Monday, January 17, 2011

Markets in Everything: Cars As Virtual Piggy Banks


GLOBAL POST -- Argentines are buying cars in record-breaking numbers this year, but not necessarily because they're burning to drive. With currency markets uncertain and inflation expected to reach 30 percent in 2011, Argentines are trying to find places to park their savings.

"Those who can buy property, but those who can't buy cars," said Hernan Valdez, who bought a new Peugot. He said many of his friends bought cars this year, too.

Fueled by record soy and corn harvests last year as well as strong Brazilian demand for Argentine-made cars and manufactured goods, Argentina is one of Latin America's fastest growing economies. Its GDP is forecast to grow between 7 and 9 percent this year. Yet Argentina also has Latin America's second highest inflation rate, next to Venezuela. The national statistics agency reports annual inflation at 11.1 percent (see chart above), but private analysts say Argentina's actual inflation rate is closer to 26 percent and set to increase with government spending ahead of next year's presidential election.

With banks only providing 8 percent annual interest rates, Argentines are turning to cars as virtual savings banks. In most places in the world, a new car depreciates in value as soon as it leaves the lot, but not in Argentina.  For example, an Argentine consumer can buy a car for 50,000 pesos, use it for one year, and sell it the next year for almost the same price or more. In Europe or the United States, cars leave about 20 percent of their value when they leave the lot, said Hernan Dietrich, owner of one of Argentina's largest car dealerships.

"Here the loss is absorbed by inflation and the equation balances out," Dietrich said. "So many people have decided to buy a car if they don't have another way to save."

21 Comments:

At 1/17/2011 7:53 PM, Blogger Craig said...

I'm going slightly off the topic of Argentinian inflation. This clause reads as nonsense -- it takes several re-readings to figure it out.

Those who can buy property, but those who can't buy cars

Why are people so scared to use commas anymore? Try this as a replacement.

Those who can, buy property; but those who can't, buy cars

Commas are meant to indicate a pause. They are not merely separators of two independent clauses. I sincerely miss the comma in too much of modern prose.

Now, on to the discussion.

 
At 1/17/2011 8:29 PM, Blogger Benjamin said...

While Argentina may be a bad example, this post raises an interesting topic.

Would you rather live, permanently, in an economy that had 5 percent inflation and 5 percent growth, or 1 percent inflation and 1 percent growth?

Obviously, the 5 percent model.

Most people dodge the question, and start to talk about "eventually" the higher inflation undercuts growth (although the US economy grew mightily from 1980 through 2008, with moderate inflation).

China is growing now at 10 percent, and has moderate inflation--while Japan is shrinking again, and has minor deflation.

The Nipponistas and gold nuts keep saying low inflation is best--but Japan has been deflating for 20 years, and their growth is almost non-existent. Tight money policy in Japan has been a disaster, as it was in the Great Depression.

For some reason not tied to the real world, some peopel have developed a fetish for price stability and the shiny metal gold (never silver, although silver has had a great run lately too. Also palladium).

You know, I think about sex all the time. Some people think about gold and inflation all the time.

But I don't put sex into my economic discussions, or advise a "sex standard."

You know, $50 should be convertable into a standard sex act by a nightwalker--the price of which, I could probably contend has been stable over time, like those mysterious suits that always cost the same as one ounce of gold.

Remember, the future is with China and Korea, where there is moderate inflation, and not with Japan, which has nearly perfect price stability for 30 years.

 
At 1/17/2011 8:31 PM, Blogger Benjamin said...

Craig-
Commas? Are they like apostrophes?

 
At 1/17/2011 9:03 PM, Blogger Michael Hoff said...

Can I open a savings account in an Argentinian bank?

 
At 1/17/2011 9:10 PM, Blogger mongander said...

I hate commanists.

 
At 1/18/2011 8:50 AM, Blogger Paul said...

"Would you rather live, permanently, in an economy that had 5 percent inflation and 5 percent growth, or 1 percent inflation and 1 percent growth?"

Of course, if those are the only two options. Those aren't the only two options, Benji.

 
At 1/18/2011 9:46 AM, Blogger Junkyard_hawg1985 said...

Benji,

While you say Argentina is a bad example, I disagree. Argentina is an excellent example. In 1900, Argentina had the 4th highest per capita income in the world. Today they are #52. What happened? A century of treating their currency like toilet paper and too much socialism. Why does our current government expect different results than we saw from Argentina?

 
At 1/18/2011 11:58 AM, Blogger Benjamin said...

Junkyard-

Hey, if it were up to me, we would sunset the USDA, VA, HUD, Commerce, Labor and Education, and reduce defense spending by 75 percent, and limit federal outlays to 16 percent of GDP.

But monetary policy is another matter. The goal of absolute price stability now appears very dubious, and Japan is the leading example of a central bank more concerned with inflation than economic growth.

On the other hand, I'll take the moderate inflation and performance of the US economy in the 1990s. Good times, jack.

 
At 1/18/2011 1:35 PM, Blogger James Leroy Wilson said...

The problem is the very idea that there needs to be a monetary policy. We need a central bank (or politicians) making monetary policy like we need a corn policy or a laptop policy or a streetwalker policy.

 
At 1/18/2011 1:55 PM, Blogger Junkyard_hawg1985 said...

Benji,

I think you make the error assuming that inflation gives you faster growth. I don't think there is evidence supporting that statement.

 
At 1/18/2011 3:07 PM, Blogger Ron H. said...

"Would you rather live, permanently, in an economy that had 5 percent inflation and 5 percent growth, or 1 percent inflation and 1 percent growth?

Obviously, the 5 percent model.


Well, if 5% is better than 1%, 30% should be even better, right.

I can't believe you, Benji, doesn't this very article refute what you are asserting? As is pointed out, inflation causes people to misallocate money in an attempt to protect some of it's value. Savings and investment are necessary for growth, but instead people in Argentina are buying cars, hoping that the depreciation rate is less than inflation. How sad.

The trouble with inflation as a monetary policy, is that you can't tell people ahead of time that you're going to cheat them, or they will just price the anticipated increases into their current plans. The only way to make it work is with ever increasing rates of inflation.

 
At 1/18/2011 3:10 PM, Blogger Ron H. said...

James Leroy Wilson said...

"The problem is the very idea that there needs to be a monetary policy."

You, sir, have hit the nail on the head.

 
At 1/18/2011 3:19 PM, Blogger Ron H. said...

"Can I open a savings account in an Argentinian bank?"

Sure, but why would you want to?

You can deposit Argentine pesos, earn 8% while losing 30% to inflation, then withdraw those pesos and convert them back into less of whatever currency you started with.

Sounds like a plan.

 
At 1/18/2011 3:29 PM, Blogger Eric said...

And as Thomas Sowell so aptly put it:

"When someone removes a cancer, what do you replace it with?"

"The Nipponistas and gold nuts keep saying low inflation is best--but Japan has been deflating for 20 years, and their growth is almost non-existent."

Not true for their nutty gold.

 
At 1/18/2011 4:56 PM, Blogger Junkyard_hawg1985 said...

"In the long term, all fiat currencies return to their intrinsic value."

 
At 1/18/2011 5:03 PM, Blogger Ron H. said...

"In the long term, all fiat currencies return to their intrinsic value."":

Thanks, Junkyard, That's a good one. I'll have to remember it.

 
At 1/18/2011 5:21 PM, Blogger Eric said...

"In 2007, then-President Nestor Kirchner purged the national statistics agency and began using a formula that underestimates the official inflation rate of the country."

Deja vu...this all seems so familiar...

"We've been very, very clear that we will not allow inflation to rise above 2% or less," Bernanke said. "We could raise interest rates in 15 minutes if we have to."

 
At 1/18/2011 5:24 PM, Blogger Benjamin said...

Ron--

We had moderate rates of inflation from 1990 to 2008, and very solid growth in the period. The US economy expanded by more than 60 percent, in real terms. That means real income, real money, real food in people's mouths, cars, houses, medical care, paid girlfriends etc.

Japan had no inflation and almost no growth.

Why the need for modsertae inflation, Some people say wage stickiness. Other people say ihvestors need a little Dutch courage. It is easier to borrow and invest if you think that if yo hold on long enough, you can pay back with cheaper dollars.

What I do know is that the world has enjoyed a global economic party since we went off the gold standard, and the US boomed for nearly 20 years straight, until the the Bush jr. Great Recession.

Japan is outside the orgy, on the cold street, looking in.

 
At 1/18/2011 7:05 PM, Blogger Ron H. said...

Benji,

You are wrong. Inflation doesn't equal growth. This single theme rant of yours continues unchanged no matter what others explain to you.

I am near my wit's end.

Please see the excellent video of an interview with Thomas Sowell at this link, which Eric thoughtfully provided.

 
At 1/19/2011 11:03 AM, Blogger vontrapp said...

Benji, you mean all that "real income, real money, real food in people's mouths, cars, houses, medical care, paid girlfriends etc." that ALL evaporated almost overnight? Isn't it interesting that the period of wonder you cite ends in 2008? Why? Why did it end? Because inflationary "growth" is unsustainable and is NOT real, it's NOT real wealth. Just look at it. Where is that wealth?

 
At 1/20/2011 12:21 AM, OpenID Sprewell said...

Benji, correlation is not causation, look it up. Also, what are these paid girlfriends you speak of? ;)

 

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