"Alberto Fernández will lead us to hyperinflation"

Former Economy Minister Domingo Cavallo published a new column on his blog in which he pointed out that the binomial Alberto Fernández-Cristina Kirchner, if he was elected, was going to cause a big change in the foreign policy and foreign trade policy.

In foreign policy, he believes that the privileged relations with the United States, Europe and non-Bolivarian Latin America will be replaced by the search for political, commercial and financial support in Russia and Europe. China.

"In accordance with this foreign policy, in terms of foreign trade policy, the idea of ​​opening up the economy and integrating it into the global economy will be abandoned", a- he said, adding that "the mere announcement of this policy will result in a strong exchange rate."

"My prediction is that the policies that can be inferred from the statements of Alberto Fernández, would lead the country to hyperinflation. I have no basis for predicting what the political consequences will be, but it is not excluded that, in such circumstances, Kirchnerism would hold Alberto Fernández responsible for the collapse, claiming that it is the only one of its kind. He had applied the neoliberal policy and promoted his resignation for Cristina Kirchner to badume the presidency with a minister of the Economy. of the Kicillof school, "he said.

Then the complete column:

"Six months before the elections of May 14, 1989, during which Carlos Menem was elected President, I delivered a speech in the Chamber of Deputies, on which I described the prospects for the transition. The next year Those who want to read it will find it on pages 86 to 89 of my book "Economy in Times of Crisis." I also suggest reading the prologue of this book.

Unfortunately, as I explain in the article entitled "Why Brodersohn and Jesús Rodriguez Attack", published in Clarín on March 21, 1989 and reproduced on pages 91 to 95 of the same book, members of the Alfonsin government invented what I had asked the World Bank to suspend the sending of funds and was responsible for the exchange that broke out from March this year. Unfortunately, many social communicators use this invention to badert that Alberto Fernández and his badociates are doing the same thing I would have done before the elections of May 14, 1989.

Obviously, those who make this comparison are completely ignorant of the circumstances experienced at the time, very different from those that we currently live and especially do not know what my speech was then, completely opposite to the one that I was talking about. Alberto Fernández and his badociates have come since his nomination as a Front de Tous candidate.

But in order not to make this message a mere historical story, I would like to reiterate the predictions I made last July 31 about what could happen if the pair Alberto Fernandez-Cristina Kirchner was elected. As I maintain in the title of this post, I hope my predictions are wrong.

And if the formula Fernández-Kirchner wins?

A future Kichner government, when it comes to power, will bring about great changes in foreign policy and foreign trade policy. In foreign policy, privileged relations with the United States, Europe and non-Bolivarian Latin America will be replaced by the search for political, commercial and financial support in Russia and China.

In accordance with this foreign policy, the idea of ​​opening up the economy and integrating it into the global economy will be abandoned in terms of foreign trade policy. This is what the so-called "economists of the international markets" say and the industrialists who always claim protectionism against the competition of the imports (of which Ignacio de Mendiguren is the best symbol),

Differential increases in import duties, more stringent quantitative restrictions on imports, greater holdbacks in agriculture, mining and energy, and even restrictions will become standard and very important economic policy instruments. In addition to price and exchange controls and the freezing of tariffs, trade restrictions will seek to control both price increases and the external trade balance, two fronts in which policies have rebounded to support the rise in domestic consumption, surely they will find serious complications.

Second, the stabilization policy of the program negotiated with the IMF, which is based on monetary restraint and fiscal adjustment, would be abandoned to stimulate domestic consumption through a recomposition of the income of workers and pensioners. In this respect, there are great coincidences with Lavagna's proposals.

As the only announcement of this policy will provoke a significant exchange, the most recent statements of Alberto Fernández suggest that the operation occurs between the OSP and the first round of October, so that the Macri government ends with a sharp devaluation and consequently the further deterioration of real wages and pensions. If this is not the case, one would not understand that he is talking at the same time about additional increases in wages and pensions and a sharp devaluation. Any economics insider knows that it is impossible to obtain both effects simultaneously: large devaluations always cause a decline in the real income of workers and retirees.

The Kirchnerists would like the government to change the price of the dollar much higher than the current price, and the fall in wages, pensions, and consumption in real terms to be much higher than what it is. is already produced because of the sharp devaluations that occurred from May 2018 to April 2019. This is only so that they will then be able to say that they will manage to recover the power of purchase. workers and retirees, using hands, without complex, to exchange controls in order to avoid the devaluations continue.

If the race does not occur before the elections and the government manages to maintain the exchange rate between 45 and 50 pesos, the likelihood of a triumph of the formula Alberto Fernández Cristina Kirchner decreases, but if they were winning the elections, they would have no other choice. first step of his government and blame the initial devaluation on the legacy of the previous government. Of course, in this case, they would form the government, resulting in a further decline in real wages, pensions and consumption, as was the case with the Duhalde government from January 2002. But the Kirchnerists hope that in this In this case, they will be able to convince people that this is the inevitable consequence of the Macri government's policy, just as Duhalde managed to entrust the De La Rúa government with responsibility.

Statements by Alberto Fernández claiming that increases in pensions and other social benefits can be financed with the resources that the Central Bank now allocates to pay the interests of LELIQs must be interpreted in the sense that their government does not not intend to finance the budget deficit with indebtedness, but will clearly resort to the monetary issue.

LELIQs, such as LECAPs and LETES, are alternative means that the government uses to finance the budget deficit without monetary issuance. In principle, if there were no stock problem, the monetary financing of the deficit would cause a limited inflation that can be estimated in the ratio between the budget deficit and the monetary base.

But the existence of an initial stock of LELIQ, LECAP and LETES poses a much more serious inflation risk. If you do not want to continue to pay the interest rates charged by the holders of these securities to renew them, the only solution is to pay them by currency issue and to use the subsequent inflationary explosion as a "liquidation" mechanism. of all the debts in pesos of both countries. public sector and private sector.

In the case of LETES, as in the case of dollar deposits in the banking system, the "bidder" mechanism would operate after the decision to pay in pesos, at the official exchange rate (after the application of exchange control), dollars under Argentine law. Of course, this whole process would take place in response to the original exchange rate scenario and would be responsible for managing the Macri government's debt reduction policy in the event of an emergency.

Those who think about this type of "initial solution" to the problem of public debt believe that after the inflationary explosion, it will be possible to prevent it from turning into uncontrolled hyperinflation. This is intended to use rate freezes, exchange controls and price controls. Exchange controls will appear simultaneously with the decision to pay LETES and pesos dollar deposits and will immediately generate a parallel market for the dollar, which will initially be far from the official price.

The expectation with which they are managed is that of the process of stabilization and reactivation implemented by Lavagna from the second half of 2002, after the devaluation and the inflationary explosion caused by the compulsive imposition of January this year.

This wait is totally unfounded. In 2002, the economy came from an earlier period of 10 years with no inflation, no indexing and despite a strong recession, the economy was very well capitalized and had a large amount of money. an abundant installed capacity in the main sectors of the economy. The lack of domestic and external debt completely eliminated the budget deficit, because during the ten years of stability, the primary deficit had been zero. The primary zero deficit that is expected to be reached in 2019 is the result of a fiscal adjustment that Kirchnerism promises to reverse.

In addition, foreign exchange conditions became positively favorable from the second half of 2002. From then on, the dollar began to lose value against all currencies in the world, reversing the reverse trend initiated. in 1999. the main cause of the recession of the end of the government Menem and the two years of the government De la Rúa. Nothing similar is expected at the moment with regard to the world economy.

My prediction is that the policy that can be inferred from the statements of Alberto Fernández would lead the country to hyperinflation. I have no basis for predicting what the political consequences will be, but it is not excluded that, in such circumstances, Kirchnerism would hold Alberto Fernández responsible for the collapse, claiming that it is the only one of its kind. He had applied the neoliberal policy and promoted his resignation for Cristina Kirchner to badume the presidency with a minister of the Economy. from the Kicillof School ".

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