6/10/2022 - Economy and Finance

The history of inflation - Part 2

By Agustin Arnal

The history of inflation - Part 2

Category: 2001 in Argentina

Another leap in time brings us to one of the most spicy steps in Argentina: 2001. But contrary to what could be expected, this example serves to show one of the advantages of inflation. Yeah, just like that.

What happened, punctually? Argentina came from 10 years without inflation, achieved the strength to tie the weight to the dollar. In late 2001, the system became unstable because many of the dollars that supported the weight came from the debt, and were transitory. When the dollars were missing, it was not possible to sustain the value of weight and, similar to the Roman coins with less noble metal, this generated inflation. With the aggregate that, in Argentina in 2001, many people had a high level of debt (Hipotecas, Gifts, and loans of all kinds). I believed this was an explosive combo, but the debt was a relief.

How? To summarize, a lot of people had loans in weights, the fixed rate. What does this mean? That it is returned, suppose, 10% more than was borrowed. As the rate was fixed, although inflation went up, what had to be returned was previously put. With the 2001 crisis, inflation went to 40%. Many people, in this way, just returned less than he borrowed, just because inflation made this debt smaller. This effect is called licuation, and is one of the few advantages of inflation.

How does it work? Well, we go back to the example. Suppose we took a loan for $100. If inflation is 40%, it means that the 100 dollars we ask for in a year are worth $140 (assuming we have not recorded them in the form of a note). However, by the original agreement, we have to return $110 (record: 10% interest rate). If we have to return $110, but what we borrow is worth $140, it means that what we return is less than what we borrow today. Returned, but true.

Therefore, among other things, Argentina's recovery after the crisis was so fast: the people and companies who had debts were able to cancel more easily because the real value of these was very much affected. So it is always convenient to be indebted? Not so fast. This only works if inflation is higher than the interest rate, or if inflation increases more than the previously agreed rate. Duty always has its risks, as it can have its benefits.

Third conclusion: Inflation benefits loans at fixed rates via liquation.

2015 in Argentina

This temporary trip is shorter, and it brings us to an episode that we probably all know of memory. December 2015, Macri taking full dance on the balcony of Casa Rosada. In addition to the anecdote, its administration decided to cover all types of public services as possible. Regardless of the outcome of the decision, the interesting is the diagnosis and symptoms around it.

What happened? At the end of 2015, public services (water, light, gas, transport) had a very high payload in the AMBA, which generated two specific situations: on the one hand, the prices of these services were much lower than their costs, and on the other, these subsidies generated an excess of expenses that would then be financed.

Let's go first. Prices in dollars of public service tariffs were six times higher at the end of 2019 compared to the end of 2015. Let's go to the concrete example: a million families paid less than a dollar of light invoice, less than the price of a tailor. One of two: the tailor is expensive or very cheap light. What's the right one? Humor, in addition, this graphic problem generates very concrete imbalances: on the one hand, when something is cheap, one wants to consume more, and on the other, one produces a good that sells cheap, does not win silver, and can not (ni want) invest in continuing producing. Translation? We all have air conditioning, and we have light cuts. You sound? This is a clear example of relative price unbalance, and generates just enormous inefficiencies at the time of consuming, investing, and this results in the fact that the economy grows less.

The curious thing is that governments seek to subsidize these services precisely to protect the population from inflation, but end up generating the opposite. On the one hand, in the short term, they generate imbalances in relative prices (the alfajor costs the same as the light), and on the other, to finance these subsidies increases public expenditure. As we have seen, this rebounds in our show star: more inflation.

Economists strive to talk about the importance of relative prices, when the examples are clear and are in sight. The subsidies and the light is one of them.

Fourth conclusion: One of the effects of inflation is the imbalances in relative prices, which generate serious inefficiencies.

Refuges for Doña Rosa: How do we protect ourselves from all this?

There are different forms, many of them combined, which allow the Doña Rosa "not to lose" against inflation. As we said, the best known is to go "strong, in the middle": all-in al buck. It is not necessary to explain much, but the interesting of this strategy is that the dollar will evolve like inflation. Homeache: What happens if inflation wins the dollar?

Another widely used way is to buy goods "that you remain forever" (i.e., durable): car, washing, microwave, etc. The main assumption is that if we buy these things, their price will rise to the pair of inflation, then "we do not lose" silver.

Being a little more sophisticated strategies, we find out how to buy what is called financial assets. Examples: obligations, actions (Argentine and overseas), etc. In this case it is not only sought not to lose, but seeks to win. In Creole: if we go with this strategy, we are no longer just saving, further we are investing. For this kind of strategies, it is necessary to open a comitant account, and choose which assets we will buy. Nothing to be frightened: in all banks will fight for helping us use this tool (because they also win, of course).

The fourth, "Priest sister" from the previous, but not for millennials, directly for centennials, is to buy cryptoactives. If Doña Rosa is a perfect metaphor, Bitcoin is its exact equivalent in terms of crypto. The reality is that this type of assets has evolved in its - of course, brief - history, and we can meet with several options to implement this strategy. Bitcoin, Ethereum, USDT (digital dollar version), etc. are some of the best known. Ojo: they are active at very risk, and there are known cases of huge losses because they do not measure the risks. Searching well before buying.

As we see, inflation is a theme that takes us from ancient history to the future. Moraleja: get used to her, and take advantage of her.

https://storage. googleapis. with/finguru_static/p9525_e837e37ed4/p9525_e837e37ed4.htmlo miss PART 1 of this note where we count the principles of inflation in Ancient Rome.

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agustin arnal

Agustin Arnal

Hi, I'm Agus Arnal. I am passionate about creating and developing business and solving problems. I believe that the most important minority of all is the individual, and that is why entrepreneurship, finance in general and chryptocurrencies in particular are the three things I live chasing.

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