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Don't Cry for Central Banksters
How to destroy a thriving economy... lessons from Argentina to America
Bill Bonner, reckoning today from Dublin, Ireland...
Hola! Bienvenidos a Argentina!
What did we learn from two months in a country with 100% inflation?
“The most surprising thing,” says a friend, “is that it doesn’t seem to matter. The restaurants are full. People are spending money. Life goes on.”
Our cab driver voiced much the same sentiment.
“Yeah…it’s a crazy country. But we have good meat. Good vegetables. Pretty women. And Messi. [Argentina’s world champion soccer player.]
“Yeah…” he went on, after a moment of reflection… “it’s nice here…but only if you have dollars.”
Gresham’s Law in Action
We confirm that a person with dollars can live well on the pampas. Our last night in Buenos Aires, for example, we went to the very popular restaurant, Fervor, in Recoleta. The place was packed with foreigners and locals. No wonder; the meat was among the best we ever had. And with a good bottle of wine from Mendoza, the meal…the service…the ambiance – all were near perfect.
A popular restaurant in a capital city is bound to be expensive. Compared to our dining in Salta, it was expensive. But at $30 a person, compared to prices in New York or London, it was an incredible bargain.
And that is true of many things – not tractor parts! – in most of the country. Almost everything is cheap…in dollars exchanged at the black-market rate.
Great for foreigners.
But this is just an example of a broader, more universal truth: the particulars matter. You may say that “all cats are the same.” But life for a scrawny alley cat in West Baltimore is very different from life for a pampered pet of the bourgeoisie in Harbor East. So too, even in a country with 100% inflation, some people live well. Many young people, for example, get paid in dollars…or bitcoin. Older people may rent out apartments, or be able to raise prices in their businesses to keep up with inflation.
Almost everyone spends pesos and keeps dollars. The upper classes have investments in the US and Europe. The lower classes buy bricks and mortar…adding spare rooms and garages, confident that no matter what happens to the peso, the concrete will still be there. Credit is almost impossible to get, so buildings go up a brick at a time, as owners spend their extra pesos.
At today’s inflation rate, bricks double in price every year.
But what about the US? And here is where looking back at Argentina may help us look ahead at America. What we see is that when countries work themselves into an inflationary jam, inflation begins to look like the least of their problems.
Panem et Circenses
For all the blah, blah on the subject, there are still only two possibilities. Either individuals decide for themselves what they want…and get it by ‘voting’ for it with their own money. Or someone else decides. The ‘someone else’ is always the big-mouth busybody who pretends to be selflessly acting on behalf of some greater good…some common good – equality, saving the planet, the Triumph of the Proletariat….Deutschland Uber Alles…or whatever.
In Argentina, in 1919, Roque Saenz Pena, then president of Argentina, thought he had taken a giant step forward for mankind when he backed universal suffrage for all men. Not only did he allow them to vote, his Saenz Pena law made voting mandatory. Then, a few years later, women too, were brought into the scheme.
Opponents argued then that the masses lacked the education or the sophistication to vote intelligently. They were right. But the poor knew what they wanted. And, in 1946, for the first time in Argentine history, a candidate was able to win the Casa Rosada (equivalent to the White House) by promising to give them more of it.
Juan Peron had a smile like an ad for toothpaste. And he could do math. He quickly realized there were more poor voters than rich voters. And their votes were relatively cheap. The formula was such a hit, it ruled Argentina for the next 7 decades as the country slid downhill, from the 7th richest nation on earth…to number 86!
What happened was no mystery…and no surprise. When you give away free stuff, you have to pay for it somehow. Peron taxed the rich. He taxed the middle classes. He taxed the productive parts of the economy and gave the goodies to the unproductive part. Output went down. But the demand for free stuff did not slack off. And soon, the tax base depleted, the politicians turned to borrowing. Tax, spend, borrow, default, print. The country has defaulted nine times. By 2001, Argentina defaulted on the biggest pile of debt ever – $100 billion.
When the loans gave out, the gauchos turned to the time-honored scams of desperadoes everywhere: war and inflation. The first distracts the public; the second rips them off.
In 1976, the generals staged a military coup and took power from Peron’s second wife, Isabelita. In 1982, they attacked the Falklands/Malvinas islands. By 1989, inflation was running hot – at 1,000%.
Then, Carlos Menem restarted the cycle. The peso was pegged to the dollar, one to one. That emboldened borrowers to borrow and lenders to lend. Pretty soon, they had borrowed too much…and the one-to-one peso/dollar peg blew up. Then, prices rose again.
When we first came to the pampas, the exchange rate was one-to-one and Menem was in the Casa Rosada. Then, a couple of years later, in the early 2000s, the rate had gone to 3 to one. Skip ahead to this year – and we were getting almost 400 pesos per dollar.
Why don’t the Argentines put a stop to the spend-borrow-default-inflate cycle? Because once you get into it, the only way to stop it is financially painful – with recession/depression/bankruptcies/unemployment etc. But the real reason it goes on is because it becomes almost impossible, politically, to stop it. First, the masses want free stuff. Later, they depend on the free stuff. That’s why the US – where ‘transfer payments’ have gone up 290 times since 1954 – will find it almost impossible to stop the cycle too.
But the most charming (and loco) thing about Argentine finance is the way people are willing to let bygones be bygones. Yes, Argentina is a serial defaulter. But that didn’t stop the country, in 2017, from selling more than $2 billion worth of 100-year bonds. If history is any guide, investors will get wiped out…not once, but several times, as the government will default five times before they mature.
So, what do we take from this experience…Argentina’s history…and our own history with it over the last 25 years?
An inflation-and-default prone financial system is not the end of the world. But it requires a different attitude…less trust and more caution. The money rots faster than a ripe banana. Everyone struggles to get rid of it. People feel they have been ripped off – as they have – and then they don’t feel so bad about ripping other people off.
A taxi driver may inflate his prices. A restaurant may give you the wrong change. A business may bill you incorrectly.
And everyone will cheat on his taxes. Almost every major deal includes some ‘black’ money as well as some ‘white’ money. And then there’s the ‘blue’ money….the dollars you get from exchanging money at the free market rate; you don’t want to have too many of them, lest you have to explain where you got them.
Every transaction requires quick calculations…and flexible book-keeping. Every relationship demands trust…and verification. And every experience comes with a certain amount of ambiguity…a moral and financial fluidity. It’s like having a picnic on the side of an active volcano; you need to relax in order to enjoy it…
…but be ready to run.
Bill may have only been gone a week or so… but already the exchange figures he was experiencing while in town are long out of date. Shortly after last week’s inflation print hit the presses on Friday, showing prices rising at a blistering 104.3% rate annually, the highest level since 1991, the “dólar blue” was off to the races.
A euphemism for the “black market,” the “dólar blue” rate represents what people actually pay on the street… as opposed to the “official” rate, which nobody bothers with. The blue rate shot through the 400:1 mark late Friday… then opened Monday at 408:1. This morning we saw it quoted at 412:1. Long lines snake out of the illegal exchanges and around the block, as workers… shop owners… even policemen, line up to offload their fast-depreciating fiat. And daily does the price of escaping peso inflation extend beyond the reach of the long-suffering Argentine people…
Some porteños have even taken to calling it the dolor blue (“dolor” being the Spanish word for “pain.”)
Predictably, folks convert their fast evaporating pesos as quickly as they can, into bricks, gold, foreign currency, crypto… anything they can get their hands on. And here we see Gresham’s Law – simply stated as “bad money drives out good” – in action. Bad/unreliable pesos push good money onto the sidelines, into foreign accounts and under the mattress.
Of course, the Argentine government is doing all it can to make a bad situation worse, such is its wont. Elections later this year, in October, will determine whether voters are desperate enough to “throw the bums out.”
Meanwhile, up in American del Norte, the feds are likewise running low on dollars… even those they print themselves! BPR’s macro analyst, Dan Denning, forwarded this chart along this morning…
As you can see, at only $109 billion, the Treasury’s coffers are looking rather slim. It’s almost as if long-abused dollars are falling out of favor in international trade…
Janet Yellen herself admitted as much on Sunday, when she told CNN…
“There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar.”
In totally unrelated news, the Standard Chartered Renminbi Globalization Index, which measures international renminbi usage in global trade, rose 26.6% last year as BRICS nations sought alternative settlement mechanisms beyond the US-imposed ruble sanctions.
When the Argentines begin trading pesos for rubles and renminbi, instead of dollars and euros, we’ll know the jig is up…