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Argentina Joins Venezuela In The Currency Crisis Club

May 4, 2018

In interviews, whenever I try to make the case that US policies are leading to the kinds of currency disruptions common in developing countries, I say something like, “For a glimpse of America’s future, take a look at Argentina, where they’re eating cats and dogs because of hyperinflation … wait, no, I meant Venezuela.”

Mixing up countries kind of dilutes the power of the statement, but for some reason I can’t seem to help it.

That might not be a problem going forward, though, since Argentina seems to be joining Venezuela in the currency crisis club.

To understand what happened we have to go all the way back to the Spanish invasion of the Americas in the 1500s. Conquistadores showed up, enslaved the locals and set up oligarchic systems in which a handful of Spanish families owned pretty much everything, backed up by police states that brutally suppressed dissent.

When Latin American countries eventually kicked the Spanish out they kept their oligarchies.

This massive wealth disparity led to continuous cycles of repressive dictatorships alternating with socialist reform governments bent on equalizing things even at the cost of currency destruction — which of course leads back to dictatorship.

So it’s Spain’s fault but Latin America’s problem.

Now, much more recently – and more disappointingly – two things have happened:

First, Argentines elected Mauricio Macri, a pro-business reformer, as president. He proceeded to liberalize investment rules and invite in foreign capital. This produced some initial growth and encouraged global investors to buy Argentine bonds. Meanwhile, emerging markets in general were seeing strong demand from abroad thanks to global growth and rising commodity prices. Developing nations borrowed a lot of US dollars and put the cash to work building infrastructure like roads and power plants designed to make their economies more efficient.

So far so good. But with presidential elections approaching in 2019, Macri fell prey to the temptation to juice growth artificially by ramping up government spending and leaning on the central bank to finance that spending with newly created currency — despite the fact that inflation was already in double-digits.

The predictable result: a rapidly weakening currency (the peso fell by nearly 8% versus the dollar in a single day this week) which makes all those dollar-denominated debts impossibly hard to pay off, which puts additional downward pressure on the peso, and so on, until a currency death spiral looks both inevitable and imminent.

Then comes the desperate round of interest rate hikes to protect the currency – in Argentina’s case a benchmark rate that is now over 30% — which reverses the social and economic gains of the past few years by making it impossible for locals to borrow to cover their obligations.

The final stage is a political/economic collapse in which the central bank runs out of foreign exchange reserves and gives up, replacing the old currency with a new one featuring fewer zeros. Civil unrest (as citizens realize that their savings have just evaporated) leads to the replacement of the old profligate government with one that promises not to repeat the same mistakes. And the cycle begins again.

For a glimpse of what else might happen along the way:

Venezuela boosts minimum wage 155 percent to fight inflation

(Associated Press) — Venezuela’s president says he’s boosting the minimum wage by 155 percent to keep up with runaway inflation that’s making it difficult for people to afford daily goods.

President Nicolas Maduro issued an order Monday that brings the monthly wage to 1 million bolivars, or $1.61 on the commonly used black market. It’s the third increase this year.

Despite having the world’s largest proven oil reserves, Venezuela is in its fifth year of an economic crisis worse than the Great Depression.

The International Monetary Fund has said it estimates that Venezuela’s inflation could soar 13,000 percent by year’s end.
Maduro will seek a second six-year term on May 20.

He blames inflation on so-called imperialists who he says he’ll overcome once he’s re-elected.

You read that right: Oil-rich Venezuela has a minimum wage of a buck-sixty a month.

Why should we care what happens in countries that seem to exist in a permanent state of currency crisis? Because the developed world is now making the same mistakes, choosing to finance their way through each war and/or election cycle and worry about the currency implications another day.

For Argentina that day has come. For the US, Europe and Japan –unless you assume that we’re somehow exempt from the laws of economics and finance, that day is coming.

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