The Default is a Minor Problem – Argentina's Real Problem is Something Else Entirely
By now it is well known that Argentina has been declared in default by the major credit rating agencies. This has happened in spite of the Argentine government actually depositing the interest payment intended for those creditors who have grudgingly accepted the post 2001 default restructuring because they thought they had no other choice. After all, they couldn't very well invade Argentina and sell its government assets. That is the problem with lending to governments: they not only assuredly waste the money they borrow, but when push comes to shove, creditors often find themselves left out in the cold.
However, the so-called “hold-outs” – a group of investors that didn't accept the terms of the debt restructuring – have continued to fight the Argentine government in court to get restitution, and have won several cases. At one point, they even had an Argentinian warship confiscated in a Ghanaian port. The latest court case won by the hold-outs has led to the current impasse and subsequent default.
“Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds.
The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P.
Argentina and the hedge funds, led by billionaire Paul Singer’s Elliott Management Corp., failed to reach agreement in talks today in New York, according to the court-appointed mediator in the case, Daniel Pollack. In a press conference after the talks ended, Argentine Economy Minister Axel Kicillof described the group of creditors as “vulture funds” and said the country wouldn’t sign an accord under “extortion.”
“The full consequences of default are not predictable, but they certainly are not positive,” Pollack wrote in an e-mailed statement. “Default is not a mere ‘technical’ condition, but rather a real and painful event that will hurt real people.”
Kicillof, speaking at the Argentine consulate in New York, told reporters that the holdouts rebuffed all settlement offers and refused requests for a stay of the court ruling. He said Argentina couldn’t pay the $1.5 billion owed to the hedge funds because doing so would trigger clauses requiring the country to offer similar terms to other bondholders.”
Given the nature of the current government of Argentina (financial repression is its bread and butter), we love to see its neo-Marxist “economy minister” Axel Kiciloff squirm. On the other hand, creditors to governments occasionally deserve to be taught a lesson about lending to governments, and one must fear the ultimate victims of the tussle will be the people of Argentina (of course, they could have voted for someone else, but it is not certain that it would have made any difference).
Be that as it may, the default is really a sideshow to Argentina's real problem, which is a profligate government financing its spending increasingly via the printing press, while publishing severely falsified “inflation” data in order to mask this fact.
The Merval Index has exploded higher in recent years, and just as is the case with stock market rally in Venezuela, it is not a sign of a healthy economy at all – on the contrary, it is actually a sign that a hyper-inflationary crack-up boom is anticipated by its captive audience (captive due to exchange controls that include “dollar sniffing dogs” being deployed at border crossings).
The Merval Index (monthly) is anticipating a hyper-inflationary crack-up boom as the printing presses are doing overtime in Argentina. Back in 2001, this index traded at 200 points. Its surge has nothing to do with the economy's health, as any visitor to Argentina can easily confirm first hand – click to enlarge.
The official exchange rate of the peso looks bad enough as it is, but it doesn't tell the whole story:
The Sobering Reality
Professor Steve Hanke from John Hopkins University runs the “troubled currencies” project at the Cato Institute. One of the things he is doing is to look at the black market exchange rate in countries that have currency controls in place to determine the “implied inflation rate” of its consumer price index. Even though one must acknowledge that such measurements are inherently difficult, as it is not truly possible to measure the purchasing power of money in the first place, the method gives us a rough idea how far removed from reality the official data are. In this particular case, very far indeed.
Obviously there is a rather big gap between the officially admitted annual CPI rate of change of 15.01% and the implied rate of 51%. Given the action in the Merval, we can state with some confidence that the 'implied rate' is probably a lot closer to the truth. Here is a chart comparing the peso's official to its black market rate (inverted). This chart has been last updated in early July, so the most recent swoon in the currency is not yet shown on it:
And finally, here is Professor Hanke's chart of Argentina's implied annual inflation rate over time (note that due to the calculation method, implied rates below 25% are considered unreliable):
The implied inflation rate is highly volatile, but has been far higher than the official one for an extended time period. Since this is a year-on-year measure, the effect is compounding over time, hence the growing flight into 'real values' in Argentina. People are not only buying stocks, but also real estate and other hard assets – click to enlarge.
Such inflation rates represent an unmitigated economic disaster. Not only for the obvious reason that they make economic calculation practically impossible and rob savers of their hard-earned money, but because they also undermine people's productivity and their morals. Once a nation's entire population is forced to spend a lot of effort on a daily basis looking for ways to escape the ravages of inflation, its economic productivity is invariably sapped.
By robbing savers, government moreover undermines the moral fabric of society at large, while creating a new underclass – comprising all those who rely in some way on fixed incomes.
As Hans Sennholtz once wrote (and although this was written in the context of the Federal Reserve's inflationary policies, it is readily applicable to such policies everywhere):
“[…] many victims readily conclude that thrift and self-reliance are useless and even injurious and that spending and debt are preferable by far. They may join the multitudes of spenders who prefer to consume today and pay tomorrow, and they may call on government demanding compensation, aid, and care in many forms. Surely, the hurt and harm inflicted by inflation are a mighty driving force for government programs and benefits.
In their discussions and analyses of various problems, economists usually avoid the use of moral terms dealing with ultimate principles that should govern human conduct. Ever fearful of being embroiled in ethical controversies they seek to remain neutral and “value-free.” They do counsel legislators and regulators on the cost-efficiency of a policy but not on its moral implications. They may offer professional advice on the efficiency of money management but not on the morality or immorality of inflationary policies. They dare not state that inflation is a pernicious form of taxation which most people do not recognize as such.”
The biggest debtor also is the biggest inflation profiteer.
The primary beneficiaries of the new order are its own managers: legislators, regulators, and a huge army of civil servants. They are first in power, prestige, and benefits.
Evil acts tend to breed more evil acts. Inflationary policies conducted for long periods of time not only foster the growth of government but also depress economic activity. Standards of living may stagnate or even decline as growing budget deficits thwart capital accumulation and investment that are sustaining the standards.
Inflationary policy is and always will be extremely destructive. In the developed world, a situation like that observed in Argentina has so far been avoided, but that doesn't exactly mean that central banks in the industrialized nations are slouches in the money printing department.
Their actions buy us what appear to be “good times” by diverting scarce resources into various bubble activities, but in reality they impoverish us. In this respect, there is no difference with Argentina. The latter has merely gone a step further, attempting to keep its government flush and the boom going by going completely overboard with its inflationary policy. The end result in either case is economic devastation, there are merely differences in degree, but not in substance.
Charts and tables by investing.com, Cato Institute/Steve Hanke
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “Argentina – the Economic Backdrop to the Default”
Most read in the last 20 days:
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...