The Argentina Government Plays a US Dollar Con Game

Running out of US dollar reserves, the increasingly desperate regime of Argentina President Cristina Fernandez de Kirchner plans to tap on the US dollars held by their informal economy by issuing US dollar based IOUs

From Bloomberg: (bold mine)

President Cristina Fernandez de Kirchner’s wish of being able to print dollars is coming true as the central bank begins issuing dollar-denominated certificates today that trade in pesos.

Argentina is issuing the certificates, known as Cedines, as part of a tax amnesty plan to attract undeclared cash back into the economy. The nation’s foreign reserves have fallen at the fastest pace in more than a decade to a six-year low of $37.2 billion, as Argentina uses the money to pay debt instead of borrowing dollars at interest rates that are more than double the 5.95 percent average in emerging markets.

Fernandez, who said last year that it was unfortunate she didn’t have a “little machine” to print dollars, is trying to tap some of the estimated $160 billion held by Argentines under mattresses or in bank accounts abroad, to ease dollar demand stoked by more than 30 measures that she has imposed since 2011 to restrict access to foreign currency. While the measure is designed to provide individuals dollar-backed claims that can be used for real estate and energy projects, Empiria Consultores says Argentines will just exchange them back for U.S. currency.

More from the same article:

The reference value for every $100 of Cedines, is 90 for purchase and 93 for sale, for an implied exchange rate of 7.2 pesos per dollar, according to a recently created website called Cedin Trading.

That rate would be weaker than the official rate of 5.3903 and stronger than the black market where Argentines pay as much as 8 per dollar. A fourth rate used for financial transactions by swapping bonds and stocks was 7.8257 at 4:26 p.m. in Buenos Aires….

Fernandez is seeking to reverse a rout in property transactions after her ban on buying foreign currency almost paralyzed the dollar-based market.

Undeclared dollars can also be traded for a government-issued bond maturing in 2016 that will pay a 4 percent annual interest rate that will be used to finance the energy industry and state-run YPF SA.

First the Argentine government prevents her constituents from transacting in US dollars, so the public kept them outside of the grasp of the government and from the government controlled banking system.

Now that such confiscatory policies has backfired, the Kirchner regime hopes to usurp people’s savings held in foreign currency via unfunded US dollar based IOUs or certificates which is why this program looks like a sting or a con game.

Yet Argentina’s fiscal intemperance will only mean higher inflation and economic stagnation ahead.

As Simon Black of the Sovereign Man expounds: (bold mine)

Inflation here is completely out of control. The government figures say 10%, but the street level is several times that.

Curiously, even Cristina acknowledges that prices are way too high. But rather than rein in spending and stop the money printing, she’s digging her high heels in even further by launching a new clothing line.

This new brand– NYP (Nacional Y Popular) will be owned and run by the government, selling everything from jeans to shirts to shoes at prices below 100 pesos (less than $20 officially).

In every instance, they just keep going further down the rabbit hole of more government control, more central planning. It’s like living inside the pages of Atlas Shrugged.

In a world where capital seems to be shrinking as evidenced by the ongoing bond market rout, the global governments appear as likely to increasingly resort to political, economic and financial repression measures in order to fulfill the whims of their political leaders and to preserve the status quo or the privileges of the political class.

Developments in Argentina and Venezuela seem as the proverbial writing on the wall.

What life is like in a Sovereign Default and Currency Collapse

Simon Black of the Sovereign Man quotes the experience of his friend during the Argentina economic crisis of 1999-2001.

During the crisis, the Argentine government froze bank accounts for 12 month (known as Corrallito).  This engendered an environment known as confiscatory deflation first, and when such restrictions were lifted, a burst of inflation

Such nightmare has been neatly captured in “what it’s like to live through a sovereign default and currency collapse” (bold original)

On December 1, 2001, Argentina’s economy was in trouble. Unemployment was high, debt was high, and recession had taken hold. But life was somewhat ‘normal’.

Basic services still functioned. And no one had to really worry about… food. Or water. Then it all changed. Literally within a day.

On December 2nd, our bankrupt government imposed measures that essentially froze everyone’s bank accounts. You can just imagine– one day having access to your funds, and the next day being completely cut off.

Within a matter of days, people were out in the streets doing battle with the police. The government soon defaulted on its debt, and the currency went into freefall.

I was doing some post-graduate work in Boston at the time. As a foreigner in the US, I wasn’t really able to work… so I was living on a tight budget from my savings.

Yet, overnight, I went from being able to pay my rent and living expenses to being completely cut off from my funds. I had nothing.

But when I spoke to my family back in Argentina, I realized that they had it even worse.

Everything became scarce. The electricity went out all the time. Even food on the grocery store shelves ran low. You would eat what you had available at home.

And in a way, food became a medium of exchange. Within just a few days, people went from having confidence in their currency to not trusting it at all. No one wanted to accept paper money anymore, especially for something as valuable as food.

And if they did, it would be at 2-3 times the normal price. With all of this unfolding, I flew back down to see my family.

My father called me and said he had stashed his life savings in US dollar cash in a bank safety deposit box. He needed my help getting it out.

When we arrived to the bank, there were thousands of people in the streets rioting. The police were there in paramilitary gear. It was so tense, we had to bribe someone just to get inside the bank.

Fortunately we were able to get access to the box. But… we had to walk 3 or 4 blocks to the car. It was half panic, half adrenaline rush walking past an angry crowd with my father’s life savings shoved down our pants.

Looking back, this was crazy. But at the time, it was the only way. Then came the even harder part– getting it out of the country.

We had friends who would take rowboats full of cash to neighboring Uruguay. But this was incredibly risky.

At the time, the only legitimate way to get money out of the country was buying ADRs (Argentine public companies listed on the New York Stock Exchange). And the only reason we were even able to do this was because we had the contacts.

But we got killed on the fees. The commission alone was 20%, and then, of course, the stocks we purchased took a dive.

So my father ended up losing about half of his savings trying to get it out of the country at the wrong time.

What’s funny is that we eventually ended up suing the government. They had destroyed everyone’s life savings, and even seized pensions as well.

The government dragged out the legal process for years, almost a decade. They were hoping that all the retirees who were suing them would simply die off, and the problem would go away.

Eventually, we won the case (along with thousands of others). But the judge gave the government a ‘suspended sentence’. So, no penalty.

There are so many more stories to tell about this… and fortunately I can laugh about it all now. But at the time, it was beyond stressful.

The best way I can describe it is despair. And this is really the worst emotion you can have. Because when you’re in a state of despair, you’re hopeless. It’s a terrible position to be in.

Life becomes hell because you do not know whether you are going to be able to put food on the table the next day.

And in such a state of despair, you’re not in a position to make good decisions. It’s all about survival.

Of course, we kept thinking, “why didn’t we see this coming? Why didn’t we do something sooner?”

If only we had moved some money out of the country before, or taken steps to safeguard his pension, life would have turned out much differently.

It’s like that old saying– better to be a year (or decade) too early than a day too late. Because one should never underestimate the speed with which things can unravel.

The vicarious anecdote above exhibits the agony from deteriorating events during a crisis. This happens especially when political authorities scalps on people’s savings to bailout themselves and their friends. And importantly this becomes an affliction when people fail to prepare for such eventuality.

While every crisis will be distinct, in as much as every economy is like a thumbprint, the common feature will be entrenched hardship.

Realize that for every artificially inflated boom the consequence will be an economic bust that could lead to sovereign debt crisis or even a currency collapse. The Argentine economic crisis should be a paradigm to learn from.

Yet ironically, the Argentines fail to pay heed to such harrowing episode; their fascist-crony political economy have been enduring the transition from stagflation to hyperinflation.

Argentineans Find BMWs, Bitcoin and Gold as Inflation Hedges

The Argentine Peso continues to massively devalue to the point that they have become symptoms of hyperinflation. 

In barely a few days the peso has sunk to its weakest level ever at 10.45 pesos vis-à-vis the US dollar. As of last week, the implied annual rate of inflation, based on 9.87 pesos/USD, is at 98.7% as estimated by Cato’s Steve Hanke. In short, the peso fell by whopping 5.9% in less than a week. 

Yet Argentines don’t just hold cash and see their savings erode, they have sought refuge partly through purchases of luxury cars.

From the Bloomberg:

Argentines are buying more BMWs, Jaguars and other luxury cars as a store of value as inflation decimates their deposits and pummels the nation’s bonds.

Purchases of cars from Germany’s Bayerische Motoren Werke AG (BMW) and Jaguar Land Rover Automotive Plc, owned by India’s Tata Motors Ltd. (TTMT), jumped the most in April among brands sold in Argentina. The sales were part of a 30 percent surge in car sales from a year earlier that was the biggest increase in 20 months, according to the Argentine Car Producers Association. While used-car prices rose in line with inflation last year, or about 25 percent, peso bonds tied to consumer prices fell 13 percent. The drop was the biggest in emerging markets.

Car sales in Argentina increased by the most in almost two years last month as a ban on buying dollars made Argentines turn to vehicles to protect savings against the fastest inflation in the Western Hemisphere after Venezuela. Luxury models are becoming more attractive because they are imported at the official dollar rate, said Gonzalo Dalmasso, vehicle industry analyst at Buenos Aires research company Abeceb.com. Argentines with savings in dollars are able to purchase cars at half the cost by trading in the unofficial currency market.

It is not clear how the operations of these high end car merchants remain viable considering the wide disparity between currency rates from which such trade has been conducted. The blackmarket rate is nearly about 50% below the official rate, this should translate to significant economic losses for these firms.

On the other hand, used car sellers appear to be losing money as selling prices has only been expanding at the statistical inflation rate of 25% when real inflation rate has been above 90%. 

The unevenness of returns suggests of something fishy behind the surge in luxury car sales.

Though barter has reportedly been one of the options taken by these firms. From the same article:

The decree prompted BMW to export rice and Porsche Automobil Holding SE to begin exporting olives and Malbec red wine. Shizuoka Subaru Motor Co. agreed to export chicken feed, Hyundai Motor Co. began sending soy flour to Vietnam and Mitsubishi Motors Corp. (7211) started shipping peanuts.

These reports are really questionable.

Rather I suspect that these luxury car dealers are cronies or political allies, who are subsidized by Argentina’s politicians through the government. In turn, Argentina’s political elites and their allies could have been the major buyers of these high end cars.

In short, subsidies to exotic car traders are really transfers or subsidies to the political class and their cronies in disguise.

Yet the average Argentinean seeks gold and bitcoins as refuge.

More from the same article:

Argentines are buying cars, gold and even virtual currency such as bitcoin as they look for ways to preserve their savings as the peso is forecast to fall 17 percent this year.

It's pretty obvious that Argentina has gone into a debt default route via inflation. Again from the same article:

Argentina’s dollar-denominated bonds aren’t a better alternative as a U.S. legal dispute on repayment of the nation’s defaulted debt caused average yields to soar to 13.92 percent, almost three times the average in emerging markets, according to JPMorgan Chase & Co.

The notes have plunged 10 percent his year.

The rate banks pay for 30-day deposits of more than 1 million pesos was 15.38 percent on May 10….

The cost to insure Argentine debt against default within the next five years through credit default swaps rose 107 basis points to 2,770 basis points, according to data compiled by CMA Ltd.

While inflation and a gap in the exchange rates is fueling sales, the same reasons are also deterring investment in the car industry, said Cristiano Rattazzi, President of Fiat Auto Argentina SA.

See what I mean? The gap in inflation and exchange rate has simply not been consistent with soaring sales for the toys for wealthy class unless they have been subsidized. 

Unfortunately for the political elites, when hyperinflation will hit critical levels enough to spur social violent unrest, these luxury cars will easily become objects of agitation and consequently will be transformed into junk.

Abenomics on McDonalds: Higher Prices, Lower Sales

According to the proponents of Abenomics, inflationism will bring about corporate profitability that would lead to economic boom.

In real life, inflationism has brought upon the opposite.

I pointed out earlier that in response to BoJ’s doubling of monetary base, McDonald’s Japan in April has increased prices of their products by as much as 25% for some items.

As expected, the result has been slumping sales.

From the Bloomberg:

Same-store sales at McDonald’s locations in Japan dropped 3.7 percent in April, the 13th straight monthly decline. Comparable, or same-store, sales are an indicator of a company’s growth because they include only older restaurants.

Basic economics: higher prices, lower demand.

Ironically booming global stock markets has also failed to generate strong growth in sales for McDonald’s outside the US.

From the same Bloomberg article:

McDonald’s Corp. (MCD), the world’s biggest restaurant chain, said sales at stores open at least 13 months fell 0.6 percent last month as growth slowed in its Asia-Pacific region.

Analysts estimated a 0.5 percent drop, the average of 11 estimates from Consensus Metrix. Sales at stores in the company’s Asia-Pacific, Middle East and Africa unit fell 2.9 percent, the Oak Brook, Illinois-based company said today in a statement. Analysts projected a 1.4 percent decline.

On the other hand, McDonald’s sales in the US marginally increased as sales in Europe plunged.

However, McDonald’s stock (MCD) continues to power higher. So we have a parallel universe between global stock markets and real commercial activities around the world.

Note that the stagnant McDonald’s global sales comes amidst record low interest rates for the world.

Ironically, India’s franchise holder of McDonalds has also declared coming price increases.

From Reuters (hat tip Zero Hedge)

An Indian franchise operator of McDonalds Corp (MCD.N) may increase prices for the second time this year, responding to rising inflation which, along with an economic slowdown, it expects to temper demand growth for at least the next 7 months.

The company, Hardcastle Restaurants, said on Tuesday it could raise prices by 5-6 percent. That follows a 5 percent hike after the government increased the service tax rate in February.

"There is pressure and it's a tough environment, no doubt. But inflation is at 8-10 percent so we have to hike our prices," said Amit Jatia, vice-chairman of Hardcastle Restaurants, which owns the McDonalds franchise for west and south India.

He said, however, that the company had no intention for now to raise prices.

Consumer spending in India has taken a hit in the past three quarters as rising food prices, meager salary increases and the slowest Indian economic growth in a decade hurt buying appetites for clothes, cars and eating out.

Inflationistas can't seem to grasp of the casual relationship between business commercial and entrepreneurial activities with changes in money supply.

 

They don’t see that price instability will not only crimp on the demand side but also reduce the incentives for the supply side to expand. This would account for as the economic calculation problem.

If inflationism is the elixir, then Venezuela and Argentina would now account for the most prosperous economies.

Cato’s Steve Hanke points out that black market rate of the Argentinian Peso now “sits 47.3% below the official exchange rate” which he adds represents “an implied annual inflation rate of 98.3%.” 

Wow Hyperinflation in motion.

The Argentinian Merval index is now seen picking up steam on the intensifying hyperinflation. Soaring stock markets based on hyperinflation could mean a purchasing power of only 3 eggs ala Zimbabwe in 2008.

What are the lessons to be learned from inflationist politics? The advocacy of the religion of inflationism signifies as deflation of intelligence and an inflation of the belief in fantasies and lies.

Argentines Flee to Gold on Financial Repression, Devaluation

Escalating financial repression implemented by the Argentina government has been prompting its citizenry to seek gold as safehaven. 

From the International Business Times:

Argentines are utilizing gold to hedge their savings as economists forecast the peso will lose more value than any currency in the world, and President Cristina Fernandez de Kirchner forbids dollar purchases.

The nation’s inflation rate of 26% is also eroding Argentina’s peso- denominated bonds to fall 5.5% ytd.

With Argentina printing pesos to finance itself, the growth of pesos in the economy has rose 38% in the past year, leading analysts to predict that the currency will depreciate 12.9% through year-end, the highest of currencies tracked by Bloomberg.

Banco Ciudad is the only bank left that trades in gold after Fernandez  banned the purchase of certified 99.99% pure gold for savings in July. The bank sells it at 99.96% purity, according to Carlos Leiza, who oversees the lender’s gold trading.

There is a 35% gap in the prices to buy and sell physical gold at Banco Ciudad, while there’s no premium to sell the country’s benchmark 2017 dollar bond in the local market, according to the Buenos Aires-based Open Electronic Market, known as MAE.

Gold sold by Banco Ciudad also isn’t recognized internationally, making it more difficult to determine its value, he said.

Watch Bloomberg’s news video on this here

I must say that Argentina’s inflation rate must have been severely understated by the mainstream. Price controls have been distorting real conditions in Argentina. The Argentine government even recently banned advertising as part of price controls.  Official inflation rates are way below private estimates. Argentina’s government has also been censoring private sector economists from making inflation forecasts.

Argentina’s “blue dollar” or the nickname for the US dollar based on the black market rate has fallen to a new low yesterday, at 8.27 from 8.07 last Monday or a decline of about 2.4% in just a few days. The Peso is far from the official rate of about 5.1. The gap between the black market rate and the official rate continues to widen.

The increasingly desperate government has imposed more capital controls through a 15% tax hike on the use of credit cards abroad aside from new 20% levy on airline tickets.

Unlike Venezuela, so far, Argentina’s stock market has yet to manifest symptoms of hyperinflation. The Merval index has been up 22.23% year to date, as of Friday’s close, and nears a milestone breakout.

We should not confuse rising stock markets with prosperity or even bubble cycles, when they serve as evidence of worsening monetary disorder. Nonetheless a breakout of the Merval along with increased panic buying on gold will could mean a tipping point towards hyperinflation and a crisis.

Inflation is Good: Argentina Imposes Price Controls Amidst Spiraling Inflation and Shortages

Some people argue that inflation is necessary. 

Well we will take the validity of such claim based on the current Argentinian experience

From Businessweek/Bloomberg

Argentine supermarkets, including local units of Wal-Mart Stores Inc. (WMT), Carrefour SA (CA) and Cencosud SA (CENCOSUD) agreed to freeze prices for 60 days amid inflation that accelerated last year to the highest in the hemisphere.

The United Supermarkets Association agreed to keep prices unchanged in their stores until April 1 during a meeting today with Interior Trade Secretary Guillermo Moreno in Buenos Aires, according to a statement from the Argentine Chamber of Commerce.

President Cristina Fernandez de Kirchner has defended her government’s official data that shows consumer prices rose 10.8 percent last year compared with private estimates of 25.6 percent. The government’s alleged underreporting of inflation, which began under Fernandez’s predecessor and husband, Nestor Kirchner, prompted the International Monetary Fund to censure the South American nation on Feb. 1 for the first time in the Washington-based organization’s history.

“They’re trying to hold down inflation, but we’ll see what happens once the agreement ends,” said Susana Andrada, director of Buenos Aires-based consumer watchdog Center for Consumer Education in a telephone interview. “They may be able to control prices of 300 goods, but then we may face some shortages as retailers keep goods off the shelves.”

I am reminded by the great Ludwig von Mises who wrote of the semantic maneuvering by officials and their apologists to redefine inflation to justify price controls.  [italics original, bold original]

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase.

They put the responsibility for the rising cost of living on business, This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices. While the Office of Stabilization and Price Control is busy annoying sellers as well as consumers by a flood of decrees and regulations, the only effect of which is scarcity, the Treasury goes on with inflation.

And that price controls function as mechanical responses by political authorities on inflation. Again the great Mises:

The problems the world must face today are those of runaway inflation. Such an inflation is always the outcome of a deliberate government policy. The government is on the one hand not prepared to restrict its expenditure. On the other hand it does not want to balance its budget by taxes levied or by loans from the public. It chooses inflation because it considers it as the minor evil. It goes on expanding credit and increasing the quantity of money in circulation because it does not see what the inevitable consequences of such a policy must be…

The real danger does not consist in what has happened already, but in the spurious doctrines from which these events have sprung. The superstition that it is possible for the government to eschew the inexorable consequences of inflation by price control is the main peril. For this doctrine diverts the public's attention from the core of the problem. While the authorities are engaged in a useless fight against the attendant phenomena, only few people are attacking the source of the evil, the Treasury's methods of providing for the enormous expenditures. While the bureaus make headlines with their activities, the statistical figures concerning the increase in the nation's currency are relegated to an inconspicuous place in the newspapers' financial pages.

I expect such twin political reaction (inflation-price control) to become a global phenomenon.

Argentina Politics: Biggest Protest Rally in Decades

The president of Argentina’s Central Bank (BCRA), Mercedes Marcó del Pont, recently declared

it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sector’s behaviour

Add to this the Argentine government’s statistical manipulation to suppress inflation measures, currency controls (banning of the US dollars), and other political controls (such as ban on imported books), as well as cronyism, the result has not only been intensifying capital flight but growing social instability which has been ominous of mounting social crisis.

Writes the London Evening Standard, (hat tip Bob Wenzel)

Tens of thousands of Argentinians blocked the streets of Buenos Aires in the country’s largest anti-government protests in more than a decade.

Demonstrators marched against rising inflation, crime and corruption under President Cristina Fernandez de Kirchner, whose popularity has plummeted since she was re-elected last year as the economy wobbles.

Argentina’s etatism or a combination of both socialism and interventionism (fascism) only validates the admonitions of the great late Professor Ludwig von Mises,

State interference in economic life, which calls itself "economic policy," has done nothing but destroy economic life. Prohibitions and regulations have by their general obstructive tendency fostered the growth of the spirit of wastefulness. Already during the war period this policy had gained so much ground that practically all economic action of the entrepreneur was branded as violation of the law. That production is still being carried on, even semi-rationally, is to be ascribed only to the fact that destructionist laws and measures have not yet been able to operate completely and effectively. Were they more effective, hunger and mass extinction would be the lot of all civilized nations today.

Our whole life is so given over to destructionism that one can name hardly a field into which it has not penetrated. "Social" art preaches it, schools teach it, the churches disseminate it.

The consequences of destructionism has now become evident in the streets of Buenos Aires.

Argentina's Government Openly Promotes Poverty

Poor Argentinians. The Argentine government does not only want to subtly confiscate savings of ordinary folks through inflationism, their government openly promotes poverty for the Argentina’s population through economic fascism and political repression.

From Nasdaq.com 

The president of Argentina's central bank has affirmed the government's policy of eliminating the U.S. dollar as a transaction and savings medium in the South American economy.

"De-dollarizing the economy is a challenge" and Argentines "have to save in local currency like [people] do everywhere else in the world," Mercedes Marco del Pont said in a speech late Friday night.

Argentines have long viewed the U.S. currency as a haven in times of economic uncertainty because of their country's long history of high inflation and periodic devaluations.

Mrs. Marco del Pont wants Argentines to save in pesos amid a backdrop of one of the highest rates of inflation in the Americas.

Annual inflation, which most economists say hovers around 25%, has eroded faith in the peso and fueled demand for dollars. The interest rates banks pay on deposits are well below inflation.

The government's data--which has been widely criticized by economists and the International Monetary Fund--put 12- month inflation at 10% in August.

Inflationism has only been part of the overall strategy of financial repression which has been coursed through fascist policies of nationalization, currency controls, strangulating regulations, civil liberty proscriptions (e.g ban on imported books) and more…

Since late October 2011, the government has severely restricted the public's access to the foreign-exchange market to stop capital flight that was slowly draining the central bank's international reserves.

The currency controls have dented economic activity, especially in the real estate sector where most transactions were done overwhelmingly in dollars.

Property sales in the capital city Bueno Aires plunged 35% on the year in August.

Argentina, aside from Venezuela, are likely or potential candidates to join Iran as models for modern day hyperinflation.

How Argentina’s Class Warfare Policies Promotes Poverty

Argentina’s politics serves as an example of how the minority (political class) exploits the majority (voting poor) to perpetuate themselves into power.

In the attempt to redistribute wealth, Argentina’s government has engaged in the tightening of currency controls that has only exacerbated capital flight.

First the unintended consequences

From the Telegraph, (bold emphasis mine)

The new regulations required anyone wanting to change Argentine pesos into another currency to submit an online request for permission to AFIP, the Argentine equivalent of HM Revenue & Customs. To submit the request, however, you first needed to get a PIN number from AFIP, either online or in person. Having finally obtained your number, submitted your online request and printed out your permission slip, you could then present it at the bank or official cambio and buy your dollars. Well, that was the theory.

In practice, the result was chaos. The online system quickly folded under the onslaught of applications, while a personal visit to an AFIP district office meant bringing a camp bed and picnic hamper.

The reason for this tidal wave of requests, and indeed for the introduction of the restrictions in the first place, was the ferocious rate of capital flight from the Argentine economy that had started in 2010, when many could already see the writing on the wall. Which brings us to that thumping electoral victory in October.

Argentina’s politicians implemented class warfare policies to gain hold of political power.

Again from the same article,

When Mrs Kirchner first came to power in 2007 she inherited the social reform programme of her predecessor (also her husband), Nestor Kirchner. Hefty tax demands on the country’s wealth base were liberally redistributed to the disadvantaged, but with little investment in longer-term projects that would deal with the causes of poverty.

From the point of view of the middle-classes, the Kirchners were using taxpayers’ money to buy themselves a constituency of dependents that would keep them in power, a tactic vindicated by that 54 per cent majority last October. Anyone with moveable assets started shifting them out of her reach by transferring them abroad or converting them into dollars.

The nasty economic effects from despotic redistributive policies and a culture of dependency: capital flight, inflation and economic stagnation as investors scamper for safety elsewhere.

In 2010 the flight of capital started gathering speed, totalling $11 billion by the end of the year. In 2011, as the election approached and signs of a probable Kirchner win emerged, this figure more than doubled to $23 billion. Hence the great slamming of the fire exits as soon as her victory was in the bag.

The months since then have seen an almost weekly tightening of restrictions to close any remaining loopholes, to the extent that it has now become almost impossible to buy foreign currency anywhere apart from the black market.

Which is, of course, exactly what the government hoped for, and in that respect at least the policy has been a success. In the first six months of this year dollar flight has been reduced to $3.5 billion. But damming the flood has come at a huge cost to the economy, especially since the currency restrictions were coupled with another set of regulations that effectively imposed a near-total ban on any imported goods. 

Apart from the minor inconveniences this has caused to shoppers, such as no longer being able to buy breakfast cereal not composed of shredded carpet, the measure has also backfired on Argentine industry itself because so many of the products manufactured in Argentina still need component parts and raw materials from elsewhere. Hence, for example, the 1,600 workers laid-off from the Renault car plant in Cordoba last June, while the parts they needed to finish the job languished in a container on a Buenos Aires quayside. But you do not need to be an economist to imagine the consequences when a G20 nation suddenly adopts North Korean-style siege-economy tactics, which does make you wonder about the quality of advice the government is getting.

Eventually there will be no one else to squeeze but the gullible and manipulated poor, and signs are becoming evident…

It’s not that significant, but set alongside the downwardly spiralling prospects and the upwardly spiralling inflation (25 per cent), the frantic hunt for hard currency and the bland ministerial assurances that there is nothing to worry about, it is just another little ripple of déjà vu permeating life in Argentina.

This reminds me of all the free stuffs given by local governments in the Philippines which most people think are without costs.

Nevertheless Argentina’s politics serves as a grim reminder of the evils of democracy.

As the great libertarian Henry Louis H.L. Mencken once warned,

The state — or, to make matters more concrete, the government — consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can’t get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting ‘A’ to satisfy ‘B’. In other words, government is a broker in pillage, and every election is a sort of advanced auction on stolen goods.

Bottom line: There is no such thing as a free lunch

Argentina’s Snowballing Capital Flight

This should be another slap on the face for inflationistas or people who myopically advocate inflation as economic elixir.

From Reuters,

Argentine banks have seen a third of their U.S. dollar deposits withdrawn since November as savers chase greenbacks in response to stiffening foreign exchange restrictions, local banking sources said on Friday.

Depositors withdrew a total of about $100 million per day over the last month in a safe-haven bid fueled by uncertainty over policies that might be adopted as pressure grows to keep U.S. currency in the country.

The chase for dollars is motivated by fear that the government may further toughen its clamp down on access to the U.S. currency as high inflation and lack of faith in government policy erode the local peso.

"Deposits keep going down," said one foreign exchange broker who asked not to be named. "There is a disparity among banks, but in total it's about $80 million to $120 million per day."

U.S. dollar deposits of Argentine banks fell 11.2 percent in the preceding three weeks to $11.5 billion, according to central bank data released on Friday. The run on the greenback has waxed and waned since November, after President Cristina Fernandez won a second term on promises of deepening the state's role in the economy.

From May 11 until Friday, data compiled by Reuters from private banks showed $1.9 billion in U.S. currency had been withdrawn, or about 15 percent of all greenbacks deposited in the country.

Feisty populist leader Fernandez was re-elected in October vowing to "deepen the model" of the interventionist policies associated with her predecessor, Nestor Kirchner, who is also her late husband.

Since then she has limited imports, imposed capital controls and seized a majority stake in top energy company YPF.

Earlier, Argentina’s central bank President Mercedes Marcó del Pont even mocked at the laws of economics and haughtily declared that printing money does NOT lead to inflation.

Like in the Eurozone, what governments and their minions say and what people do always clash: The prospects of intensifying devaluation worsened by concerns over capital controls and other forms interventionism have been prompting people to turn to black markets, take refuge on foreign currencies and flee the Argentine banking system altogether

Joel Bowman at the Daily Reckoning has a nice take on this…

The Argentinean government’s policy of theft via inflation has created a demand for the relative safety of US dollars. Obviously, a massive flight from pesos would create considerable headaches for the Argentine State and its efforts to control “its” people…and their taxable income. And so, even though there is no official rule preventing the purchase of US dollars (or any other foreign currency), Argentina’s equivalent to the IRS, AFIP, has made it virtually impossible to do so through regulated channels (i.e., banks).

Therefore, the informal exchange houses do a roaring trade responding to a very real and honest demand for US dollars. And there’s still enough business left over to maintain a vibrant market for the “green rate.” This exchange rate is even less official than the unofficial “blue rate.”

The “green rate” is offered by los arbolitos — i.e. “little trees” — who stand along Florida Street waving their arms (like little trees) and offering their exchange services. That rate, currently at 6.20 pesos to the dollar, is quite literally the “street price” for dollars.

The nearby chart shows the wide — and rapidly widening — gap between the official exchange rate and the blue rate, the most often quoted parallel dollar rate.

Exactly as you would expect, the more money the government prints, and the tighter the capital controls they impose, the greater the urgency to swap pesos into dollars…and the higher the unofficial exchange rates soar.

Clearly, this is a trend that cannot continue indefinitely.

The Argentine State is scrambling to outlaw the consequences of its own recklessness. For years now, Argentina’s Central Bank (BCRA) has brought forth freshly inked fiat notes by the billions to pay for unaffordable election promises. Our North American readers will recognize this crafty monetary prestidigitation as “money printing.”

The practice is nothing new, of course — neither here nor in any country where the tyranny of the mobjority — democracy — enjoys the power to decide the cost to be levied on the minority.

What seems peculiar about Argentina’s case is the government’s Herculean effort to ignore the immutable laws of economics in their pursuit of grand larceny. The country has seen five currencies in just the past century, averaging a collapse every twenty years or so. In 1970, the peso ley replaced the peso moneda nacional at a rate of 100 to 1. The peso ley was in turn replaced by the peso Argentino in 1983 at a rate of 10,000 to 1. That lasted a couple of years, and was then replaced by the Austral, again at a rate of 1,000 to 1. To nobody’s surprise, the Austral was itself replaced by the peso convertible at a rate of 10,000 to 1 in 1992. During the past four decades, when all was said and done, after the various changes of currency and slicing of zeroes, one peso convertible was equivalent to 10,000,000,000,000 (10¹³) pesos moneda nacional.

Obviously Argentinians haven’t learned, yet they are adversely responding to such policies via capital flight. Nevertheless sustained capital flight should help starve the beast.

While stock markets have functioned as to flight to safety against governments going into a maximum inflation overdrive, apparently Argentina’s worsening capital controls has been sending their benchmark index the Merval into a steady downhill as Argentinians seem fearful that their savings could be seized anew like in 2001.

Inflationism constitutes part of, or a mixture of the many other repressive measures from an increasingly despotic government such as higher taxes, price controls, capital controls, nationalization, protectionism and other forms of anti-market interventions. So whatever interim gains will be offset by lower real economic growth.

Argentina seems likely headed for for another sordid chapter of hyperinflation.

The other hyperinflation candidates are neighboring Venezuela, communist North Korea or any European crisis affected nations who will severe ties with the EU.

Argentina’s Road to Serfdom: Book Import Bans

From Cato’s Juan Carlos Hidalgo,

The Argentine government has severely restricted the importation of books due to “human health concerns” [in Spanish]. That’s right. According to the government, it can be dangerous to “page through” a book that has high lead quantities in its ink. “If you put you finger in your mouth after paging through a book, that can be dangerous,” said Juan Carlos Sacco, the vice-president of an industrialist organization that supports the measure.

The government claims that this is not a ban. However, since each buyer has to demonstrate at the airport’s customs office that the ink in the purchased book has lead quantities no higher than 0.006% in its chemical composition, the result is that all book imports into the country are stalled.

The measure has a lot to do with the increasing efforts of the Argentine government to stop the flight of dollars out of the country. Capital flight in 2011 reached $21.5 billion, and it accelerated after the reelection of Cristina Fernandez de Kirchner in October. Facing increasing fiscal pressures, and after seizing private pension funds and raiding the Central Bank’s reserves, many people expect the government to go after their bank savings.

The government has reacted with increasingly ridiculous measures. Sniffing dogs are being deployed at airports and border check points to detect the ink used to print U.S. bills, so Argentines cannot take out of the country more than $10,000 without declaring it to the government. The Fernandez administration is also requiring major importers such as automakers to match the price of their imports with that of goods they must now export. As a result, Porsche is exporting Malbec wine and Mitsubishi is now selling peanuts.

Desperate governments will resort to any measures to advance their interests. And to stem capital flight from the private sector in reaction to their spendthrift ways, the Kirchner government now attempts to curtail freedom of speech through policies that promotes ignorance and illiteracy. Talk about ‘noble intentions’.

And of course, part of these mind control measures, imposed through propaganda and censorship, has been for the President of Argentina’s central bank to declare that printing money does not lead to inflation, as well as, to ban the private sector from making public estimates of statistical inflation which went against the government’s data.

As Benjamin Franklin once said,

A nation of well-informed men who have been taught to know and prize the rights which God has given them cannot be enslaved. It is in the religion of ignorance that tyranny begins.

Any government cannot simply wish away the laws of scarcity, which in fullness of time will be vented over the marketplace and eventually would incite a tempestuous political response.

Argentinians have yet to slough off their tolerance for despots which has brought about a cycle of political and economic crisis since the 20th century (as previously discussed here)

Confiscatory Deflation and Gold Prices

This is a reply to an objection

Gold’s rise represents:

1. fear of bank failure.

My reply

With all the money being sunk into the banking system of major economies, such observation omits the current evidences that abounds (from ECB’s $1 Trilion QE, Fed’s explicit guarantee and rollover of principal payments, SNB’s and Japan’s currency interventions and bans on short sales by 4 European nations plus Turkey and South Korea)

This of course doesn’t even include the money spent for the bailouts during the 2008 crisis where the Federal Reserve audit revealed $16 trillion issued to foreign banks and or previous estimates of $23.7 trillion exposure of US taxpayer money to save the systemically important or ‘too big to fail’ banks and other politically privileged companies.

As one would note, people stuck with an ideology will tend to dismiss evidences even if these have been blatantly “staring at their faces’.

2. concerns of the "Pesofication" of hard currency accounts

My reply

Assumptions that government’s may confiscate deposits or prevent withdrawals like the Argentina crisis (1999-2002) does not translate to an increase of demand for gold, for the simple reason that such government policies promote deflation.

Austrian Economist Joseph Salerno calls this ‘Confiscatory Deflation’

Mr. Salerno explains (bold emphasis mine)

As a result, Argentina's money supply (M1) increased at an average rate of 60 percent per year from 1991 through 1994. After declining to less than 5 percent for 1995, the growth rate of the money supply shot up to over 15 percent in 1996 and nearly 20 percent in 1997. In 1998, with the peso overvalued as a result of inflated domestic product prices and foreign investors rapidly losing confidence that the peso would not be devalued, the influx of dollars ceased and the inflationary boom came to a screeching halt as the money supply increased by about 1 percent and the economy went into recession. Money growth turned slightly negative in 1999, while in 2000, the money supply contracted by almost 20 percent.

The money supply continued to contract at a double-digit annual rate through June 2001. In 2001, domestic depositors began to lose confidence in the banking system, and a bank credit deflation began in earnest as the system lost 17 percent, or $14.5 billion worth, of deposits.

On Friday, November 30, alone, between $700 million and $2 billion of deposits--reports vary--were withdrawn from Argentine banks. Even before that Friday bank run, the central bank possessed only $5.5 billion of reserves ultimately backing $70 billion worth of dollar and convertible peso deposits. President Fernando de la Rua and his economy minister, Domingo Cavallo, responded to this situation on Saturday, December 1, announcing a policy that amounted to confiscatory deflation to protect the financial system and maintain the fixed peg to the dollar.

Specifically, cash withdrawals from banks were to be limited to $250 per depositor per week for the next ninety days, and all overseas cash transfers exceeding $1,000 were to be strictly regulated. Anyone attempting to carry cash out of the country by ship or by plane was to be interdicted.

Finally, banks were no longer permitted to issue loans in pesos, only in dollars, which were exceedingly scarce. Depositors were still able to access their bank deposits by check or debit card in order to make payments. Still, this policy was a crushing blow to poorer Argentines, who do not possess debit or credit cards and who mainly hold bank deposits not accessible by check.

Predictably, Cavallo's cruel and malign confiscatory deflation dealt a severe blow to cash businesses and, according to one report, "brought retail trade to a standstill." This worsened the recession, and riots and looting soon broke out that ultimately cost 27 lives and millions of dollars in damage to private businesses. These events caused a state of siege to be declared and eventually forced President de la Rua to resign from his position two years early.

By January 6, the Argentine government, now under President Eduardo Duhalde and Economy Minister Jorge Remes Lenicov, conceded that it could no longer keep the inflated and overvalued peso pegged to the dollar at the rate of 1 to 1, and it devalued the peso by 30 percent, to a rate of 1.40 pesos per dollar. Even at this official rate of exchange, however, it appeared the peso was still overvalued because pesos were trading for dollars on the black market at far higher rates.

The Argentine government recognized this, and instead of permitting the exchange rate to depreciate to a realistic level reflecting the past inflation and current lack of confidence in the peso, it intensified the confiscatory deflation imposed on the economy earlier. It froze all savings accounts above $3,000 for a year, a measure that affected at least one-third of the $67 billion of deposits remaining in the banking system, $43.5 billion in dollars and the remainder in pesos.

Depositors who held dollar accounts not exceeding $5,000 would be able to withdraw their cash in twelve monthly installments starting one year from now, while those maintaining larger deposits would not be able to begin cashing out until September 2003, and then only in installments spread over two years. Peso deposits, which had already lost one-third of their dollar value since the first freeze had been mandated and faced possible further devaluation, would be treated more liberally. They would be paid out to their owners starting in two months, but this repayment would also proceed in installments. In the meantime, as one observer put it, "bank transactions as simple as cashing a paycheck or paying a credit card bill remained out of reach of ordinary Argentines."

Mr. Lenicov openly admitted that this latest round of confiscatory deflation was a device for protecting the inherently bankrupt fractional reserve system, declaring, "If the banks go bust nobody gets their deposits back. The money on hand is not enough to pay back all depositors." Unlike the bank credit deflation that Lenicov is so eager to prevent, which permits monetary exchange to proceed with a smaller number of more valuable pesos, confiscatory deflation tends to abolish monetary exchange and propel the economy back to grossly inefficient and primitive conditions of barter and self-sufficient production that undermine the social division of labor…

Unfortunately, things were to get even worse for hapless Argentine bank depositors. After solemnly pledging when he took office on January 1 that banks would be obliged to honor their contractual commitments to pay out dollars to those who held dollar-denominated deposits, President Duhalde announced in late January that the banks would be permitted to redeem all deposits in pesos. Since the peso had already depreciated by 40 percent against the dollar on the free market in the interim, this meant that about $16 billion of purchasing power had already been transferred from dollar depositors to the banks.

Prices of gold vis-à-vis the Argentinean Peso only surged after the Argentine government allowed the Peso to be devalued.

Chart from Nowandfutures.com

Devaluation had been the outcome of an explosion of money supply

Chart from Nowandfutures.com

As the bust cycle of the imploding bubble culminated (explained above by Dr. Salerno above) inflation fell (see red ellipse below).

Chart from tradingeconomics.com

More of the Argentine Crisis from Wikipedia,(bold emphasis mine)

After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso–dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.

In addition to the corralito, the Ministry of Economy dictated the pesificación ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.

After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge depreciation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time).

The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%; these figures were considerably lower than those foretold by most orthodox economists at the time. The quality of life of the average Argentine was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.

Since the volume of pesos did not fit the demand for cash (even after the devaluation) huge quantities of a wide spectrum of complementary currency kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded the attractiveness of their associated revenue, originally stated in convertible pesos. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges, consequently becoming very irregular. Very often they were taken at less than their nominal value—while the Patacón was frequently accepted at the same value as peso, Entre Ríos's Federal was among the worst-faring, at an average 30% as the provincial government that had issued them was reluctant to take them back. There were also frequent rumors that the Government would simply banish complementary currency overnight (instead of redeeming them, even at disadvantageous rates), leaving their holders with useless printed paper.

Bottom line:

The above experience from Argentina’s crisis shows that when government adapts policies to confiscate private property through the banking system, demand for gold does NOT increase or gold prices don’t rise.

It is when the Argentine government decided to devalue and inflate the system where gold prices skyrocketed.

Both confiscatory deflation and the succeeding inflation lowered the standard of living of the Argentines. The antecedent to the above events had been a prior boom.

In short, policies that promote boom-bust or bubble cycles represent as net negative to a society and even promotes more interventionist policies that worsens the prevailing social predicaments.

Lastly record gold prices today points to inflationism NOT confiscatory deflation.