Roberts and Zuegel on Argentine Inflation and Crypto
The latest EconTalk, Russ Roberts’ interview with Devon Zuegel, is first rate. It shows how someone who’s not an economist, Zuegel, but who pays careful attention, can suss things out. She makes the point early on that she’s not alone: dinner conversations in Argentina ultimately turn to the issue of how to protect one’s assets in a country with high inflation where you can’t trust the government or even the banks. Interesting story after interesting story.
Some highlights follow.
Argentine’s GDP Per Capita 100 Years Ago
Many economists, including me, have spoken or written about how bad economic policies brought Argentina from being one of the highest per capita income countries a little over a century ago to one that’s basically in the middle today. According to Zuegel, we’re half right. She argues that Argentina during World War I had unusually high income per capita because of its exports of high-priced agricultural output. I haven’t checked, but it seems plausible.
Long-Term High Inflation
“In the last hundred years, Argentina has seen an average of 100% annual inflation.” By the way, that doesn’t come close to hyperinflation, which is typically defined as inflation of 50% per month, but it’s high and destructive nevertheless. See Michael K. Salemi, “Hyperinflation,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.
Bricks as an Inflation Hedge
You read that right.
How Law-Abiding are Argentinians?
And, I think in the United States people tend to be kind of bashful about breaking the law, at least in my friend circles. In Argentina everybody breaks the law. Every single day. Because otherwise you get half the income, and like, you can’t pay your rent. And so people–everyone knows exactly what the black market rate is at all times. Politicians will even quote it. Like, it’s well understood that this is out there.
Long story short: Everyone tries to be in the black market as much as they can. There are certain transactions where that’s really difficult, but for the most part people will try to exchange their money in the black market.
The only thing I know of that comes anywhere close in the United States is sellers of used cars cooperating with buyers to understate the price of the transaction to save the buyer on sales tax. A huge percent of people who have sold their used car have told me that they do so if the buyer asks.
Russ Roberts says:
When you read about hyperinflation, say, in the Weimar Republic in Germany after World War I, you’d read about people who would take wheelbarrows of cash to the store–literally–because it took so many pieces of paper to buy stuff, suddenly.
He could have added, because it’s true (although I can’t find the reference immediately), that in one case the person left the wheelbarrow with money outside while entering the store and returned to find the money on the ground and the wheelbarrow stolen.
Buying Houses Depends on Trusting Third Party
Read the part about avoiding banks and relying on a third party to hold the money in escrow.
Extended Discussion of Cryptocurrencies and How They Are Vital to Argentinians in a Way That We Americans Have Trouble Imagining
Absolutely worth listening to or reading. I have nothing to add.
Inflation Propagates Unevenly
As Russ points out, this could be simply big changes in relative prices due to big changes in supply conditions. But I do think she’s making a good point. In economics, we call them Cantillon effects.
The Tragedy of Wasted Minds
Just to tie that up, at the beginning I joked that every dinner conversation in Argentina ends up on the topic of what to do about your money so it doesn’t lose value. And, it’s kind of funny, but it’s also, if you think about it, it’s really wasting the minds of generations of people. There’s all these really smart people who are spending half of their brain just trying to figure out how to store their money so that they don’t get wiped out tomorrow. It’s just really tragic. I see all these really smart people who I love who could be doing so much more, but they’re stuck in this cycle.
Oct 19 2022 at 9:48pm
According to data from the Maddison Project, which calculates historical real GDP per person for many countries, Argentina’s fell about 14% from 1913 to 1918. Exports rose, but imports (a very rough measure of consumption) fell. The war sharply diminished inflows of European investment, which along with European immigration had played an important part in developing the agriculturally rich but sparsely populated land. Growth returned after the war until the Great Depression, which convinced Argentine policy makers to adopt an import-substitution policy that they thought would be more stable but that over the long run has not been. Argentina’s relative affluence a century ago was the result of good policies as well as favorable circumstances. Its relative decline has been mainly the result of bad policies. Australia, another large, sparsely populated agricultural producer far from other rich countries, has remained among the rich countries.
Oct 20 2022 at 9:26am
Oct 20 2022 at 9:09am
“There’s all these really smart people who are spending half of their brain just trying to figure out how to store their money so that they don’t get wiped out tomorrow. It’s just really tragic”
I have seen a similar thing time and again here in the US:
really smart people spending half of their brain just trying to figure out how to design (or at the very least) modify their business model just to reduce their tax liabilities. To add insult to injury this useless exercise frequently results in a “worse” business model.
And, also, spending even more time discussing how to incorporate your new venture with “just” the tax code in mind.
This is wasteful. And lots and lots of brilliant minds make a living out of this totally socially useless activity. And all of this, while sitting in lavish downtown useless office buildings.
Oct 22 2022 at 4:32pm
Keynes’ quotation to illustrate your point (admittedly writing about the UK in the 30s)
” The avoidance of taxes is the only intellectual pursuit that still carries any reward.”
Oct 20 2022 at 12:27pm
The first thing to know about Argentina today is that all the people with some skill are leaving, in droves. Those who can go back to the country of origin (Italy, which is easy because they accept anyone who has some Italian ancestry, or Spain, which is a bit harder.) Those who cannot go to Uruguay. Inflation is the last straw. The change in demographic composition of Argentina is accelerating. This poor country is returning to its original demographic state, or something closer, which is the real social basis of the Peronist party today. It’s like a forest eating up the remnants of a civilization once great, with roots cracking up the foundations of once majestic buildings. So now we know what is in store in the USA.
Oct 20 2022 at 7:06pm
Sorry, David. The interview and your readers’ comments are wrong, some very bad. The most grotesque idea is that the average annual inflation rate in the last 100 years has been close to 100%. Anyone familiar with hyperinflation knows that inflation rates over 100% last a few months, at most a couple of years (I can tell you a lot of details about Argentina’s monthly inflation rate, including what Domingo Cavallo –a Harvard Ph.D.– did in July 1982 resulting into the first Argentine hyperinflation which lasted a few months but returned several times until the same idiot was allowed “to dollarize” the economy in March 1991, leading to years of very low inflation but ending in the great “corralito” designed by the same idiot in December 2001). Yes, I can tell you what happened in Argentina every day since 1951, when high inflation started and Perón asked us not to use the dollar, but it would be a waste of time because the only way to understand the dynamics of Argentina’s inflation is by explaining how successive governments have been trying to redistribute income. This Monday I’m going to BA after 3 years and I’m studying the whole menu of exchange rates for the dollar which the government offers to residents depending on their spending plans (some old friends are still discussing if they will use the new Qatar exchange rate rather than the blue rate for their trip to the World Cup).
Oct 21 2022 at 9:38am
30 months of 1000% inflation and 97.5 years of zero percent inflation averages out to more than 100% annual inflation over 100 years.
So I have no trouble believing that Argentina has averaged 100% annual inflation over the last century. A few periods of hyperinflation really screws up the long term average.
Oct 21 2022 at 3:36pm
No need to apologize. One advantage of blogs is that the blogger can learn from the commenters.
On this issue, you haven’t established the point, though. An average is an average, which is the point robc made in response to you. To say that an inflation rate averaged 100% annually over 100 years is not to say anything about what it was in a particular year. To get it away from inflation for a moment, because maybe that’s distorting your thinking, let’s look at grades on courses. You could have a B+ average, but that doesn’t mean that you didn’t get any A’s or C’s.
The way to calculate the average annual inflation rate, remembering that inflation, like interest, compounds, is to take the price level 100 years ago, divide it into the price level today, take the 100th root of the answer, and subtract one from that root. Then multiply by 100 to get the percent. I don’t know what the answer is, but if you have the data from 100 years ago and from now, I can do it, or anyone, following my steps, can do it.
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