Coping with High Inflation: Lessons from Argentina and Turkey

The Illusion of Normalcy Amid High Inflation

Despite high inflation, daily life in Argentina and Turkey continues with people going to work, shopping, and engaging in leisure activities, creating an illusion of normalcy. This semblance of everyday life persists even as the economic environment becomes increasingly unstable. People adapt to the new reality, often out of necessity, masking the deeper economic troubles that lie beneath the surface.

In Argentina, for instance, people prefer to save in US dollars rather than the local currency (peso) to preserve value. The Argentine government restricts access to US dollars to combat the devaluation of the peso, leading to a black market for dollars. Despite these challenges, day-to-day business transactions are conducted in pesos, with prices and wages constantly adjusting.

Economic Stagnation and Savings Challenges

High inflation causes uncertainty about the value of money, making it difficult for businesses to invest and expand, leading to economic stagnation. This uncertainty discourages long-term planning and investment, which are crucial for economic growth. As a result, the economy suffers from a decline in demand for big-ticket items due to a lack of savings, further pressuring the country's economic stability.

High inflation also discourages savings because interest rates on savings accounts cannot keep up with inflation, causing people to spend their money quickly on consumer goods and services. In countries with high inflation, people often spend their entire paycheck on groceries immediately after payday to avoid losing value. Middle-class Argentinians often buy groceries in bulk to cope with inflation and use credit cards with monthly payment options to manage expenses.

Economic Decline and Dollarization

High inflation can lead to a slow economic decline, with decaying infrastructure, worse public services, and fewer job opportunities for younger people. In Argentina, poverty rates are high, with 55% of the population living below the poverty line. The concept of "dollarization" is prevalent in both Argentina and Turkey, where people and companies calculate and save money in US dollars to hedge against local currency depreciation.

In Turkey, more than half of deposits are in US dollars or euros, reflecting a lack of confidence in the local currency. Turkish grocery stores and employment contracts are not allowed to use dollars, creating friction for regular people, although large corporations can navigate these restrictions more easily. The Turkish government tries to combat dollarization through taxes, high interest rates, and legislation, but people still prefer stable currencies.

Wage Adjustments and Cost of Living

In Turkey, wages are frequently raised to keep up with inflation, with some raises being quite drastic compared to those in the US. Despite wage increases, the cost of living in Turkey remains high, making housing and cars unaffordable for many. High inflation necessitates continuous wage adjustments, highlighting the unsustainable nature of the situation.

Argentine salaries are frequently updated to match inflation, especially for registered workers under the Argentinian IRS (AFIP). However, these adjustments are often insufficient to keep up with the rapidly rising cost of living. The long-term solution to high inflation involves stopping it entirely, as temporary measures like wage increases are insufficient to address the underlying economic issues.

A Path Forward

High inflation creates a challenging environment for both individuals and businesses. The experiences of Argentina and Turkey highlight the importance of stable economic policies and the need for effective measures to combat inflation. By understanding these challenges and the strategies employed by people in these countries, we can better appreciate the complexities of high inflation and the importance of sustainable economic solutions.