Saturday, March 14, 2009
Monday morning I leave for Argentina to visit friends and family for three weeks. My Argentine wife—who has been there for the past week while I have been skiing—and I lived there for four years in the late 1970s, and that is when I acquired a permanent interest in inflation, economics, and finance. During the time we lived there, inflation averaged about 7% per month, and was routinely in the triple digits per year. I remember one month in particular when prices rose almost 50%. I also remember when we went to Argentina in 1986 for a three week visit, and prices tripled during our brief stay. I went to the corner grocery store daily, and noted how prices were posted on chalk boards and were changed sometimes once or twice a day.
The image above is a photo of a 1 million peso note I keep as a reminder of how inflation works. When it was first introduced, sometime around 1978, it was worth the equivalent of about $2,000 dollars. When it went out of circulation about ten years later (caution--my memory may be failing me and I might be off a few years), it was worth the equivalent of about 20 cents. I asked some friends to collect a bunch of the notes for me, and I still keep them tucked away in a drawer. Who knows--they may be worth a bit more than 20 cents someday, if only as a curiosity.
When we were in Argentina in 1986, I remember my 6-year-old son was fascinated by all the banknotes that people carried around in order to conduct their daily transactions. They had denominations of 3-8 digits, and most were essentially worthless. Prices were routinely quoted in "palos" with a palo being slang for a million, much as we would say "5 bucks." A friend gave him a grocery bag full of old peso notes that he had collected, and my son went almost crazy with delight. "Wow, Dad, how much can I buy with all this money?" he asked me. "Well, Ryan, with all that money you might be able to buy a pack of chewing gum," I replied, even though the nominal value of the notes must have been in the tens of millions. I then tried to explain to him how inflation worked, but I quickly realized he just couldn't understand what had happened.
In 1979 we sold our house in Neuquén Argentina, in preparation for returning to the U.S. There was no such thing as a mortgage at that time, and hardly anyone had a checking account. If you wanted to buy a house, the best terms you could find were "0-30-90," which meant that you had to pay one-third of the purchase price at the time of signing the purchase contract, followed by the second third a month later and the third third in three months. The man who bought our house graciously agreed to pay me the full amount in cash at the signing of escrow. Before going to the escrow office to finalize the deal, we went to his office. There he took out several grocery bags full of money and started counting the bills; after counting each stack he passed it over to me, and I counted it, then he placed the stack back in one of the bags. I wish I could remember what the price of the house was in pesos, but all I remember is that the bills were of large denomination and they filled three grocery bags. It took us about 25 minutes to count it all. In dollar terms, we got about $30,000 for the house. After we had both counted the money and signed the escrow papers, he accompanied me to the bank, mainly in order to help me carry all the money and to serve as an informal body guard—can you imagine carrying cash equal to the price of a house in grocery bags while walking 6 blocks to the bank? I handed over the bags of money to the cashier and explained that I wanted to convert the pesos to dollars and wire the total amount to my account in the U.S. It took the cashier another 25 minutes to count and verify the bills. I was fortunate that at the time it was legal to convert pesos to dollars and to wire dollars to an overseas bank account—it hasn't always been like that.
Things have progressed significantly in Argentina since that time, but inflation and other bad government policies have left permanent scars on the economy. I hope to be posting interesting tidbits from Argentina during the next several weeks, commenting on how the country is faring under the leadership of the Kirschners, who are, like Venezuela's Chavez, in the process of nationalizing one industry after another. Already I know that there are too many things happening in the U.S. these days that remind me of what it was like to live under a regime that wants to control prices, regulate industries, and nationalize failing companies. Stay tuned, as thanks to the internet and Bloomberg I'll still keep posting comments on developments here in the U.S. as well.
Posted by Scott Grannis at 9:13 PM