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I’ve been an observer of the Argentine economy ever since I first went there in 1970 to visit my soon-to-become wife. So I am compelled to make this brief post as Argentina’s currency passes a key marker: today, Argentines must now come up with 1000 pesos to buy just one dollar.
Actually, if Argentina had never taken multiple zeros off its currency several times since 1916, when the exchange rate was 2 pesos per dollar, today it would take 10,000,000,000,000,000 (ten quadrillion) of those original pesos to buy a dollar!
The spark behind the latest peso plunge is Sunday’s presidential election. The front-runner, Javier Milei, promises to ditch the peso and dollarize the economy. Which, in my opinion, is the only sensible thing to do, though it might prove tricky to implement.
The Argentine government has been resorting to the printing presses to finance its profligate spending for far too long.
People know that every day you hold a 2,000 peso note (the largest note in circulation!) in your pocket you are losing money at the rate of 150-200% per year – i.e., the current rate of inflaton.
So the demand for pesos has plunged and the demand for dollars has soared. No wonder, Argentines are demanding a radical change – this has gone on for far too long.
The lesson in this for the U.S. is that our government seems to have abandoned any concern over deficit spending. The budget deficit for the just-finished fiscal year was about $1.700,000,000,000, which is over 6% of GDP.
It only exceeded that level during WW II, the 2008-09 Great Recession and its aftermath, and the 2020-22 Covid shutdowns.
Today it’s sky-high despite the fact that the economy is relatively healthy. Federal debt is now about 94% of GDP, and annual interest payments on that debt are about $1 trillion and rising.
We were flirting with Argentine-style inflation a few years ago, when the M2 money supply increased by $6 trillion (40%) in less than two years, thanks to $6 trillion of Covid-related deficit spending.
Chart #1
As Chart #1 shows, since 2007, the peso has lost 99.7% of its value vis a vis the dollar, and the losses are accelerating.
Something is going to have to change, and quickly, or the economy will grind to a halt for lack of money. Let’s hope our own Congress can get its act together as well.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
