Editor’s Note: As you know, Bill believes the U.S. is about to experience a violent monetary shock. So today, we’re sharing with you a classic from the archives. It’s Bill’s firsthand account of Argentina’s monetary crisis. But as an American, you may eventually experience a very similar situation …

 

Cash Only

One of the things that vexes just about everyone in Argentina is money. The value of the peso changes rapidly. There is the official rate. And there is the unofficial rate.

Nobody knows what a peso is worth. Many people – including your humble editor – have to do some pretty serious calculating. The parts of his brain that do math must be swelling from overexertion.

 

cash_only_inline

 

“We need gas for the truck,” said Elizabeth yesterday.

“Well, I don’t have any more peso cash. Let’s put it on a credit card.”

“They don’t take credit cards. Cash only.”

“Then let’s pay with dollars.”

“Don’t be silly. That would cost us 50% more. He won’t give us a good rate.”

“Then let’s get some pesos at the ATM.”

“That’s just as bad … we’ll get the official rate.”

Let’s see: We want to pay in pesos, but only if we get the pesos at the unofficial rate. Otherwise, it’s better to pay in dollars, but only if the person on the other side will take the dollars at the “blue” or free-market rate.

Usually, you end up somewhere in between. If you try to bring money into the country, the government insists you trade it on the official market. But you can still work out trades at the “blue” rate – either by bringing physical cash into the country or by working with an unofficial money changer.

The money changers buy bonds for you in Miami. Then they sell the bonds in Buenos Aires. The market for the bonds should be about the same in both cities. The money changer is happy to have his dollars. You are happy to have pesos that you can spend – or in our case, pay our farmhands and farm expenses

 

Evoluci+¦n del d+¦larThe official and black market rates of the Argentine peso. Prior to the 2001 crisis, the peso traded at 1:1 to the US dollar, to which it was tied via a currency board. It was realized far too late that a domestic fractionally reserved banking system and a currency board operating concurrently could mean trouble…credit expansion closely followed capital inflows, which funded the government’s burgeoning debt – via dolarblue.net – click to enlarge.

 

Half-Mad Money

It is always a pleasure to visit Argentina. It is a country where economic disaster stories are daily life… where economists’ daffy theories are government policy… and where everyday citizens have to figure out how to deal with a monetary system that is half-mad… and half merely incompetent.

When we are here, we need to spend pesos… especially out in the country, where people’s math skills are not as well developed as they are in Buenos Aires. But any serious purchase – say, if you’re buying an apartment – requires dollars… either on top of the table or underneath it. So you have to be prepared.

Most people want dollars. But they can’t take them. Because the Argentine feds will ask a lot of questions. If a merchant takes dollars at the unofficial rate, the feds will give him a hard time. That leaves buyers and sellers of dollars getting together in dark “caves.” Dow Jones reports:

“Argentina’s foreign-exchange market is going underground. As the government restricts access to foreign currencies, Argentines seeking hard-to-get dollars have been pushed into cuevas, or caves – clandestine operations where customers pay dearly to exchange pesos for greenbacks.”

Buying dollars for savings is banned, and authorities make only small amounts of foreign currency available for travel abroad. Travelers must submit an online request to the national tax authority just days before leaving, and they usually receive approval for much less than they requested.

 

cristina_fernandez__kirchner_775525The Kirchner-Fernandez vacuum

Cartoon by Dragan

 

Businesses need government approval to import equipment and materials at the cheap official exchange rate. The national tax agency has even posted dollar-sniffing dogs at border crossings to catch those traveling with undeclared currency.

A visit to Argentina is like getting a PhD in monetary catastrophe and economic mismanagement. It reminds us how politicians can really make a mess of an economy when they put their minds to it.

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

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