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As Western investors continue to agonize over the United States’
impending “fiscal cliff” and whether Europe’s recent currency expansion
and debt relief programs will save the euro, the nation of Peru, little
noticed by pundits and major media outlets, is providing an example of
how to do things right. Both the media and the leaders of the world’s
largest economies might do well to borrow a page from Peru, which has
consistently delivered GDP growth of between 6% and 9% year over year.
So what is Peru doing right that the rest of the world is doing wrong?
According to a June 2012 statement by Goldman Sachs’ chief economist for Global Investment Research, Jan Hatzius, both the U.S. and EU are expected to see minimal growth for the last half of 2012 and into 2013. For the U.S. this growth is expected to be somewhere between 1.8 and 2.0 percent. When accounting for persistent losses in purchasing power of the currency GDP is measured in, the “growth” is actually contraction. For example, if price inflation in the U.S. is 4.0 percent, real GDP (as opposed to nominal) shows a 2.0 percent decline in the best case. Over the past four years, growth in U.S. output (nominal GDP) has varied from -8.9% to a high of 4.1%.
Now compare the U.S.’s feeble record to the rate of Peru’s GDP growth.
The unflattering comparison above begs the question: What is Peru doing that the U.S. isn’t—and should be—doing?
The short answer is, Peru’s leadership is adhering to consistent and disciplined monetary and fiscal policies. One example is the decision by Peru’s central bank to hold interest rates steady, as Reuters reports.
It is the Peruvian finance ministry’s and central bank’s steady
policies that allows for planning and formation of expectations by
entrepreneurs. Businesses are initiated, and hiring commences.
Relatively limited government spending ensures a booming economy in Peru
as capital is left in the private sector where efficient economic
calculation is possible, as opposed to simply consuming capital. As a
result of the relatively good decision making, the Peruvian currency,
the sol, traded at its all-time high earlier this year.
Not everything in Peru is blossoming, however;Julio Velarde,
president of the Banco Central de Reserva del Peru, implemented policies
that were aimed at weakening the sol in relation to the Federal Reserve
Bank’s dollar in a fit of new-economics Keynesianism. This included
raising the reserve limit on accounts held in dollars, furthering the
restrictions on the sale of the Fed’s dollars, as well as increasing
reserves by buying $12 billion. Just two short weeks after Velarde took
those steps, the PEN (Peruvian sol) was down approximately 17%—exactly
what Velarde expected, and but very detrimental to the natural balance
free prices would have lent to the developing Peruvian economy. A weaker
currency subsidizes exports at the expense of both imports and the
Peruvian people’s savings. And as we know, savings and capital formation
is the precursor to business investment, development and hiring.
Despite the shortcoming, many countries take even stronger tactics in
following false prophets.
Peru’s finance minister Luis Miguel Castilla, recently named Latin American Finance Minister of the Year by Emerging Markets Magazine, avoided the heavy-handed market interventions and nationalization of resources practiced by Venezuela’s Hugo Chavez. Although Castilla instituted reforms to Peru’s lucrative mining sector, he ensured it remained competitive in the world market and attractive to foreign investors.
What happened in Peru is that once local and international investors
realized its economy was stable with steady hands at the wheel, a strong
business infrastructure began to develop as foreign trade flourished
and investment funding poured in. As a result, Peru’s unemployment is
low, its economy steadily growing in real terms, with wage and price
structure in balance. Despite the boom, many are still saving in silver and gold coin as the history of currency losing purchasing power is no foreign affair.
In contrast to Peru’s chief banker, Ben Bernanke, chair of the Federal Reserve Bank, has lowered interest rates to near zero and shows no sign of allowing them to rise anytime soon. Rather than implementing measures to keep their dollar strong, Bernanke is working overtime to debase the dollar, increasing the rate of expansion of the currency supply. The U.S. economy remains depressed, unemployment remains high, and price inflation is already significant, and about to explode higher. In the economic turmoil of the day it is ironic that Peru’s economy, like Iceland’s, is growing, its currency is strong, and its price inflation is under control—but it’s no accident.
According to a June 2012 statement by Goldman Sachs’ chief economist for Global Investment Research, Jan Hatzius, both the U.S. and EU are expected to see minimal growth for the last half of 2012 and into 2013. For the U.S. this growth is expected to be somewhere between 1.8 and 2.0 percent. When accounting for persistent losses in purchasing power of the currency GDP is measured in, the “growth” is actually contraction. For example, if price inflation in the U.S. is 4.0 percent, real GDP (as opposed to nominal) shows a 2.0 percent decline in the best case. Over the past four years, growth in U.S. output (nominal GDP) has varied from -8.9% to a high of 4.1%.
Now compare the U.S.’s feeble record to the rate of Peru’s GDP growth.
The unflattering comparison above begs the question: What is Peru doing that the U.S. isn’t—and should be—doing?
The short answer is, Peru’s leadership is adhering to consistent and disciplined monetary and fiscal policies. One example is the decision by Peru’s central bank to hold interest rates steady, as Reuters reports.
Peru's central bank held its benchmark
interest rate steady at 4.25 percent for the 18th month in a row on
Thursday, as inflation has retreated and the economy grows near its potential.
On October 22, the sol reached a 15
year high against the dollar, at 2.5780. The sol has gained 17 percent
in the last five years making it the best performing Latin American
currency.
Peru’s finance minister Luis Miguel Castilla, recently named Latin American Finance Minister of the Year by Emerging Markets Magazine, avoided the heavy-handed market interventions and nationalization of resources practiced by Venezuela’s Hugo Chavez. Although Castilla instituted reforms to Peru’s lucrative mining sector, he ensured it remained competitive in the world market and attractive to foreign investors.
Castilla was key in maintaining a
stable economic strategy during the transition of power after the
left-leaning Gana Peru won power in July 2011.
…Pablo Goldberg, head of emerging
market research at HSBC, says the finance ministry played a role in
ensuring the new government saw the “benefits of keeping the course” in
many aspects of macroeconomic policy. “There were important concerns in
the market about what could have happened and whether [Gana Peru] could
have taken a different approach,” he says.
In contrast to Peru’s chief banker, Ben Bernanke, chair of the Federal Reserve Bank, has lowered interest rates to near zero and shows no sign of allowing them to rise anytime soon. Rather than implementing measures to keep their dollar strong, Bernanke is working overtime to debase the dollar, increasing the rate of expansion of the currency supply. The U.S. economy remains depressed, unemployment remains high, and price inflation is already significant, and about to explode higher. In the economic turmoil of the day it is ironic that Peru’s economy, like Iceland’s, is growing, its currency is strong, and its price inflation is under control—but it’s no accident.
Sign up before Midnight to watch our video,
“Biggest Ponzi Scheme in U.S. History to Crash,”
and get our daily e-letter Investment Contrarians.
We respect your privacy!
We will never rent/sell your e-mail address.
That’s a promise! And you can opt out at any time.