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Inflation: Latin America’s lessons for Biden | The Global Observer



A neighborhood in Bogotá, Colombia, in a 2020 file photo.
A neighborhood in Bogotá, Colombia, in a 2020 file photo.Mauricio Duenas Castañeda / EFE

It’s easy to discount what Latin America may have to teach the world about running an economy. After all, what can a region perpetually embroiled in intractable problems possibly teach us? In this part of the world turmoil is the norm. In reality, though, the basic problem in Latin America is not its chronic economic instability, but the inability of its leaders to learn from experience, and their propensity to keep pushing policies that have already proven disastrous. I call it ideological necrophilia – the passionate commitment to dead ideas.

This, however, does not mean that more advanced economies can’t learn from Latin America. In fact, here is some advice from Latin America that President Joe Biden and his team would do well to keep in mind.

The first is not to ignore the deficit. The idea of brushing aside the consequences of spending far more than a government collects in taxes has a long history, and is the subject of a fierce academic debate. In 1932, John Maynard Keynes argued that recessions can be remedied with dramatic increases in public spending. In 2002, then-US Vice President Dick Cheney blandly asserted that “deficits don’t matter.” That debate is very much alive. In 2020, economist Stephanie Kelton published a book titled The Deficit Myth. In this bestseller, the unorthodox economist explains why the so-called Modern Monetary Theory means that a government that controls its currency can increase public spending as much as it wants. Again: fiscal deficit doesn’t matter.

It has become easy to ridicule economists who sound the alarm about inflationary spikes that never seem to materialize

It’s clear that President Biden has decided to gamble on a huge increase in public spending not causing any collateral damage to the economy. More specifically, he is betting that it will not cause inflation. Or that whatever inflation it does cause is not a serious problem. Or that the increase in prices will be only temporary. Perhaps he feels that if inflation does become rampant and prolonged, it can be brought to heel through other economic policy instruments, like interest rates. Economists call this fine tuning: trying to adjust economic policies in order to cool an economy overheated by increased public spending. But most importantly he seems convinced that, as the deficit doves argue, inflation is simply no longer a problem in advanced economies. For decade after decade, those who have predicted damaging inflationary outbreaks in the US or Europe have been wrong. As a result, it has become easy to ridicule economists who sound the alarm about inflationary spikes that never seem to materialize.

But as any student of Latin American history knows, the region’s presidents have been serving up this same kind of explanation for why inflation is not a threat, ad nauseam in fact, while they carelessly increased public spending, and almost always with disastrous results. It turns out that in these countries the deficit does indeed matter. A lot. The consequences turn up everywhere: currencies are devalued, debt skyrockets, capital flees, investment stalls and, of course, prices spiral with devastating effects on the least well off. The United States and other developed countries have conditions and institutions in place that makes them less vulnerable to this dynamic. But not immune. The complacent tolerance for inflation can be disastrous.

The Latin America experience has been that once inflation is rooted in the economy (in prices, contracts, wages, and people’s expectations), it is excruciatingly difficult to root out. And that attempts to fine tune the economy usually fail. What’s more, big increases in public spending spark waste, inefficiency, and corruption.

Larry Summers and Olivier Blanchard, two highly respected economists, believe that Biden’s huge spending binge will be inflationary

It is true that Latin American countries do not control the currency they borrow in, while having the dollar as its currency opens up possibilities for the United States that other countries just don’t have. Even so, the fear of inflation is already making itself felt in the US. A survey by Fortune magazine found that 87% of American adults are concerned about it. Private investors are already restructuring their portfolios to make them less vulnerable to inflation. Larry Summers and Olivier Blanchard, two highly respected economists, believe that Biden’s huge spending binge will be inflationary. Summers, a former US Treasury secretary and adviser to Presidents Clinton, Obama and Biden, accused the US Federal Reserve of misreading the economy: “The primary risks today involve overheating, asset price inflation and excessive financial leverage and subsequent financial instability.” Martin Wolf, the influential economics columnist for The Financial Times, wrote that “doubts about the Fed are reasonable. We know that it is politically easier to loosen than to tighten monetary policy… Lobbies for cheap money have strengthened, while those for prudence have weakened.”

If deficit spending enthusiasts like Paul Krugman start to hedge their bets, it’s time to look again to the Latin American experience. The influential Nobel laureate has just written that, although he does not believe that inflation will be a problem, “this does not mean that the entire Biden economic program is going well. It may indeed end up being overly ambitious.” Translation: it could very well cause inflation.

When the economy of a Latin American country becomes unstable, its own people pay the consequences. When the world’s largest economy becomes destabilized, absolutely everyone pays the price.

Twitter @moisesnaim

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MEPs join EU citizens on farm-animal cage ban



The European Parliament has lent political weight to an EU citizens’ petition to end farming of caged animals and force-feeding of ducks and geese to make fois gras pâté, putting pressure on the European Commission to table legislation. Forced-feeding was “cruel and unnecessary” and cages so small animals cannot stand or turn around were of “grave concern” MEPs said Thursday. Over 90 percent of EU-farmed rabbits are kept in cages.

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Speculations Run Amok as Johnson Crashes ‘Awkward One-on-One’ Meeting Between Biden and Morrison




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The Australian prime minister held a meeting with the US president on the sidelines of the G7 summit in England, where the two agreed to work closely on “challenges” in the Indo-Pacific region, among other things.

Scott Morrison was hoping for a one-on-one meeting with US President Joe Biden at the G7 summit in the UK, however, event host, British Prime Minister Boris Johnson frustrated his plans by crashing their tête-à-tête.

The Australian prime minister was invited to this year’s G7 Summit in Carbis Bay, Cornwall and was set to meet Biden in a bilateral setting.

When Morrison was asked why the supposed private meeting suddenly included a third party, the prime minister said “it was an opportunity that presented because we’re all here and so it was mutual”.

“We were particularly keen to have the discussion with both parties”, he added.

The incident has prompted great speculation as to why Morrison was unable to secure a bilateral meeting with the US president.

“This seemed to me like it was Boris Johnson stepping in what seemed like it might be a little awkward meeting, given Morrison’s full-on support for [former US President Donald] Trump”, Nikki Sava, a former adviser to ex-Australian Prime Minister John Howard, told ABC’s Insiders.

Many others ventured that Johnson’s decision to make the meeting trilateral was motivated by a willingness to make discussions about climate change productive.

Labour’s Foreign Affairs Spokesperson Penny Wong called the prime minister’s inability to secure a face-to-face meeting with Biden “disappointing”, and suggested Morrison’s “stubborn refusal” to commit to net zero emissions by 2050 was damaging the country’s reputation on the world stage.

“Mr Morrison’s stubborn refusal to sign up to net zero emissions has left him isolated and left Australia isolated”, she said on Sunday.

Ex-Liberal opposition leader John Hewson, in turn, alleged Biden might “not be prepared to extend Morrison the privilege [of a one-on-one] given his indefensible irresponsibility and stubbornness on climate”.

Greens leader Adam Bandt, for his part, thinks the only reason why Morrison was invited to the G7 summit is so the heads of states and governments can rebuke him over Australia’s perceived inaction on climate change.

“Climate is a critical issue at this G7. It is the only game in town. When they sit down to discuss climate, Scott Morrison will be sitting at the kids’ table and I think part of the reason he’s been invited to this summit is so the rest of the world can give Australia a dressing down on climate”, Bandt told ABC’s Insiders on Sunday.

Meanwhile, Morrison has since rejected those claims, arguing that climate change was not a point of discussion for the meeting and would instead be a topic of conversation at Monday’s G7 Plus sessions. 

Following the trilateral meeting, Biden, Morrison, and Johnson issued in a joint statement, revealing they had “discussed a number of issues of mutual concern, including the Indo-Pacific region”.

Morrison later downplayed any suggestion of a diplomatic snub, describing it as “a meeting of great friends and allies who share a view on the world”.

“Australia has no greater friends than the United States and the United Kingdom. It was a great opportunity for my first meeting with the president. I’ve known Boris for many years, and there was a very easy understanding amongst the three of us”.

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EU relations: Berlin, Paris hoping Spain will stay close to EU’s French-German bloc | International



France and Germany, considered the traditional axis of the European Union, are hoping that the Spanish government will remain a firm ally despite statements by Foreign Minister Arancha González Laya about seeking to diversify ties within the 27-country bloc.

In the space of just a few months, Spain has gone from embracing a G-3 of sorts with France and Germany to considering new alliances. These could include cooperation with Poland and Hungary in the battle to preserve European cohesion funds.

It makes sense to complement alliances with other states, but there is no substantial reason to justify walking away from the Franco-German axis

Ignacio Molina, senior analyst at the Elcano Royal Institute

Toward the end of former Foreign Minister Josep Borrell’s term in office, there were attempts at opening up to alternative alliances as Europe moved to a post-Brexit scenario. But it is González Laya’s first steps at the helm of the Foreign Ministry that have most clearly set the new tone.

Sources consulted by this newspaper played down this difference and instead highlighted Spain’s pro-European sentiment as a key to EU collaboration.

“It is normal for each country to seek out partners based on its own interests regarding a specific issue,” said a German diplomat. “This is not a big surprise, and you could also see it happening with Borrell. “The main thing, and there is no question about this, is that everyone should row in the same direction: for a Europe that is strong and shows solidarity.”

A French diplomatic source said that Spain remains a key player in the new European landscape that opened up when Britain left the club on January 31. “We cannot build a sovereign Europe without great involvement by Spain,” said this source. “France and Germany expect a lot from their main partners, particularly from Spain, in order to address Europe’s challenges.”

Everyone should row in the same direction: for a Europe that is strong and shows solidarity

Anonymous German diplomat

Since 1986, the year it joined the European club, Spain has stuck close to the French-German axis. “The only time we went our own way was in 2001, under [former Prime Minister] José María Aznar, and that was a strategic move prompted by the Iraq war,” notes Ignacio Molina, a senior analyst at Elcano Royal Institute. “It is not possible to distance yourself from the axis: [Hungarian PM Viktor] Orban can do it, the way that Aznar did, but everything in the EU goes through that core group.”

In early February, González Laya told this newspaper that she wished to cooperate with France and Germany on some policies, but not on all. “On other issues, the geometry will be a little bit different,” she said, citing a few countries from Eastern Europe that follow opposite policies from Spain on issues such as immigration or the rule of law. In spite of this, Spain could consider these countries allies on matters such as EU cohesion policy.

In her initial days in office, the new minister received Mediterranean colleagues first, notably Italy’s Luigi di Maio and Greece’s Nikos Dendias. But two sources who spoke on condition of anonymity said there is no particular state strategy behind the move. Instead, it is González Laya’s own take on the role that Spain should play within a bloc that has just lost its second-biggest economy, triggering a political reshuffle on the continent.

The minister will appear before Congress for the first time this coming Thursday, when she will discuss the main lines of her work as head of Spanish diplomacy.

González Laya was asked to come Berlin by Germany’s foreign minister, the social-democrat Heiko Maas, in the welcome letter he sent her following her appointment. While these letters are part of the protocol, they do not always include an invitation. No date has been set yet for the meeting.

This week, a lower-level bilateral meeting between Spain and France is taking place in Madrid, where the Spanish Secretary of State for European Affairs, Juan González-Barba, will meet with his French counterpart, Amélie de Montchalin. These two officials will also meet with a Portuguese representative to discuss electricity connections between their countries.

The Elcano analyst trusts that González Laya’s early remarks will not result in a more distant relationship between Spain, France and Germany. “It makes sense to complement alliances with other states, but there is no substantial reason to justify walking away from the Franco-German axis,” said Ignacio Molina.

English version by Susana Urra.

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