Friday, August 31, 2012

Argentina takes a giant step towards another big devaluation

Today the Argentine government announced that any Argentine using a credit card to buy stuff outside the country will have to pay an additional 15% when they pay their bill in pesos, although they can apply this amount to what they may owe in income taxes. This is nothing other than a flimsy attempt to disguise what is a 15% devaluation of the peso.

Those familiar with the goings-on in Argentina know that since last October, the government has been trying desperately to restrict the ability of its citizens to exchange pesos for dollars, because dollars have been in short supply. Imports have been strictly limited, and those traveling abroad must do the impossible to justify their right to buy dollars to pay for their expenses. But one big loophole remained: those with credit cards could continue to buy things overseas and pay for those purchases at the official rate. Now that loophole has been partially closed.

We have some good friends from Argentina staying with us right now, and they were dismayed (to put it mildly) to find out tonight that, starting September 1st, their expenses, if paid by credit card, will suddenly cost them 15% more.

At this point it is practically inevitable that Argentina will eventually declare a major devaluation of the peso. It will probably be at least 40% if not more. As of a few days ago, the "parallel" rate for the dollar was about 6.5, whereas the official rate was 4.6. In other words, the market has been expecting a 40% devaluation. After today's announcement, the parallel rate will undoubtedly rise even more.

When the government restricts people's ability to buy something—in this case dollars—that almost guarantees that the price of that prohibited thing will rise. If Argentines are not free to exchange their pesos for dollars, they will pay almost any price to do so. A currency which is not freely convertible soon becomes worthless. Unfortunately, I have seen this play out so many times in Argentina that I'm amazed that there are still 40-some million people in the country who are willing to suffer under their miserable excuse for a government.

If you want a good reason why the dollar is still so much in demand, this is one. The Fed may be acting irresponsibly, and our government may be spending irresponsibly, but things are not as bad here as they are in Argentina.

10 comments:

Benjamin said...

The Fed is acting irresponsibly?

Dr.Perry, over at Care Diem, recently intoned that "inflation is dead." I agree.

If the Fed has killed inflation in the wake of the worst recession since the Great Depression, I would say the Fed is acting irresponsibly---towards people who depend on making a living by working or investing in our economy.

Gloeschi said...

This, too, is obviously Obama's fault, and the Mitten will fix it.

Gil Rodveltz said...

With respect to your visiting friends...This is a classic example of: "A people get the goverment they deserve"
After all Madame Presidenta is the democratic choice of most of the voting citizens.

Dr William J McKibbin said...
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Dr William J McKibbin said...
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William said...
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William said...
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William said...

Bloomberg on Paul Ryan's Sub three hour Marathon:

"The Republican vice presidential candidate, a Wisconsin congressman, said on the Hugh Hewitt Radio show Aug. 23 that his personal best for a 26.2-mile (42-kilometer) marathon was “under three, high twos. I had a two-hour-and-fifty something.” I was fast when I was younger, yeah,” Ryan said, according to an online transcript of the interview. “I hurt a disc in my back, so I don’t run marathons anymore.”

"After Runner’s World magazine reported on its website it couldn’t find any marathon results by Ryan, his campaign told the publication he ran a race called Grandma’s Marathon in Duluth, Minnesota, while he was a college student. Ryan finished in 4 hours, 1 minute and 25 seconds in 1990, the magazine reported yesterday."

Oh, well. We all tend to recall our youth with exaggeration.

http://www.bloomberg.com/news/2012-09-01/ryan-retreats-from-claim-he-ran-marathon-in-under-3-hours.html

marmico said...

"Marathon Man" Ryan took his 4:01 Rosie Ruiz time to 2:59 after he cut the marginal tax rate (time) and broadened the tax base (subway). It's a piece of cake when you don't specify which subway. :-)

Family Man said...

How big is Argentina bonds market?