Argentina: A Deadly Mix of Totalitarian Thuggery and Business Cowardice

This weekend's Wall Street Journal published an article by Taos Turner on price inflation in Argentina. What I take away is that the country is in a state of internal warfare.

The Pertinent Fact:

According to the article, Argentina's public is now confronted with 30 percent annual price inflation.

The Cause and Cure, according to Argentina's Ruling Class of Thugs:

Friends of Cristina Kirchner have created propaganda posters accusing CEOs of large retailers of gouging the public. The gaudy creations now paper the walls of large cities. The caption reads: "THESE ARE THE PEOPLE WHO ARE ROBBING YOUR SALARY." Below an unflattering photo and the CEO's name and company is written: "They are increasing the price of everything to take your money." (The modern equivalent of Wanted-Dead-or-Alive posters?)

Elsewhere, individual consumers are encouraged to report any "unfair pricing" through an 800 number or via a government-provided app on smartphones. (Sounds powerful and scary, but I am curious to know who will do what with the information.)

Kirchner's cabinet chief, Jorge Capitanich, denies that macroeconomics have anything to do with Argentina's price inflation. He states that all the economists blaming the government's economic policies are prejudiced. He is sure of this, he declares, because he knows all of them and "[t]hey are all undercover agents." (For whom, he doesn't say.)

The Asininely Feeble Response of Retailers:

"In January, retailers agreed to freeze prices on about 200 products ranging from detergent to condoms."

[Audible gasp.]

That's it? No riposte? No counterargument? Not even the slightest attempt at self defense? Just a whimper and capitulation? I can here them now in their boardrooms: "Let's give them cheap condoms, that should do it."

No wonder totalitarians win. Their enemies are weak and short-sighted, and they cave in at the first boo.

[Thanks to Skreened.com for the image.]

Italy Suggests Global "Legal Standard": A Viable Financial Measuring Stick?

In today's Financial Times, we find an article by Guy Dinmore entitled "Italy calls for 'legal standard' on world finance."

Italy's finance minister Giulio Tremonte thinks he can persuade the G7 to adopt a new global financial standard--"just as once there was a gold standard"--to discipline world financial markets. He thinks he has the support of France's Sarkozy and Germany's Merkel.

The idea is to bring "tighter financial regulation" through a "legal standard" that would be "the minimum basic set of rules on propriety of international activities and transparency which the whole international community is expected to respect."

Hm. Nice idea. But...

My first reminiscence was about the UN, an optimistic creation that came about in another time of abject pessimism. The second was the Bank of International Settlements, intended to regulate foreign exchange after it became apparent that the world was abandoning the gold standard. My third was the Doha round of talks, meant to free trade relations as the international community struggles with the seeming impossibility of applying free-market theory to the real world.

I stopped there. No point in prolonging the agony: These three international cooperative efforts--but not only these three--have been failures. I wonder where Italy's finance minister gets the courage to attempt another such unrealistic idea.

According to the article, he thinks that the trading nations of this world would abide by "a mix of voluntary and binding codes" that "would be closely monitored with a wide range of tools, including peer review, naming and shaming, indicators and 'black listing ... for "rogue" economies.'"

OOooooooo. These sound ree-e-e-e-eally scary (not).

The Organization for Economic Cooperation and Development is helping work out the details. They will suggest "an anti-bribery convention, principles on corporate governance including state-owned enterprises, guidelines on multinational enterprises, standards of transparency and cooperation on tax, principles on disclosure of financial information, existing G7 task force recommendations on money laundering, and standards on international property rights."

Remember, every nation would have to participate to make it work. I wonder how many legislators of participating G20 countries would tremble at the thought of being named and shamed--places like China, Russia, Argentina, ... why, even Europe and the US.

As recently as yesterday, the USA--the supposed bastion of the free market--raised the (already existent) import tariffs on French Roquefort goat cheese. (See this article in the French newspaper Le Monde.)


"What?!? Qu'est-ce que tu dis?!?"

[Thanks to Lepetitcochin.fr for this picture of their cute little French goats, admittedly from Poitou and not Roquefort.]

Did you know Americans already pay a 100% import duty on Roquefort cheese, and that it will now go up to 300%? And that you will now have to pay 100% duty on French "meat, fruits and vegetables, mushrooms, cereals, chewing gum, chocolate, chestnuts, fruit juices, mineral waters, and fat products"?

Of course, this will spark a lawsuit by the European authorities at the World Trade Organization (WTO) against the US. Their statement (my translation): "It is clear that this decision of the American administration signifies that we will have no other choice but to begin preparations to bring this matter to the WTO. Important efforts have been made to find a set of rules that could be accepted by the various parties in the current conflict. This task has now been rendered more difficult."

Oh, I forgot to tell you that the EU had previously banned US beef on the (unsubstantiated) grounds that the hormones in it are dangerous.

Just like a couple of five-year-olds.

Does Mr. Tremonti really think a "legal standard" will do the trick? I doubt it. His ideas are in a huge bag labeled "Wishful Thinking," especially when you consider that the supposedly most capitalist countries of them all can't even stop bickering about beef and cheese (never mind get rid of subsidies of American sugar, rice, et al., or agree to abide by some vague and relative international financial "legal standard").

The irony is that the international community is passing by the very thing that has any chance in hell of carrying some weight: The gold standard itself, or some modern form of it designed to avoid the pitfalls that caused its demise in 1971.

The gold standard, as contrasted to a "legal standard," is tangible, physical, and precise. It is literally measurable, not just approximate. It is based upon something with a specific density, weight, and chemical composition, whereas a legal standard is based upon morality; and everyone knows that morality is relative when it comes to politics.

That the world might obey such a solid, modernized gold standard is perhaps also a pipe dream. I'm not saying that it would not need legal backing; quite the contrary. It will indeed need sharp judicial teeth. But those teeth would at least have a solid-gold jawbone as a foundation, and not just international good will, which would be a standard with about as many rotten holes as Roquefort cheese.

Stephanie Pomboy: My Kinda Bear

I'd never heard of Stephanie Pomboy until this morning when I read this interview with her in today's Barron's. Now I have a second bear with whom I see eye to eye. (The first is Doug Noland at PrudentBear.com, although I have no idea what the latter invests in.)


[Thanks to Janusmagnus.be for these cute bears.]

She is founder and president of MacroMavens, a company providing "macroeconomic research and commentary to the institutional investment community." The company strives "to identify major economic trends early while avoiding the typical overemphasis on short-term swings."

Isn't that what any wise investor should be trying to do? No one with a 401(k) should be speculating in any way, shape, or form; and that is what they are doing, albeit unwittingly, by ignoring the macroeconomic ebb-and-flow underneath us all.

She believes we should be "long 'socialism,'" that there will be more government intervention, or as she jokes, "partnering with the government." She thinks the next industry to receive a guarantee will be the municipal bond market.

She sees only two potential outcomes of our present interventionist fling: Higher interest rates or devaluation of the currency. She picks the latter, seeing a weaker dollar as being the choice Bernanke's Fed will make. As soon as interest rates start to climb significantly, they will begin a program of Treasury purchasing to prevent it, which will in turn lower the dollar.

It is this potentiality that makes her a believer in gold, for the medium-term profits and protection of capital. I would add that gold plays a role as a thermometer of monetary inflating. (My mantra, remember: You can take gold out of the standard, but you can't take the standard out of gold.)

Barron quotes her:

"We are going to see a secular rotation from paper assets to hard assets like gold. The whole global competitive currency devaluation, including that of the dollar, plays right into that." [--Yes!--] "I do worry about preservation of capital from the standpoint of how many more unconventional policy actions we are going to have. If I'm correct about the economic deleveraging still ahead and that it will continue for many years, that's a legitimate concern. That's why I'm long gold. I view it as the best way to protect my capital."

Yes yes yes.

As she says on her own website and as quoted in The Weekly Standard in January of 2004, “'Far beneath the surface,’ she writes, ‘the tectonic plates under the U.S. economy have begun to shift, revealing a molten lava river of inflation below….'"

How right she is. I've been railing against inflation since I was born, and more recently since March of 2005 on this blog. The 20th Century's experiment with fiat currencies will very likely fail, as they always have in the past.

In the meantime, hold onto your ingots.

How to Resist the Temptation to Scapegoat

It's always tempting to scapegoat some player in a game that is not going the way you want it to, even when the problem lies not with the players but with the game itself.

I am having a friendly debate with a very good friend, an economics and law professor, who insists that we need more regulation, that the government hasn't done enough to prevent those evil bankers and brokers from getting rich off the backs of the poor innocents of middle America.

I argue that, although it may be true that some bankers are rotten and regulators have been sleeping at the wheel, this will always be the case under macroeconomic and regulatory conditions such as we have in the US today.

I maintain that the underlying fault lies not with an individual player's greed or incompetence, although this does play a role; it lies rather with the foolish adaptation of bad rules of the game, rules that are based on the fallacious notions that government can manage a macroeconomy and that monopoly-encouraging intrusions by regulators into the banking industry, among others, are helpful.

While perusing today's Wall Street Journal, I received some help for my side from their daily human-interest column about a Venezuelan banker named Victor Vargas.


[Thanks to polobarn.com for the photo.]

If anyone walks and talks like a greedy banker, Vargas is it. This is the kind of fellow my friend loves to hate. Read what Vargas says:

"People write stories about me saying I have a Ferrari, a plane, a yacht. But it's not true. I've got three planes, two yachts, six houses."

Can you imagine Mozilo saying something like this? Vargas is just the kind of man who would get lynched here in the US for saying something like that in times like these.

But several other sentences leapt off the page at me:

"Venezuelan elites have learned to profit amid repeated volatility."

Exactly. People adapt in difficult times.

Some argue that these are the most stable times we have ever lived in. Some believe, as Milton Friedman and I do, that things could be much more stable if government and their appointed economists would get out of the money management business.

The 1970-80s inflationary-stagflationary episode incurred unprecedented capital losses. The extent of the financial market instability of those years has been compared to the Great Depression.

The 1980s and 90s brought us Latin American bank bail-outs, US savings bank failures, and a hedge fund panic. 2000 gave us the Dot.com crash. Today we have the housing bust and the credit crisis, an interrelated double-whammy.

Each time, macroeconomic policy has accommodated us back into the same expansionary credit parameters that brought us all of these episodes in the first place. And today, once again, we're issuing more credit to bail ourselves out of the 2007 housing and market crises--actions that will only serve to create our next bubble, unless the world has finally lost faith in our money managers' capacity to steer the ship.

Just look at the damage to the dollar. According to the AIER, you need $20.78 today to buy one 1913 dollar's worth of goods.

Markets have simply adapted to the fluctuations, and market players have learned to live with the new rules. Volatility has become the norm, in the US as in every country around the world. Look to the most flagrant examples (like Venezuela) to study the underlying phenomenon at work.

More quotes:

" 'Venezuela has developed a special business culture, where the game is played amid high inflation and other distortions,' says Venezuela-born Latin America specialist Gilbert W. Merkx, who directs the Duke University Center for International Studies. 'You can either get very rich or lose a lot of money playing the game, and it always gets more complicated as the distortions get worse.'"

Exactly. People adapt. Just because US inflation is at only 4 percent while Venezuela is at 22, doesn't mean that the players don't adapt, that "a special business culture" doesn't develop. It does.

"Mr. Vargas says his survival strategy is remaining agnostic about politics."

Exactly. Play the field. Don't play politics. Where have we seen that before? How many US companies wait to see which way the political wind is blowing before writing their campaign finance checks?

"In 2002, [Vargas] helped convince other bankers not to join strikes led by businesses that were aimed at ousting Mr. Chavez. As president of the banks' industry association, he helps negotiate banking regulations."

Exactly. Where have we seen that before? How many US banking regulations are put in place through consultation with industry big-wigs? Why fight city hall when you can feather your nest and get so big the government has to bail you out if you bet incorrectly?

" 'A businessman has to deal with his government, no matter how far to the right or left it is,' he says."

Exactly. A businessman is a businessman. He is not an idealogue, or even an idealist, except in his more private moments. A businessman enjoys the challenge. He plays by the rules, no matter what they are. And if the game is rigged, the tough competition will attract some rough characters who don't mind playing by rigged rules because they have a knack for manipulating people and rules to their advantage. At some point the less ferocious will throw down their cards and leave the table, leaving only the hard core participants. "I'm an intuitive guy," says Mr. Vargas.

"Mr. Vargas's high-level government contacts have attracted critics who say he's suddenly become rich as 'Mr. Chavez's banker,'" which he doesn't deny directly, side-stepping the accusation with statements like, "I've been rich all my life!" and that he's only met Chavez twice.

In sum, for the winning players in a rigged game, the motto is "Why beat 'em when you can join 'em, play unfair, and make it really big." That's the strategy that works today, in Venezuela or in the US.

Who is our US Treasury Secretary? Henry Paulson, former CEO of Goldman, Sachs. No personal attacks from me, of course, rather just an observation of the tight relationship between government and big business, even in this "capitalist" country (see links below).

Who is recommending that the Fed go ahead and issue credit galore to save Wall Street, even if it means tanking the dollar--indeed who has rationalized dollar devaluation, through a "non-partisan think-tank," "scientific," "economic" evaluation, into a way to solve our problems? The Peterson Institute, whose chairman is a founding partner in one of the largest hedge funds in the world, Blackstone Group, and who was once a Secretary of Commerce and an Assistant to the President for International Economic Policy. (His partner at Blackstone is a former Yale colleague of George W. Bush. Small world, isn't it.)

Want to influence government policy? Create a think-tank.

What do you say to this, dear Professor?

See this post for the development of my argument that government incapacity to manage the macroeconomy and over-regulation are the causes of our problems. I also describe how this country is a mixed economy, not a purely capitalist one, which may just be affording us not the best of both worlds, but the worst.