Abstract
An eternal characteristic of inflationary processes is scarcity or a violent drop in production. This is exactly the opposite of what we have been and continue to be taught. Inflation and hyperinflation have a relevant impact on investing performance. In the first part of this chapter, we examine what constitutes inflation and some counterintuitive aspects of it. In the second part, we address the less known dynamics of hyperinflation and discuss the contemporaneous example of Argentina.
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Notes
- 1.
Pierre Gaxotte, La Révolution Française, Paris, Éditions Tallandier, 2014.
- 2.
Idem.
- 3.
As the BCRA delayed the fx adjustments, the bank was technically bankrupt. For all relevant purposes, the bank was simply a printing press and one could have easily argued that it was not even trusted as lender of last resort.
- 4.
President Macri’s administration also settled Argentina’s fiscal bankruptcy with the respective holdout investors.
- 5.
Banco Central de la República Argentina, Informe Semanal de Subastas de Lebacs and Nobacs, Week of April 11– 15, 2016 (author’s translation).
Bibliography
Banco Central de la República Argentina, Informe Semanal de Subastas de Lebacs and Nobacs, April 11– 15, 2016.
Rodríguez, Carlos Alfredo. (Septiembre 1993). Economic Consequences of Quasi-Fiscal Deficits. CEMA Working Papers. No. 91. Retrieved May 2014 from https://www.ucema.edu.ar/publicaciones/download/documentos/91.pdf.
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Addendum
Addendum
The comments above on the situation in Argentina were written in April, 2016, for the first, self-published edition of this book.
They proved to be incredibly on spot: In April 2018 (i.e. two years later, as suggested in Lesson 1, “Sovereign Risk, Fallacy No. 3: Sovereign debt in local currency cannot default”), Argentina’s central bank could almost not refinance its short-term debt (i.e. Lebacs). Between April 16, 2018, and May 15, 2018, the peso devalued from 20 to 25 versus the US dollar, proving my point: To believe that a government cannot default on its debt, if the same is denominated in its own currency, is a fallacy.
Buyers of Lebacs lost 25% of principal (in US dollars), Argentina’s banks were forced to sell US dollar holdings (they were deliberately pushed to insolvency as their market capitalization plunged), and the government had to request a stand-by arrangement from the International Monetary Fund.
This also proves that having lost control of the situation (the central bank had to accept paying a minimum 40% interest rate on their short-term peso liabilities), Argentina in June 2018 is seriously headed towards a hyperinflationary scenario.
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Arisson, M. (2018). Inflation and Hyperinflation. In: Investing in the Age of Democracy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-95903-0_8
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DOI: https://doi.org/10.1007/978-3-319-95903-0_8
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