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4/3/08

Luis Carranza: Arthur Burns redux

The Refutation of Bishop Berkeley

After we came out of the church, we stood talking for some time together of Bishop Berkeley's ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal. I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it. I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it -- "I refute it thus."


I warned you.
Don't say I didn't warn you.


There has been two disparate pieces of Peru economy news in the last 48 hours, namely the nasty inflation rise and the Fitch ratings hike to investment grade. I've actually put a couple of rockingly cool charts together on the investment grade theme, but this post will be about inflation and we can save the fruits of Excel for later.

Carranza gave an interview to the highly professional, intelligent, clean-living, handsome, sexy-yet-totally-masculine and witty reporters who work at Reuters Lima on Thursday. Glad to say the triumphalist "we're on the road to first world" that was part of his comments of Wednesday were not part of the interview, but the Carranza dude is still pretty keen on what he sees in Peru's economic future, that's for sure.

Bloody frightening, if you ask me. His comments on inflation included such gems as, "We want to make sure that domestic demand doesn't grow excessively and that inflation expectations stay in check."

Errrrr....say that again? STAY in check? Now this is the country that, just a few months ago, lowered its inflation target to 2%, plus or minus 1% (meaning a ceiling of 3%) for FY08. What did that mean? That meant there was AN INFLATION EXPECTATION of 2% for the whole of 2008. Here we are, just three months gone, and annual accrued inflation is already over 2%. And now Carranza is saying to us that he was expecting this, and if it changes from now it might be a cause for concern? Gimme a break!

Unfortunately it wasn't just a one-off slip of the tongue, cos later in the same note he is reported to say, "If we observe inflationary factors and expectations change or cause contagion of food prices, we will react with a bigger fiscal restriction"

If? IF?? IF!!!! Oh my stars! 0.91% in February (blamed mainly on imported inflation) and then 1.04% in March (but honestly, it won't happen again and this time I really mean it...honestly...like) and he says IF we observe inflationary factors!! The brass neck of the guy is impressive. Well IF you want to observe a bit of inflation, go down the market and buy some chicken, or some eggs (gone from 20 centimos an egg to 30c in a matter of weeks), or tomatoes, or rice (jeez...the price of that!! Next they'll be saying that Peru imports rice and it isn't anything to do with us) or a whole host of things that really matter to the dude on the street (and screw your beer, Alan).

We've heard that "next month will be different" from Peru's finance dude every month since December, and apart from January it's has just got worse every month. You'll also note he says that if necessary, he'll tighten the fiscal surplus to above the current 2% projected mark. Well that's total BS too, and he was blown completely out of the water by Bruno Seminario in an excellent interview published today who pointed out the surplus must be running at 5% already, so any hypothetical tightening from 2% to 5% will just be pushing on a rope.

Back in the early 1970's in the USofA, Arthur Burns made the same mistake that Carranza is making right here right now. The then Fed chairman dismissed the outbreak of inflation as "merely imported" and said it would pass quickly. He ploughed on with his own policy, disregarded what was happening in the real world, and as a result US inflation shot to 12%+. This Carranza dude needs to get down from his "I'm right I'm right I know I'm right" pedestal and learn a bit of economics history before he screws up the country (and learn a bit of humility while he's at it). Simple question: If it's imported inflation, why is rice up? I know the answer, and i'm darned sure Carranza knows the economic theory behind it too....so why is he ignoring facts?

In this minister's cloud cuckoo-land, inflation is still a hypothetical problem. Ridiculous. It really makes me want to grab him by the scruff of the neck, take him shopping, point to the price tags and say, "I refute it thus...and thus....and thus....and thus........."