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How To Destroy An Economy Using Inflation – Forbes

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In late January, President Alberto Fernández participated in this year’s virtual gathering hosted by the World Economic Forum, normally held in Davos, Switzerland. From his cozy office at the Olivos presidential residence, the Peronist leader boasted about his administration’s response to the one-two punch of a global pandemic and Argentina’s chronic economic decrepitude, worsened by Covid-19’s global impact. The president highlighted how his Peronist brand of social-democracy managed to focus on “the discarded, those most vulnerable,” claiming it is high time to “leave behind this brand of hapless capitalism.” There seemed to be a certain disconnection with reality when Alberto touted the rapid recovery of the Argentine economy, which had seen some five months of sustained and robust economic growth, according to the president.

With one of the world’s highest inflation rates — which is currently on the rise — and almost out of foreign exchange reserves, Argentina’s government is looking at an array of price controls in order to keep a lid on the economy at least until October’s midterm elections. Lay-offs are prohibited by law. To a certain extent it feels as if they are once again covering the sun with their hand, so to speak, repeating failed experiences of the past and only kicking the can down the road. At one point in the president’s speech, he asked global leaders to push an “avant garde agenda, consistent with 21st century [goals],” which seems contradictory with certain pieces of legislation his administration has passed including a “home office law” and a new tax regime for the “knowledge economy” that only penalizes the private sector.

Whatever his intentions may be, it doesn’t feel as if Alberto is pushing a 21st-century agenda. Traversed by a global pandemic, and already two years into a recessionary cycle of stagflation, the government relied on printing copious amounts of pesos to finance emergency payments to individuals and corporations, while freezing public utility bills and using regulation to cap price increases in rentals, food and beverage, and telecommunications, to name a few. Yet, inflation jumped more than 36 percent over the past 12 months — marking a steep decline from 2019’s 54 percent with which Mauricio Macri left office — substantially outpacing wages. They didn’t seem to have a choice but spend being locked out of international debt markets.

While Economy Minister Martín Guzmán has signalled his intention to gradually close the fiscal deficit reducing subsidies in order to normalize energy costs, his government has already backtracked on increases, as it did with retirement and pension payments, putting further stress on the state coffers. Interestingly, these moves were attributed to Vice-President Cristina Fernández de Kirchner, a 21st-century character stuck in the ideological struggles of the 1970s. It was during CFK’s second presidency when the macroeconomic variables got out of whack, as she relied on increasingly stricter capital controls to keep the subsidies flowing, heating up the inflationary forces to the point where she intervened the official statistics bureau, INDEC, in order to try and tame expectations.

In order to imagine an avant garde agenda worthy of the 21st century, Argentina needs to fix its 20th-century problems. According to Federico Sturzenegger, head of the Central Bank

CPF
during the first half of the Macri administration, inflation is a revenue tool used by the government. In a column in Perfil, the use of the “inflation tax” will help the Fernández-Fernández administration rake in 1.1 trillion pesos, which, together with myriad taxes, dollar-denominated bond selling, and the one-time wealth tax, will allow it to cover its financing needs in 2021. “It helps that our society is much more concerned over the costs of lowering inflation than the costs of inflation,” Sturzenegger added. Using inflation to “dilute” or “licuar” costs and savings is the oldest trick in the book, and it hurts those in the bottom of the socio-economic ladder the most, as the former Central Banker points out. “Avoiding an immediate macroeconomic crisis doesn’t avert a credibility crisis that will sink investment rates to their lowest level in years, making growth impossible and pushing many Argentines to leave the country, taking with them their businesses and human capital.”

It must be noted that Alberto’s pan-Peronist Frente de Todos front inherited an imploded economy from Macri and his Cambiemos coalition. Macri promised it would rain dollars in the form of foreign investment and that inflation and poverty would tend to zero. While he received a ticking-time bomb from Cristina, he initially seemed to have disarmed it, only to see the economy blow up in his face at the first instance of financial tension in 2018. It was all downhill from there. And after that we had a global pandemic.

A recent report suggested Alberto is pushing a global statesman agenda, trying to align himself with Germany’s Angela Merkel and France’s Emmanuel Macron, along with Pope Francis. And while that sounds noble, Merkel and Macron defend multilateralism while their European Union is considering banning vaccine exports in the face of shortages and delays. If Alberto’s administration was able to put Argentina on a sustainable path to economic growth with inflation trending downward, he would leave his mark on history. It seems unlikely, though, when their response to inflation is price controls and pointing the finger at “speculators.”

This piece was originally published in the Buenos Aires Times, Argentina’s only English-language newspaper.

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Canada to go big on budget spending as pandemic lingers, election looms

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By Julie Gordon

OTTAWA (Reuters) – Canada‘s Liberal government will deliver on its promise to spend big when it presents its first budget in two years next week amid a fast-rising third wave of COVID-19 infections and ahead of an election expected in coming months.

Finance Minister Chrystia Freeland has pledged to do “whatever it takes” to support Canadians, and in November promised up to C$100 billion ($79.8 billion) in stimulus over three years to “jump-start” an economic recovery in what is likely to be a crucial year for her party.

Prime Minister Justin Trudeau’s Liberals depend on the support of at least one opposition group to pass laws, and senior party members have said an election is likely within months as it seeks a clear majority and a free hand to legislate.

Furthermore, by September, all Canadians who want to be vaccinated will be, Trudeau has said.

Freeland has said the pandemic created a “window” of opportunity for a national childcare plan, and that will be reflected in next Monday’s budget along with spending to accelerate Canada‘s shift toward a more sustainable economy.

“It will be a green and innovative recovery plan aimed at creating jobs,” said a government source who declined to comment on specific measures. The budget will aim to help those “who have suffered most” the effects of the pandemic, the source said.

Critics say the government would be better to hold off on blockbuster spending because the economy has shown it is poised to bounce back, and to prevent the country from racking up too much debt.

“Clearly a garden-variety stimulus package is the last thing we need. This is pile-on debt,” said Don Drummond, an economist at Ontario’s Queen’s University.

“The risk is that at some point interest rates are going to go up and we’re going to be in trouble,” he said, pointing to the mid-1990s when Canada‘s debt-to-GDP ratio skyrocketed, leading to rating agency downgrades and years of austerity.

The Bank of Canada cut its benchmark interest rate to 0.25% to counter the economic fallout of the COVID-19 crisis and has said rates will not rise until labor market slack is absorbed, currently forecast for into 2023. That may change when it releases new projections on April 21.

EXPANDING ECONOMY

More than 3 million Canadians lost their jobs to the pandemic. As of March, before a third wave forced new lockdowns, only 296,000 remained unemployed because of COVID.

Despite still-high unemployment levels in hard-hit service sectors, the economy has expanded for nine straight months even as provinces have adjusted health restrictions to counter waves of infections.

“Once we see sustained reopening, we do think that the recovery will have quite a bit of momentum on its own,” said Josh Nye, a senior economist at RBC Economics.

“We think Canada‘s economy will be operating pretty close to full capacity by this time next year,” he said.

Economists surveyed by Reuters expect Freeland to project a deficit in the range of C$133 billion to C$175 billion for fiscal 2021/22, up from the C$121.2 billion ($96.7 billion)

deficit forecast in November. https://tmsnrt.rs/3wSJPcm

The deficit for fiscal 2020/21 ended in March is forecast by the government to top a historic C$381.6 billion ($304.5 billion).

Canada announced on Monday a C$5.9 billion ($4.7 billion) aid package for the country’s largest airline carrier, Air Canada, and said talks were ongoing with No. 2 carrier WestJet Airlines Ltd and others.

 

(Reporting by Julie Gordon in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Steve Scherer and Peter Cooney)

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CANADA STOCKS – TSX ends flat at 19,228.03

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* The Toronto Stock Exchange’s TSX falls 0.00 percent to 19,228.03

* Leading the index were Corus Entertainment Inc <CJRb.TO​>, up 7.0%, Methanex Corp​, up 6.4%, and Canaccord Genuity Group Inc​, higher by 5.5%.

* Lagging shares were Denison Mines Corp​​, down 7.0%, Trillium Therapeutics Inc​, down 7.0%, and Nexgen Energy Ltd​, lower by 5.7%.

* On the TSX 93 issues rose and 128 fell as a 0.7-to-1 ratio favored decliners. There were 26 new highs and no new lows, with total volume of 183.7 million shares.

* The most heavily traded shares by volume were Toronto-dominion Bank, Nutrien Ltd and Organigram Holdings Inc.

* The TSX’s energy group fell 1.61 points, or 1.4%, while the financials sector climbed 0.67 points, or 0.2%.

* West Texas Intermediate crude futures fell 0.44%, or $0.26, to $59.34 a barrel. Brent crude  fell 0.24%, or $0.15, to $63.05 [O/R]

* The TSX is up 10.3% for the year.

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Canadian dollar outshines G10 peers, boosted by jobs surge

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar advanced against its broadly stronger U.S. counterpart on Friday as data showing the economy added far more jobs than expected in March offset lower oil prices, with the loonie also gaining for the week.

Canada added 303,100 jobs in March, triple analyst expectations, driven by the recovery across sectors hit by shutdowns in December and January to curb the new coronavirus.

“The Canadian economy keeps beating expectations,” said Michael Goshko, corporate risk manager at Western Union Business Solutions. “It seems like the economy is adapting to these closures and restrictions.”

Stronger-than-expected economic growth could pull forward the timing of the first interest rate hike by the Bank of Canada, Goshko said.

The central bank has signaled that its benchmark rate will stay at a record low of 0.25% until 2023. It is due to update its economic forecasts on April 21, when some analysts expect it to cut bond purchases.

The Canadian dollar was trading 0.3% higher at 1.2530 to the greenback, or 79.81 U.S. cents, the biggest gain among G10 currencies. For the week, it was also up 0.3%.

Still, speculators have cut their bullish bets on the Canadian dollar to the lowest since December, data from the U.S. Commodity Futures Trading Commission showed. As of April 6, net long positions had fallen to 2,690 contracts from 6,518 in the prior week.

The price of oil, one of Canada‘s major exports, was pressured by rising supplies from major producers. U.S. crude prices settled 0.5% lower at $59.32 a barrel, while the U.S. dollar gained ground against a basket of major currencies, supported by higher U.S. Treasury yields.

Canadian government bond yields also climbed and the curve steepened, with the 10-year up 4.1 basis points at 1.502%.

 

(Reporting by Fergal Smith; Editing by Andrea Ricci)

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