What's Next With The Peso Devaluation?

[Reneige]

I don't know Bajo cero. From what I've read, he's an immigration lawyer that from time to time gives pretty good advice on the forum regarding mundane Argentinian legalities and beurocracy. A lot of which I've found helpful. I do get the hint that hes a pro Kirchner nationalist. But that isn't a reason or an excuse to attack him personally. If you take issue with a policy he agrees with, intelligently deconstruct his argument. No need to attack the guy personally. But that's just my opinion. Everyone does what they want.

I agree, no need for personal attacks. I do, however, recognise that as an immigration lawyer writing on an expat forum, his opinions may partially reflect business optimism, which is normal for anyone running a business that will be highly impacted by political turmoil. Cordoba riots, the peso devaluation and it's huge impact on emerging market currencies (as far away as Turkey) are all making global headlines. I wouldn't be surprised if that makes people think twice about immigrating to Argentina. I would imagine his income is very "cyclical" (ie moves up and down in tune with economic growth and recessions). Nobody wants to be pessimistic about their business prospects.

Reneige

 

[John.St]

is that really necessary? Just because his opinion is different than yours it doesn't mean you can disparage his comments. You should grow up.

You mean because Bajo_cero2 himself is soooo polite and never launches ad hominem attacks himself?

Latest examples:
http://baexpats.org/..._80#entry240706
http://baexpats.org/..._90#entry240710
http://baexpats.org/..._70#entry240699

 

[Reneige]

Yes, many people (myself included) often erroneously describe a current account deficit as as a trade deficit, rather then jump into the complexities of the balance of payments. Argentina does in fact have a trade surplus, the problem is the massive outflow of capital. But the only way to prevent capital outflow is to create confidence in the countries currency and economic prospects. The only way to achieve this is to have credible institutions such as an independent central bank, strong leadership, and educated/economically literate citizens (if we are referring to a democracy), Argentina seems to fail on all these fronts. Instead you have deceiving and ignorant (or perhaps criminally negligent) political class that is happy to sell out the prospects of a generation for a vote. To quote today's Financial Times, “The chickens of populism have come home to roost,” (re quote from Arturo Porzecanski economist from Uruguay).

I don't think anybody sees a way out now, Cristina included. The government today vowed not to allow the currency to slide any further but as long as reserves fall, this country is headed for a Currency Crisis / Balance of Payments Crisis.

Sorry, one last thing I did not mention, it should be noted that the positive trade balance largely reflects the extreme measures the government has taken to prevent imports. Not least the recent changes regarding online shopping.

The only way out that I see is to allow a real devaluation of the Peso. That could be slow and controlled or sudden, but slow is preferred obviously. This will import loads of inflation which is inevitable. In that moment, the central bank needs to cut its ridiculously expansionary monetary policy (ie doubling the money supply in two years) which, due to the lack of central banks independence, will result in a necessary and large cut in government expenditure. A cut in government expenditure is precisely the opposite of what you want in a recession but this country is out of options, most countries attempt to increase government expenditure in a recession by borrowing in order to lessen the impacts of the recession. This will result in a massive recession, which should may reign in the runaway inflation. It will also be incredibly devastating, especially to the poor who will lose many of social benefits they have seen granted to them in the past decade, and see job prospects evapourate.

Obviously this is just an estimate, economic outcomes are notoriously difficult to predict. Furthermore, I am assuming that the government will actually attempt to reverse the situation with inflation and stagnation. They may just continue to lie about the inflation so GDP figures appear positive as they have done in recent years. That obviously will lead to more unrest as it did in Cordoba, although a major cut in social spending may lead to civil unrest as well.

Basically they are damned if they do and they are damned if they don't.

Reneige

 

[GS_Dirtboy]

If this country fixed the trade imbalance of Dr. Pepper and Maple Syrup I'd be more bearish on the future of the country.

 

[Rich One]

Famous Quotes

Those who told us that One peso was worth One dollar, are the same ones that now want us to believe that One dollar is worth 13 pesos?

Axel Kicilloff

How will this sound a year from now? I wonder.

 

[GS_Dirtboy]

The Dollar is worth what people will pay for it. Nothing more. Nothing less.

Economics 101

 

[Rich One]

lol full rumor there's a meeting of the Latin American Community or whatever it's called in Habana

The CELAC meeting is taking place in Havana .
Community of Latin American and Caribbean States.


http://en.wikipedia.org/wiki/Community_of_Latin_American_and_Caribbean_States

 

[Gringoboy]

Famous Quotes

Those who told us that One peso was worth One dollar, are the same ones that now want us to believe that One dollar is worth 13 pesos?

Axel Kicilloff

How will this sound a year from now? I wonder.

I bet he got a handbag round his neck for that poor lad.

 

[jackbower]

The Dollar is worth what people will pay for it. Nothing more. Nothing less.

Economics 101

economics 101 and they didn't teach you money illusion?

 

[Reneige]

The Dollar is worth what people will pay for it. Nothing more. Nothing less.

Economics 101

Precisely that. The "price" of a dollar is what people are willing to buy it for. The "value" of a dollar is based on the extent to with people with a foreign currency are willing to purchase the goods/services produced by the nation issuing dollars, or invest in that nations assets. That's why when people tell me that the dollar is worthless because it's not backed by anything (usually uninformed people who think currencies should return to the gold standard), I retort that the dollar is backed by all the goods and services produced in the US. Basically as long as people are buying iPads, using windows computers, or advertising on Google, the dollar has a lot of value.

This is also why when the price of oil falls, generally nations whose expors are largely energy based fall as well. As in the case of Venezuela now, although they are trying to sustain an artificial dollar link. The "blue dollar" in Venezuela trades at 10x the official rate, way beyond what we see in Argentina (2x). It's also is a criminal offense to engage in the market so don't attempt to if for whatever reason you end up there.

Energy based nations that have smart economic policy, like Saudi Arabia or Norway, preserve huge amounts of the profits from their oil industry and invest it in massive globally diversified investment funds (referred to as sovereign wealth funds) in order to leave a legacy for future generations when the oil runs out, and to protect their economies from recessions caused by falling oil prices. Basically they have loads of money to spend when the economy looks bleak. Energy based economies that are poorly managed, ie Venezuela, squander all that income building a "socialist paradise" and then when the price of oil drops, fall into major crises.

Other poorly managed energy based economies (or would-be energy based economies), woo investors (ie Repsol in Spain buying YPF) to develop their oil fields, only to expropriate (or nationalise) Repsol's assets arguing that they underinvested in infrastructure. They then find themselves 2 years later with no energy infrastructure, no means to develop it domestically, no dollars to hire an external firm to do it, and no investors willing to take the risk of developing the infrastructure because it's a nation that has a habit of stealing all people's investments out of "national interest".

Just a comment on the Norwegians, their sovereign wealth fund is the single largest investment fund in the world. It's called Norgesbank. It's so big that they currently own approximately 2% of every company listed on European stock exchanges. The goal of the fund is to be able to reproduce the income stream of their oil resources forever once their oils runs dry, and to do so solely from the interest and dividends on their investments. All I can say is WOW! A Norwegian passport is worth it's weight in gold a thousand times over. I wish Canada had that policy...

Just another economic rant ;-P

Reneige