When $100 gets you a sandwich and a Coke

The amount of currency in circulation in Argentina is just over $300 billion pesos, and it is comprised almost entirely of six different denominations of bills, as show above (coins are essentially worthless and hardly ever seen). According to the Argentine Central Bank, about two-thirds of all the currency in circulation is of the $100 peso variety, with the other third spread between the five smaller denominations. If my experience here is any guide, it is rare to see a $2 bill, and the occasional $5 bill is, in practice, the smallest denomination that most people are able or likely to use. Ironically, the smallest denominations are the hardest to come by, and when you do see them they are so frayed and flimsy that many of them are held together by scotch tape.

To put this in perspective, $100 pesos today is worth about $8 dollars (US) on the black market, and about $11 dollars at the "official" rate. Imagine how it would be if consumers in the U.S. were limited to buying things in increments of 40 cents ($5 pesos), and if the largest bill available were worth less than $10. My friend (the one whose daughter got married yesterday) today told me that in order to pay for the wedding and all the people involved, he had to disburse an amount of bills (most things are still paid for in cash here) that would fill almost two shoeboxes. It's become almost comical, and reminiscent of the stories of hyperinflation we have all heard when people had to use wheelbarrows to carry enough currency to pay for daily expenses.

Why are things so crazy? For one, it's the inevitable result of a classical monetary inflation. But it's also because the government doesn't want to officially recognize that inflation has been running at 25-30% for the past six years—printing larger denomination bills would be equivalent to legitimizing all that inflation. That's silly, of course, since you can't cover up an inflation that is fundamentally driven by an almost 30% annual increase in pesos in circulation (see chart above) over the past six years by printing tons of small-denomination bills. Prices are going up at a significant pace, and it doesn't matter what denomination the bills have.

In an attempt to remedy this idiocy, an opposition politician recently proposed a law that would create bills of $500 and $1000 pesos. The government will certainly oppose this measure, but eventually it will pass in some form or other because otherwise the average citizen will need a huge wad of currency in his or her pocket just to make it through the day. Meanwhile, a $100 peso note will buy you a sandwich and maybe a Coke.

For us Americans it's not so bad, since $100 pesos will also get you a decent bottle of wine in most restaurants, or even a decent steak. And despite the inflation, Argentines are wonderfully nice people and the food is terrific.