The Argentine economy is in recession, the central bank's forex reserves are dangerously low, having fallen by almost half in the past few years, and inflation is raging. Worst of all, the government is doing everything wrong. Its peronist/populist president is completely out of touch with how economies work, and its economy minister is a young, starry-eyed socialist and former economics professor who wouldn't be able to get a teaching job in the U.S. to save his life.
Under Argentina's pegged exchange rate system, a loss of reserves is an unambiguous sign of capital flight: more money wants to leave the country than wants to come in. To enforce its currency peg, the central bank must sell dollars to accommodate those who want out. With reserves now critically low, the central bank has taken the further (and inevitable) step of rationing access to the official exchange rate. This means that those who want out are forced to use the parallel—or "blue"— currency market.
The problem started about four years ago. Once the government started rationing access to the official peso rate, a parallel, or black market for dollars soon developed and the official and "blue" rates started to diverge. The current gap between the blue rate and the official rate is now more than 70%, a sure sign that confidence in the peso is extremely weak. As the chart above shows, a similar gap opened up in the second quarter of last year, and it preceded a major devaluation of the official peso by some 8 months. Another official devaluation is almost certain, and with it should come even higher inflation and a further loss of confidence. Unfortunately, Argentina's leadership does not understand what is happening and refuses to take the appropriate corrective action, so hope for improvement is nil.
Fixing things would, among other things, require a substantial tightening of monetary policy. For years, Argentina's central bank has expanded its balance sheet in classic "money printing" fashion, by lending significant sums of money, mostly in the form of newly-printed currency, to the government, in exchange for a flimsy promise that it will be repaid. Argentina is literally a proving ground for the theory that when too much money (actual peso currency) chases a limited amount of goods, the result is inflation. As the chart above shows, the amount of pesos in circulation has increased at a 30% annualized rate for the past five years, even as the demand to hold pesos (people would much rather have dollars) has plunged. A rapidly rising money supply and a declining demand for that money is nothing less than a perfect inflation storm.
Fixing things would also require a return to free market policies, a commitment to a stable peso (e.g., something like dollarization), free capital flows, and a recognition that past debts must be honored. Unfortunately, the current government is loathe to even consider such measures, even though they could produce powerfully positive results.
Watching Argentina implode is like watching a slow-motion train wreck. It's inevitable and terribly destructive, and all for no purpose except to enrich the ruling class.
Venezuela is in much worse shape than Argentina, and Brazil is in a recession, and the Brazilian real is once again in decline. Even Chile, which had been doing so well for so long, is succumbing to bad policy decisions, with the result that its economy is slowing, inflation is rising, and the Chilean peso is falling. South America is in a world of hurt, with no lifelines on the horizon.