Americans wondering what to expect as their government piles on more debt and refuses to cut spending do not need to look any further than Argentina. A nation once among the most prosperous in the world is now deeply in debt, hemorrhaging cash, and trying to inflate its way out of the mess it has created. This inflation, naturally, has caused prices to rise sharply, and so the government is doing what all governments do in such a situation: instituting price controls.
The government of President Cristina Fernandez claims the annual inflation rate is 10 percent, which, if true, would be bad enough. Private economists believe it’s closer to 30 percent, but they dare not say so publicly for fear of being fired, fined, or even jailed. However, as the Associated Press points out, “The government says it’s trying to hold the next union wage hikes to 20 percent, a figure that suggests how little anyone believes the official index.”
The International Monetary Fund (IMF) certainly doesn’t believe it. The IMF censured Argentina for exploiting the difference between the official and private inflation rates to make it appear as though the country had saved $6.8 billion since 2007.
No one else is fooled, either. Investors were withdrawing billions of dollars from Argentina until Fernandez “tightened controls in the foreign exchange market and forced companies to repatriate revenue,” Bloomberg reports. Argentines trying to protect their savings by buying U.S. dollars — also depreciating, but at a considerably slower rate than the Argentine peso — were thwarted when the government imposed currency controls on them.
Apparently not content with the level of suffering she has already inflicted on her people, Fernandez is now instituting a two-month price freeze on “every product in all of the nation’s largest supermarkets,” according to the AP.
The intention, of course, is to conceal further the rate at which the peso is being devalued, though the policy is, naturally, couched in the language of helping average people who cannot afford the skyrocketing prices. In fact, it will do just the opposite.
When the price of a product is held below the market level, two things occur. First, since they will be making less profit on each unit sold— or perhaps even taking a loss — producers offer less of the product for sale. Second, recognizing that they are getting the product at a bargain price, consumers purchase more of it than they otherwise would. The end result: a shortage of the very product the government was supposedly trying to enable more people to buy. (Argentines have had experience with this: price controls imposed in 2007 led to food shortages then, too.)
The market will continue to function, of course, but it will be a black market. Scarce products will be available, but almost certainly at prices even higher than would be the case in the absence of the price controls. Consumers fortunate enough to obtain products on the black market will have no legal recourse if those products turn out to be faulty. And everyone involved will live in fear of getting caught engaging in peaceful commerce.
Eventually the price controls will be lifted. (These controls are set to expire on April 1, but who knows what kind of tricks the government might pull that day?) At that point prices will return to their market levels, though they will probably be even higher than they would have been if the controls had not been imposed in the first place, as producers — at least those who didn’t go out of business in the interim — scramble to make up for lost revenue. In addition, observed Tyler Durden of ZeroHedge.com, “many of the local stores will not be around as their profit margins implode and as owners, especially of foreign-based chains, make the prudent decision to get out of Dodge while the getting’s good and before the next steps, including such measures as nationalization, in the escalation into a full out hyperinflationary collapse, are taken….” (Fernandez nationalized the country’s largest oil company last year.)
Is today’s Argentina tomorrow’s America? It is certainly within the realm of possibility. In the late 19th and early 20th centuries, Argentina was one of the freest and most prosperous nations on the globe. Then came the Great Depression and the rise of demagogues such as Juan Peron, who turned Argentina into a basket case, nationalizing industries, giving vast power to labor unions, and spending as if there were no tomorrow. The country has never fully recovered from the damage, having suffered multiple rounds of inflation, price controls, and even debt default in the ensuing decades, though it is still the second-largest economy in South America.
So, too, with the United States. Prosperous before the Depression, the country elected Franklin Roosevelt to four terms as president during that downturn. He greatly accelerated the process of centralizing power in Washington, cartelizing industries, boosting union leverage, and spending enormous sums of money. Since then the United States has experienced inexorable inflation, price controls (under Richard Nixon), and ballooning debt. The U.S. government now spends more than $1 trillion more than it takes in each year, is roughly $16 trillion in debt, and has many trillions more in unfunded liabilities. The country is still an economic powerhouse compared with most of the rest of the world, but the decades of gargantuan government have taken their toll.
Economist Soledad Perez Duhalde told the AP that instead of price controls, the Argentine government should “reduce government spending, which is financing an expansion of the money supply.” Unfortunately, slashing spending is about as likely to happen in Argentina as it is in Washington. Equally unfortunately, the results of such profligacy — debt, inflation, price controls, and national decline — are also about as likely in America as in Argentina.