The restaurants are full, people are spending, life goes on. If you’re a foreigner with US dollars to spend, or a local who earns in dollars or bitcoin, then you can live pretty well on the pampas. If you earn pesos and have to buy bricks or tractor parts, not so much. But there are political lessons to learn from Argentina’s experience.
For all the blah blah on the subject, there are only two political possibilities. Either individuals decide for themselves what they want and get it by “voting” for it with their own money. Or someone else decides. The “someone else” is always the big-mouth busybody who pretends to be selflessly acting on behalf of some greater good.
Juan Peron, for example, the army general who served as president from 1946 to 1955, and whose followers are still in power, had a smile like an advertisement for toothpaste. And he could do the maths. He realised there were more poor voters than rich voters. And their votes were cheap.
What happened next was no mystery and no surprise. When you give away free stuff, you have to pay for it somehow. Peron taxed the rich. He taxed the middle classes. He taxed the productive parts of the economy and gave the goodies to the unproductive part. Output went down. But the demand for free stuff did not slack off. And soon, the tax base depleted, the politicians turned to borrowing. Tax, spend, borrow, default, print. The country has defaulted nine times. By 2001, Argentina defaulted on the biggest pile of debt ever – $100bn. And when the loans gave out, the gauchos turned to the timehonoured scams of desperadoes everywhere: war and inflation. By 1989, following coups and military adventures, inflation was running hot at 1,000%.
Then, Carlos Menem restarted the cycle. The peso was pegged to the dollar, one-to-one. That emboldened borrowers to borrow and lenders to lend. Pretty soon, they had borrowed too much and the one-to-one peso/dollar peg blew up. Then, prices rose again. When we first came to the pampas, the exchange rate was one-to-one and Menem was in power. A couple of years later, in the early 2000s, the rate had gone to three-to-one. Skip ahead to this year and we were getting almost 400 pesos per dollar.
Why don’t the Argentines put a stop to all this? Because once you get into it, the only way to stop it is financially painful – with recession/depression/ bankruptcies/unemployment and so on. But the real reason it goes on is because it becomes almost impossible, politically, to stop it. First, the masses want free stuff. Later, they depend on the free stuff. That’s why the US – where “transfer payments’ have gone up 290 times since 1954 – will find it almost impossible to stop the cycle too.
So, what do we take from all this? An inflation-and-default prone system is not the end of the world. But it requires a different attitude: less trust and more caution. The money rots faster than a ripe banana. Everyone struggles to get rid of it. People feel they have been ripped off – as they have – and so they don’t feel so bad about ripping other people off. Every transaction demands quick calculations and flexible bookkeeping. And every experience comes with a certain amount of ambiguity, a moral and financial fluidity. It’s like having a picnic on an active volcano: you need to relax in order to enjoy it, but be ready to run.
“There are only two options: you decide, or big-mouth does”