Inflation in Latin America & Foreign National Loans

Miami has a long track record of being an excellent place for foreign nationals to buy investment properties. A lot of factors can play into why people choose to invest abroad rather than at home—but the main one is inflation in Latin America.

In 2019, countries such as Venezuela, Suriname, Argentina, Uruguay, and Haiti suffered from high inflation rates of 2,665%, 63.8%, 40.7%, 18.7%, and 9.12%—respectively. Naturally, these economic stressors don’t just disappear overnight. While people may see inflation negatively, it does serve a purpose.

Inflation in Latin America and Capital Flight

In small doses, it can motivate people to spend money. Rather than waiting for a lower price, it pushes people to buy products now. In the US, this helps keep our economy strong and productive, and the Federal Reserve aims to keep inflation at around 2% annually.

However, when there’s too much inflation, economies shake under the pressure. Static wages, diminished buying power, and a lack of trust towards central governments, all cause consumer confidence to crumble.

That’s when people start stuffing money under their mattresses, or buying assets abroad before their money loses value. This is called capital flight. Those who can, start to invest and move their assets into other countries with lower and steadier rates of inflation.

But when it comes to inflation, the US is a curious case itself.

Why US Inflation Stays Low

Before the crash of ‘08, the United States government was obsessed with cutting down the deficit. It was part of every president’s campaign. However, in 2008 there was a seismic shift in how the US government began looking at borrowing money while managing national debt.

When the US borrowed money from itself by taking on US Treasuries, people would get very nervous. The reason behind this was that as the US deficit grew and the government borrowed more money in the form of bonds. The US government then began to be seen by bond traders as a high risk borrower who was taking more than they could pay back.

Being a high risk borrower, bond traders demanded higher interest rates. This was in order to be able to cover the risks of their investments, and people paid for these with higher taxes.

This went on for years before people realized that the economy was heavily affected by perceived consumer confidence.

How Some Countries Keep Inflation Low

In countries like New Zealand, they even implement what’s called inflation targeting—which is when you set an inflation target that’s intentionally higher, so that people perceive rates to be lower, and maintain their buying confidence.

For example, the Fed has had the annual target of 2% inflation a year. So far, inflation has stayed under two percent. People then perceive their buying power as steady enough that they feel that they can spend during an economic downturn.

Perception is Everything

At the end of the day, inflation in Latin America is like a tricky thermometer. It measures the health of an economy. Too cool, and economic activity can stall while consumer confidence dips due to lack of demand. Too hot, and demand skyrockets with no one being able to afford products reasonably.

As I had already mentioned, people with enough buying power are quick to pick up on these signals. They know a financial alarm when they see one—and so they invest abroad.

Now I know what you’re thinking: Is that the only time that foreign national loans are used—in times of economic crisis? Of course not! But when you see waves of immigration from Latin America to Miami, it’s difficult to overlook the political or economic situations of foreign national buyers. Miami has very deep cultural and business ties that bind it to the rest of Latin America. There’s a very real bridge between the two—it’s what makes Miami such an interesting place to live in.