The geniuses at work in Argentina. How our current situation will most probably play out also.
The signs are all there. The streets of Buenos Aires have recently seen the return of the backstreet currency exchange.
According to the ofﬁcial exchange rate, which is subject to capital controls, 4.4 pesos buys you a dollar. But on the street, people are happy to pay up to 6.7. Inﬂation runs at 25%. The purchasing power of an Argentine's peso savings is going down by one-quarter each year.
The government claims inﬂation is 9.9% and has outlawed calculating or quoting any other inﬂation rate. Forty percent of dollar deposits have been withdrawn from Argentina since last October. Now there are capital controls. You need special permission to move your dollars overseas.
To take a foreign vacation, Argentines have to apply to a bureaucrat for permission and explain where they got the money for the trip. And there are rumors that it will be made illegal to talk about the existence of the shadow market exchange rate for dollars.
But a lot of Argentines' dollars and pesos don't reside in bank accounts. Property transactions typically take place in special rooms in lawyers' ofﬁces, and they're cash deals. There's that much distrust of banks. They are ﬁne for day-to-day things like paying your electric bill. Not for your savings, though.
And these transactions more often than not take place in dollars… If you pay in dollars, you could get 25% off the price of property. The government has outlawed this, making the buying and selling of real estate in dollars illegal. Just one more rule Argentines will ﬁnd their way around.
By some reports, if an Argentine company complied with all the taxes and tariffs it faces, they would eat up more than the company's pretax proﬁts. So the shadow economy thrives… by necessity, it seems, rather than greed to pay less tax. Middle-class day-trippers take the ferry to Uruguay to put their savings in deposit boxes. The rich spend millions on condos in Punta del Este, Uruguay.
For Argentines, real estate is their bank. They understand inﬂation and expropriation from bank and pension accounts. If they have some spare cash, they'll buy an apartment. Or a beach home across the Río de la Plata in Uruguay. Or a condo in Miami.
Now, fewer Argentines are using local real estate as a hedge against inﬂation. New construction and permit applications have fallen off a cliff. They just want their cash out.
The government claims that the rate of outﬂow has slowed. But with every passing week, companies and individuals ﬁgure out new ways to get their cash out. For instance, companies buy ﬁnancial instruments locally in pesos that they immediately resell in New York for dollars.
Argentines have seen it all before. When a government and a banking system take your life's work with the stroke of a pen, you don't forget. If you're lucky enough to rebuild your savings, the next time you will be ready. And the harder the Argentine president, Cristina Kirchner, tries to keep assets in the country, the more they'll be siphoned out.
Meantime, Argentina is all but frozen out of international debt markets. The government hasn't reached a settlement with the group of creditors (known as the Paris Club) since its last default. So the country and the banking system desperately need these deposits to stay aﬂoat.
But they continue to do incredibly dumb things. Two years ago, President Kirchner seized private pension accounts. Now she is going to lend $4.4 billion of this money, at a rate of one-tenth the inﬂation rate, to new home buyers. A lottery will decide who gets the loans – not capacity to repay.
Argentina has major competitive advantages in beef production. But land under beef farming is contracting. Beef producers face large and complicated export tariffs and are forced to sell cheaply to the domestic market. Many have moved operations to Uruguay or switched to soya.
It's one crackpot idea after another. And the cycle repeats. Expropriating your citizens' savings or international companies like YPF (a subsidiary of Spanish oil company Repsol), which President Kirchner nationalized last April, might buy you some time. But not much. The writing is on the wall.
In the last crisis, the trigger event was Argentina's massive default on its sovereign debt. This time around, Argentina doesn't face that scenario. Government spending has to be funded from printing presses, taxes, and expropriation of personal or company assets. It's hard to see how the government can collect more taxes. The printing presses are already causing the inﬂation and the rush to backstreet currency-exchange brokers. There's a limit to what you can expropriate.
This time around, the trigger event for a full-scale crisis will be the country running out of hard currency. There will be no money to pay for imports. Argentina can make do without more Porsches and Gucci handbags, but the country will grind to a halt if industry and energy-producers can't get their hands on crucial imports. The factories will shut.