A PhD in Monetary Catastrophe
Managing Editor’s Note: As you know, Bill believes the U.S. is about to experience a violent monetary shock.
So today, we’re sharing with you a classic from the archives. It’s Bill’s firsthand account of Argentina’s monetary crisis. But as an American, you may be about to experience a very similar situation…
The value of the peso changes rapidly. There is the official rate. And there is the unofficial rate.
Nobody knows what a peso is worth. Many people – including your humble editor – have to do some pretty serious calculating. The parts of his brain that do math must be swelling from overexertion.
“We need gas for the truck,” said Elizabeth yesterday.
“Well, I don’t have any more peso cash. Let’s put it on a credit card.”
“They don’t take credit cards. Cash only.”
“Then let’s pay with dollars.”
“Don’t be silly. That would cost us 50% more. He won’t give us a good rate.”
“Then let’s get some pesos at the ATM.”
“That’s just as bad… we’ll get the official rate.”
Let’s see: We want to pay in pesos, but only if we get the pesos at the unofficial rate. Otherwise, it’s better to pay in dollars, but only if the person on the other side will take the dollars at the “blue” or free-market rate.
Usually, you end up somewhere in between. If you try to bring money into the country, the government insists you trade it on the official market. But you can still work out trades at the “blue” rate – either by bringing physical cash into the country or by working with an unofficial money changer.
The money changers buy bonds for you in Miami. Then they sell the bonds in Buenos Aires. The market for the bonds should be about the same in both cities. The money changer is happy to have his dollars. You are happy to have pesos that you can spend – or in our case, pay our farmhands and farm expenses.
It is always a pleasure to visit Argentina. It is a country where economic disaster stories are daily life… where economists’ daffy theories are government policy… and where everyday citizens have to figure out how to deal with a monetary system that is half-mad… and half merely incompetent.
When we are here, we need to spend pesos… especially out in the country, where people’s math skills are not as well developed as they are in Buenos Aires. But any serious purchase – say, if you’re buying an apartment – requires dollars… either on top of the table or underneath it. So you have to be prepared.
Most people want dollars. But they can’t take them. Because the Argentine feds will ask a lot of questions. If a merchant takes dollars at the unofficial rate, the feds will give him a hard time.
That leaves buyers and sellers of dollars getting together in dark “caves.” Dow Jones reports:
Argentina’s foreign-exchange market is going underground. As the government restricts access to foreign currencies, Argentines seeking hard-to-get dollars have been pushed into cuevas, or caves – clandestine operations where customers pay dearly to exchange pesos for greenbacks.
Buying dollars for savings is banned, and authorities make only small amounts of foreign currency available for travel abroad. Travelers must submit an online request to the national tax authority just days before leaving, and they usually receive approval for much less than they requested.
Businesses need government approval to import equipment and materials at the cheap official exchange rate. The national tax agency has even posted dollar-sniffing dogs at border crossings to catch those traveling with undeclared currency.
A visit to Argentina is like getting a PhD in monetary catastrophe and economic mismanagement. It reminds us how politicians can really make a mess of an economy when they put their minds to it.
June 10, 2015
Further Reading: Tune in tomorrow and Friday for the conclusion to Bill’s series on how to spot the real criminals in a world where everyone is a lawbreaker. He calls it “The Good, the Bad, and Ugly.” Catch up on Part I and Part II here.
Currency Wars Claim Another Victim
The currency wars are heating up…
To recap real quick – with central banks around the world relying on currency debasement to “steal” economic growth from one another, it’s causing MAJOR swings in currencies’ exchange rates.
A lower exchange rate makes a country’s exports more competitive… helping boost economic growth.
For example, since May 2013, the exchange rate of the Russian ruble has fallen by 40% versus the dollar, the Brazilian real is down by about 30%, and the Indonesian rupiah is down by 25%.
But over that time, the Korean currency, the won, has stayed roughly flat versus the buck.
So far at least, export giant South Korea has stayed out of the fray.
And with good reason… Korean households are some of the most indebted in the world. Koreans owe about 160% of their disposable income. (It’s 102% in the U.S.) If the Korean central bank lowers interest rates, it risks sparking an even bigger – and more dangerous – debt binge.
That creates a dilemma for Korea.
As you can see from today’s chart, the Japanese yen has fallen 20% versus the dollar since the start of May 2013.
The weaker yen makes Japanese exports cheaper relative to their Korean counterparts. This has punished Korean exporters – companies such as carmaker Kia and smartphone giant Samsung.
And in May, Korean exports dropped 11%, the biggest fall since the summer of 2009… in the depths of the global financial crisis.
Of course, every problem is an investment opportunity. As the saying goes, “Except for thieves, who would buy locks?”