first majestic silver

Argentina is Flush!

January 7, 2002

From time to time we are told scary stories of foundering economies. There have been more of them than I can recount offhand, although the Mexican economic problem sticks in my mind. There, disaster was immanent, but along came the IMF and the World Bank, and now everything is just fine. Or perhaps perfectly miserable, but, either way, our attention is taken from Mexico by the news from Argentina. It's bad!

Argentina owes 141 billion, and can't pay it. The IMF pumped 8 billion into the country last August, and that "restored confidence" for a millisecond or two. But tax revenues have fallen 14 percent from last year, which wasn't a good year either. In fact, Argentina's economy has been in a slump for more than three years. And Argentina is Latin America's third largest economy. If Argentina tumbles, can the rest of Latin America be far behind?

The country's economists are concerned about a possible run on the banks, which would present the single biggest danger to the central bank's liquidity. In that case, according to cabinet chief Chrystian Colombo, Argentina might be willing to adopt the U.S. dollar, as Ecuador has recently done. At present, Argentina is operating under a "convertibility plan," by which it keeps a reserve of dollars to match every peso in circulation, maintaining the peso par with the dollar. In practice, pesos find little use in the economy, with 85 percent of private and corporate debt denominated in dollars. With the world economy faltering after September 11, the chances of a quick Argentine recovery seem dim indeed.

Well, not to worry! It's all a misunderstanding. In actuality, Argentina is doing just fine. Not being an economist, I do not make this cheery statement on my own authority, but on our own nation's monetary authority, the Federal Reserve. In the Chicago Fed's publication Two Faces of Debt we discover that situations like Argentina's are hardly cause for alarm. "Debts are assets," we read on page 5. "While debt is a claim on the assets and earnings of those in debt, it is also part of the assets of their creditors." In other words, that 132 billion in debt held by Argentina's creditors is an asset-worth 132 billion! Of course, the holders of that 132 billion could, at least in theory, claim Argentine assets worth 132 billion, but it works both ways. We read further, "For example, such a debt as a savings bond, a DEPOSIT ACCOUNT, or a corporate bond is as much an asset to its owner as a stock certificate or title to real estate." (Emphasis added) Government bonds, and checking accounts, are debts/assets. I assume that the loans to Argentina were in the form of deposit accounts, or debts/assets. In return, the creditors received Argentine bonds, or debts/assets. The "loans," therefore, were in the form of IOU swaps. We read, on page 4, "Technically, however, Federal Reserve notes are liabilities of the U.S. government." Whether Argentina received bushels of Federal Reserve Notes, or a few checks with very large numbers, it still received debt instruments. But wait---"Currency is so widely accepted as a medium of exchange that most people do not think of it as debt." Money is debt! Argentina has scads and scads of debt! Moreover, whether in the form of cash loans or deposit account loans, that debt is money. Argentina, in other words, paid for its 132 billion loan with 132 billion worth of government bonds. Where is the debt? American debt (i.e., money) was swapped for Argentina debt (i.e., money). Who owes what to whom?

True, the holders of Argentina's bonds may question what, if anything, they can buy if they liquidate those bonds; but if that is their concern, they should have foreseen it when accepting them as payment for their loans of dollars. Moreover, all of the dollars in Argentina's pockets or bank accounts are debts of the U.S. government, or U.S. banks. Are U.S. banks, or the U.S. governments, liable for anything with regard to their debts? Of course not. And elementary fairness demands that the same be true of Argentina. Are the holders of its debt instruments owed anything by Argentina's government or banks? No, certainly not. And even a child knows that a private person or corporation does not have to sell goods or services for Argentine pesos if he doesn't want to. He can simply keep his goods or services until someone with something better to offer comes along.

If Argentina had borrowed gold, or silver, or pork bellies, or wheat, the holders of its notes would expect payment in kind, or in something of equal value. But that isn't the case. Argentina borrowed debt, or credit, or money (or inflation?). The borrower received Argentina's notes, which are, as we have been told by the Fed, money, or credit (or inflation?). It's all over, IMF. You swapped your promise (never to be paid, and created out of thin air) for an imaginary mess of pottage, for a similar promise (never to be paid, and created out of thin air) for an imaginary batch of gazpacho. Live with it! That's the way modern money works. It demands everything, and delivers nothing. Freedom and fiat, we repeat, are incompatible!

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