Is the U.S. Waiting to Follow Argentina?
Aug 3rd, 2012 | By Andrew | Category: Economics, Financial, Top Headline | Print This Article
The future of America may be playing out just to the south of us. Down in Argentina, most of what we fear will one day happen in the U.S. – seized pensions, crazy stimulus schemes, currency controls, and high inflation – has already occurred. The government has even openly sent the tax man after anyone brave enough to criticize its policies. Yet even with all this going on, Argentina is hardly a pariah in the international community like Greece. Seeing how they do it and get away with it, will the U.S. follow suit?
It’s not as crazy as it seems. Argentina and the U.S. share a number of problems. Both countries have a currency that is inflating rapidly … much faster than official statistics are willing to acknowledge. Both countries have a stalled housing market, crippling national regulatory bodies, and a large agricultural sector suffering under unusually bad weather this year.
Naturally, both countries have unmanageable levels of debt. What separates the U.S. from Argentina is that the U.S. has never defaulted on its debts … and Argentina seems to make it a ten-year tradition. Every decade, the inflation level in the country is pushed over the edge by meddling central bankers (oddly familiar, that), and the nation has to default and reboot.
Currently, Argentina is cruising for another round of bankruptcy and embarrassment. Official inflation rates are listed at 9.9 percent annually for 2012, while private estimates peg inflation at 36 percent in the Buenos Aires metro area and 37 percent in the rest of the country. In response to Argentinos’ race for the fiscal exits, the government has placed sharp limits on switching money from Argentinian pesos to dollars or euros.
Naturally, there’s a brisk underground market for selling pesos into any other currency. Most Argentinos prefer to put their pesos in dollars, and they’re willing to pay several times the official going rate to make that happen. Even black market exchange rates 40 percent worse than official rates don’t stop them from clamoring for more dollars. America’s rate of inflation is deplorable, but it’s much slower than their own!
Rather than fight the causes of inflation, the government seems determined to use central bank policies and presidential decrees to put more fuel on the fire. The country has been voted “the most protectionist nation on the planet” by the World Bank. It’s banned certain exports – including those of Argentinian beef – to protect domestic price caps, despite the certain ruination of profitable businesses caused by such policies.
Recently, the government nationalized the oil holdings and developments of Spanish oil firm Repsol, which had been running YPF, the biggest oil firm in Argentina. This landed the country in temporary hot water with the international community, but so far the government is insisting that its actions are in the national best interest and that for security, they must control Repsol’s holdings. And if the largest firms investing in Argentinian oil development aren’t safe, neither are small businesses.
Yet despite the hue and cry from international financial bodies and the number of frightened small businesses shutting up shop, Argentina seems set on a path to make its currency worthless and its business environment totally untrustworthy. To what end? Definitely a way for the ruling party to cling to power a bit longer … and perhaps an calculated escape from national debt and credit obligations that have given it a public debt to GDP level of 51.5%!
But if 51.5 percent is the debt-to-GDP level that permits a government to seize private pensions to maintain national reserves, nationalize private corporate investments, and instill currency controls that mask raging inflation, where does that leave Americans? In a bad place, actually. According to the Economist’s World Debt Clock, the US currently carries a public debt to GDP ratio of 61.5 percent, equal to a total debt load of $29,053.53 per person.
We may not follow exactly in Argentina’s footsteps, but it would certainly be prudent to keep an eye on the developments in its economy. Argentina is not so different from America … and maybe just similar enough to tempt our government to follow in their footsteps.
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