Tuesday, December 22, 2015

TEAR MANUFACTURERS

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 One of the things you learn over time if you're paying attention is centralized governments--especially heavily statist ones--have an inbuilt penchant for producing tears. In most cases delayed tears.

As many of you know Argentina just held an important election to toss out one tear manufacturer in what hopefully for the Argentinian people won't be another. Argentina might be the global capitol of tears. It's a distinction that few claim to want, but many continue to vie for. Greece and some other parts of the EU should come to mind.

In a recent article former Pimco guru Mohmed El-Erian writes:

Last week, the government of newly elected Argentine President Mauricio Macri launched a bold plan to revitalize a bruised and beleaguered economy plagued by high inflation. At a time of daunting crisis conditions, one should not underestimate the importance of this move not just for Argentina, but also for other countries, where leaders are watching closely for clues about how to deal with their own economic woes. 

Thanks to years of economic mismanagement, Argentina’s economy has been badly underperforming for decades. Previous governments sought to avoid difficult policy choices and obfuscate fundamental issues by implementing inefficient controls that grossly misallocated resources and undermined Argentina’s ability to generate the foreign-exchange earnings needed to cover its import bill, resulting in domestic shortages. The recent drop in commodity prices has exacerbated the situation, depleting what little growth dynamism the economy had left, while fueling inflation, deepening poverty, and spreading economic insecurity and financial instability. 

You have to chuckle, perhaps even give El-Erian points for politeness. Describing Argentina's long standing economic woes as mismanaged is stand-up comic material.  Bruised and beleaguered are other interesting choices. But oh well. Here are some points he offers to correct the problems.

The other thing is, any scent of a meaningful move toward less statism could spell investing  opportunities. There are caveats, however, so keep your eyes focused. That way you might avoid getting caught up in any future tears because if past is prologue.......

In theory, governments in such a situation have five basic options to contain crisis conditions, pending the effects of measures to reinvigorate growth and employment engines.
· Run down the financial reserves and wealth that were accumulated when the economy was doing better.
· Borrow from foreign and domestic lenders.
· Cut public-sector spending directly, while creating incentives to induce lower private-sector expenditure.
 · Generate revenues through higher taxes and fees, and earn more from abroad.
· Use the price mechanism to accelerate adjustments throughout the economy, as well as in trade and financial interactions with other countries. More:

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