Is the Argentine Economy Going to Collapse?

If You Live in California, Here's What You Do...
By Dr. Steve Sjuggerud

Would you lend money to someone who is completely broke and in a mountain of debt... and only demand 3.75% interest?

That's what California is forcing many people to do today.

California is out of money. But it still must pay people. So it's paying in "IOUs" instead of cash. By the end of this month, California will have handed out over $3 billion in IOUs. These IOUs are only supposed to last for a few months. And they pay a 3.75% annual interest rate.

How will this end?

Some investors are getting excited – they earn interest AND can potentially buy these IOUs at a discount to face value in exchange for cash.

Me? I have no interest in these things. I've seen this exact game before... It happened in Argentina in 2001. The lesson was this: You don't want to lend money for a tiny bit of interest to a broke state that has no problem changing its laws on you.

In 2001, the province of Buenos Aires ran out of money. So it started issuing IOUs called "patacones" that paid 7% interest.

What's a patacon? It looked like money, but it matured a year in the future. The man on the street was confused... Many merchants flat-out refused to accept patacones (though McDonald's offered a special "Pata-Combo").

"One peso buys a cup of coffee or a newspaper... but what will you be able to buy with one Patacon?" an Argentine woman asked the Wall Street Journal in 2001. She had no idea how prophetic her words were...

Long story short, a U.S. dollar's worth of patacones held in late 2001 were worth about 30 U.S. cents a year later at maturity, after the Argentine peso crashed. And that's much better than money issued by other Argentine states... For example, the "federal" issued by the province of Entre Rios north of Buenos Aires was worth maybe 10 cents on the U.S. dollar a year later.

Now, I don't expect a repeat of Argentina's crisis in the States. I don't expect the California IOUs to fall to 30 cents on the dollar.

At the same time, I'm not interested in giving cash today for a patacon, er, a California IOU that promises to pay me back at some future date with only a small amount of promised interest for my troubles.

The government of California is broke. If you're unfortunate enough to receive California "patacones" try to get rid of them. Use them to pay your taxes, sell them to the knuckleheads on Craigslist... do whatever you can.

These Tax-Free Bonds Are Still a Great Buy
This Country Is the World's Most Likely Candidate for Hyperinflation

But don't hold them. The historical record of broke governments issuing IOUs doesn't offer much promise. The "reward" of 3.75% interest versus the risk simply isn't worth it.

Get rid of your California "patacones" if you get 'em...

Good investing,

Steve
 
Perhaps this is a bit off topic...but, as an American, I do not see a huge difference between the basic democratic principles and economics between the U.S., Canada and Australia, not to mention culture and language. For someone to be Australian and strongly Anti-American is interesting. I can understand animosity towards the U.S. government of the previous eight years. I felt the same way but most people in the U.S. are hardworking and just want a decent life for their families like anywhere else. Corruption is obviously there....yes Mr. Madoff is a prime example. The main problem in the U.S. today, other than the economic one, is one which no one wants to speak of for fear of being racist...that is illegal immigration from Mexico and Central America who drain the system.

Regardless, I see corruption in Argentina from the minute I walk out of my apartment until I return. On every single level there is corruption and extortion. From the unions demanding 40% payraises (and supported by the government who, in return receives their support) to the payoffs for recommending someone, via a friend, who receives payoffs for the recommendation, to constantly being overcharged for everything...that extra bottle of wine on the bill, that bit of change that they miscounted on, mismarked prices in the supermarkets (always in the stores' favor), the illegal payoffs for gaining votes....well I could go on for days. You get the point. Here you must presume everyone is a thief until proven otherwise. Just the complete opposite of what I do in the U.S. It's very exhausting living as an honest person in a dishonest society.
 
rmartinbuenosaires, there has been some "poltergeist" thing going on around here lately in the forum :). I like your responses and they are straight to the point. I am thinking all the "ghostly disappearances" of "some" posts is in line with the changes that the El Gobierno is undergoing - perhaps. It can happen.
There are alot of disappearances around these neck of the woods that can never be explained - at least there is consistency in that regard.
RE: California smack talk - I do not see myself giving up the surf and turf anytime soon. I was there in the good times, I think I will hang on just a little longer and show some loyalty during the hardtimes.
RE: Argentina's collapsing economy - it is not going to happen tomorrow, so why worry. Really!
 
Mr. Martin, if I could have "thanked" you for half your previous posting, I would have: your first paragraph is telling. But I haven't found that Argentina is so thoroughly corrupt as at times may appear -- thank goodness!
 
I like the economist too.

Recoleta Carolina said:
I find The Economist nothing more than diluted "news" that I don´t take very seriously. It is amazing to me just how many people think that they get real "news" in this publication.
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Diluted compared to what?
Its a weekly news roundup, covering a lot of ground in few pages. A little about a lot, and a pretty decent synopsis of each issue. Just a synopsis though, it doesn't claim to be much more.
bigbadwolf said:
The Economist probably appeals to the 20-somethings and 30-something semi-educated barbarians with MBAs, clutching their blackberrys in one hand and a copy of the Economist in the other
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Audience is a lot older and more senior. Not sure who you consider to be semi-educated barbarians, but its written for people with a decent knowledge of economics, politics, global affairs etc. Reader profile is shown on their website if you're interested.

Out of all the shite that gets pumped out on a weekly basis the economist is a pretty decent read. "Biased", sure. They have an editorial line, but thats nothing to be ashamed off. Are there any unbiased publications out there? Could such a publication even exist? IMO there are just different degrees of bias, ranging from foaming madness to mild preference.
 
rmartinbuenosaires said:
Perhaps this is a bit off topic...but, as an American, I do not see a huge difference between the basic democratic principles and economics between the U.S., Canada and Australia, not to mention culture and language. For someone to be Australian and strongly Anti-American is interesting. I can understand animosity towards the U.S. government of the previous eight years. I felt the same way but most people in the U.S. are hardworking and just want a decent life for their families like anywhere else. Corruption is obviously there....yes Mr. Madoff is a prime example. The main problem in the U.S. today, other than the economic one, is one which no one wants to speak of for fear of being racist...that is illegal immigration from Mexico and Central America who drain the system.

Regardless, I see corruption in Argentina from the minute I walk out of my apartment until I return. On every single level there is corruption and extortion. From the unions demanding 40% payraises (and supported by the government who, in return receives their support) to the payoffs for recommending someone, via a friend, who receives payoffs for the recommendation, to constantly being overcharged for everything...that extra bottle of wine on the bill, that bit of change that they miscounted on, mismarked prices in the supermarkets (always in the stores' favor), the illegal payoffs for gaining votes....well I could go on for days. You get the point. Here you must presume everyone is a thief until proven otherwise. Just the complete opposite of what I do in the U.S. It's very exhausting living as an honest person in a dishonest society.
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Great post. The truth is always refreshing. You always have to be on guard here and it is exhausting after a while. If this post were on a tourist forum it would disappear.

I just came back from a wine store where I tried to buy a bottle of wine that had the price tag on the bottle. When I went to the cashier they would not honor the price saying that the price of the wine was double of what the ticket said. It does not matter where you are or what you do the list never ends.
 
fedecc said:
Pericles i think you have being reading to much government media.

It's true however that economy is not likely to collapse, but this is mostly beacuse there is no much left to collapse.

The improvements you mentioned in your post are simply non existant. The current government enjoyed the world's most economicaly prosperous five years in a long time. Now that the party is over, what does the government has to show, what improvements?.... Simply none, the debt is just as high as it was back in 2001 and poverty is even higher at 35% and stuck there. Instead we have corruption galore, crime running rampant, the worst foreing politicys we have ever had with terrible relations with most countries (even with Uruguay, only this government could manage that), and a level of hatred among argentinians that i only used to read in history books.

And im sorry to burst your bubble, Nacha Guevara (her real name is Clotilde Acosta by the way) is just an oportunist, she too enjoyed good relations with the governmet in the 90s that granted her a place in the state's TV channel. Her comitment is just as big as the profit or position she can get for it.

As far as the IMF, it's far from being a perfect institution, but it has being extremely demonized here, as argentinians are fond to do so often, so we don't get to take responsability for our own actions. The truth is the IMF provides the cheapes loans avaliable in the market. In return it ask for a minimum control and transparent numbers, both things whch the current government refuses to provide. Instead it chose to take loans from Hugo Chavez at a interest rate of 15%. Im no economist either, but i'll take the IMF anytime.

Anyway, sory for the rant....:)
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noooo...por favor!

lo dijiste perfectamente.
 
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