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Roberto
Board Administrator
Username: Admin

Post Number: 1458
Registered: 12-2004
Posted on Monday, January 21, 2008 - 2:43 pm:   Edit PostPrint Post

I just came across this 2002 piece and found it interesting

Argentina's economic collapse 2002

It is not as thorough as I thought it would be but warns about the perils of inflation, which I think where understated. The one thing missing is that in some ocassions the government's aim is to create "debt deflation" to liquidate debts both in the public and private sector. This maybe easier to understand if I say that someone's debt becomes worthless if the currency by which this debt is held also becomes worthless and the way to destroy the value of a currency is by creating inflation. Make no mistake, behind the drama of inflation and hyper-inflation there are some big winners: debtors. And in the past, these have been the industrial complex among others.

I also wanted to bring this up because I believe we just started a similar process of debt deflation in the US, which at some point will lead to higher, much higher inflation... a pre-condition must exist: currency depreciation. Who's debt will be washed out? In Argentina this helped the private sector in close rapport with the government_bandits. And it was measured against the standard international currency, the US dollar. The US is actually a peculiar case as its local currency happens to be the international standard for trade and can't be used as a benchmark.

In my view, it is impossible to envision the outcome of a debt deflation process in the US as there are no precedents. However, a few things come to mind. It appears it is the same US who's debt will be washed out by -at some point- paying its international creditors on the cheap.
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WTMendoza.com
Intermediate Member
Username: Welcometomendoza

Post Number: 111
Registered: 7-2007


Posted on Wednesday, January 23, 2008 - 11:27 am:   Edit PostPrint Post

Roberto - thanks that link is a great read a reminder of how it was...and yes the debtors love this stuff, the debtors who get their loan payments in fixed rate payments.

2008 inflation in Argentina will be very tell-tale I think..about the next few years to come. Let's see if Cristina can get down to business.
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Arial
Intermediate Member
Username: Arial

Post Number: 129
Registered: 10-2006


Posted on Tuesday, January 29, 2008 - 3:40 pm:   Edit PostPrint Post

There are a lot of people that don't realize that inflation is caused by governments printing money. If they tax people to pay for all their projects, people would scream and even throw the bums out. Which is not good for politicians' careers.

When governments do not live within their means but print money that is unbacked and unsupported by taxes, it appears that prices are rising. But the fact is the money is becoming worth less.

We can illustrate it another way. The reason that counterfeiting is illegal is because counterfeit money, if prolific enough, makes the currency of a country worthless. So we make laws against counterfeiting. So if that principle is true, then it shouldn't be a giant step to figure out that if the government creates unbacked liquidity, the effect is exactly the same. Print enough and the currency becomes worthless. No matter who is doing it!

So if politicians promise new socialist programs or new wars, etc., they may not add a visible tax but we can take note that we WILL pay. Our money won't buy the same as it would last year. We have to work more hours, or both mom and dad have to work to make ends meet and no one is there when the kids get home from school. We all become poorer in many ways--and less secure.

It has been done before, of course. Always with the same result. Rome, Greece, Germany. Eventually it ends up in hyperinflation.

I remember when a coke cost 5 cents, a notebook for school was 10 cents. A pencil was 2 cents. A loaf of bread was 10 cents in the US. And you could buy a T-bone steak dinner in the neighborhood where I grew up for $1.25. Debasing the currency has been a slow, gradual process. But we are getting there!
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WTMendoza.com
Intermediate Member
Username: Welcometomendoza

Post Number: 122
Registered: 7-2007


Posted on Tuesday, January 29, 2008 - 3:55 pm:   Edit PostPrint Post

I remember in 1982 in Buenos Aires when I lived there, getting a preview of what I hope never happens in the USA - a pack of cigs cost 60,000 pesos one month, 65,000 pesos the next month, etc...it was crazed! They finally had to cutoff 4 zeros and print new currency. That time.
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Roberto
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Username: Admin

Post Number: 1478
Registered: 12-2004
Posted on Tuesday, January 29, 2008 - 4:37 pm:   Edit PostPrint Post

Adding to the "hyper" line of thought... I think there are 4 conditions that must be met for a hyper-inflation to develop: political instability, no international desire for the currency in question, international isolation and the one that the US meets which is currency depreciation. Without all four, the likelihood of an hyper are slim to none but that is not to say that inflation may not show its ugly head sooner than everyone is expecting.

WTM, I have been longer than you in Argentina. I have seen the cutting of zeros at least two times! lol. And the change of the name of the currency another couple of times. In fact, we all have private collections of the older papers and coins!

Arial, 5c for a coke! How long ago was that?

(Message edited by admin on January 29, 2008)
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WTMendoza.com
Intermediate Member
Username: Welcometomendoza

Post Number: 123
Registered: 7-2007


Posted on Tuesday, January 29, 2008 - 5:17 pm:   Edit PostPrint Post

Roberto - good point on those 4 conditions...

Yeah those cutting of the zeros was a happy pastime for the Argies during the 80's;)

Remember that crazy moment in 1989 when almost overnight there was another radical devaluation almost overnight, coupled with a surge of inlation, . I was in the middle of a car rental and a drive from BA to Iguazu and back..the contract was in pesos not dollars, and when I returned the car they demanded dollars but there was no way they could enforce it becuase of the contract...so my car rental became much cheaper suddenly, and I felt sorry for them but held firm on paying in pesos.

Man these Argie have been through some stuff, and are probably weathered to handle anything by now.
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Arial
Intermediate Member
Username: Arial

Post Number: 130
Registered: 10-2006


Posted on Tuesday, January 29, 2008 - 5:42 pm:   Edit PostPrint Post

How long ago was THAT? Hehehehe. That's about the same as asking a woman her age (giggle). But okay. When I married in 1959, bread was 10 cents a loaf. I think cokes were still about 5 cents then. You could buy a hamburger in 1959 at White Castle for 10 cents. I well remember the prices of some things because of juggling my budget as a young wife.

This is the first time I heard that the gov had to be unstable for hyperinflation to occur. I didn't think anything was required but flooding the economy with deficit spending. Can you explain how that would cause hyperinflation? Is that an economic principle that you found somewhere but I missed?

I do think it possible that the more unstable a government gets, the more irresponsible and the more likely they are to plunder the citizens through just printing up currency, thus causing inflation. So an unstable government could be the cause of inflation for that reason. But the basic cause would still be deficit spending, wouldn't it?

Maybe you could define unstable. Do you mean irresponsible? Or a government that picks on neighbors, makes wars under false pretenses, confiscates private property, has military takeovers within the country . . . or whatever? And even then, how does that, itself, cause hyperinflation? For example, as evil as Pinochet (Chile) may have been from what I have read he actually put the country back on course financially. He had men from the Chicago School of Economic go there and figure out what was wrong and you know the story of Chile today. Economically they ended up in better shape than most (if not all) South American countries. So I could say that was an unstable situation--but it resulted not in hyperinflation but in a balanced economy.
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Roberto
Board Administrator
Username: Admin

Post Number: 1483
Registered: 12-2004
Posted on Thursday, January 31, 2008 - 10:52 pm:   Edit PostPrint Post

Haha... yes, I realized it was the wrong question to ask after I hit 'post message'. Those dollar figures make me smile...

--
Arial, this paper may shed some light although doesn't get to the bottom of it.

This is my layman opinion... in its extreme form, hyperinflation represents complete loss of trust fueled by political instability. With hyper there is a crack in the system. Inflation may get started by liquidity generation and debasement of the function of money but this unto itself does not necessarily lead to hyperinflation (my view). In the cases I personally experienced (2) there was high political unrest acting as noise in the background (for an extended period of time). And in one case there were domestic guerrillas actively creating chaos. The hyper came after, not before although at some point they both feed on each other. Books will only refer to the period of Alfonsin as hyper but we had very high inflation pre-military coup (1976) as well.

Wikipedia does not list the 4 conditions either although reading through it some of the causes become apparent. What isolation permits, is that inflation can go unchecked for an extended period of time, leading to hyper. In the case of the US, there are constant checks that are set although may not produce any effect in the short term. Saudis complain because their imports become more expensive. I personally have been switched by some of my european service providers to euros, as they claimed they were losing money by charging me in dollars. At some point, the internationl reaction has the potential to help stop whatever creates the economic unrest in their own countries (international trade and dollars as reserves > no isolation). High inflation in the US will not go unchecked as it may happen in a more isolated regime.

Now I am playing by ear, but I think monetarists will like to think that hyperinflation is solely the consequence of a monetary disorder that changes expectations and deny the influence of exogenous events that also have the ability to change expectations. But politics are intertwined as monetary and fiscal reforms are needed. Brazil ended theirs by ammending their consitution in 1994 which speaks of strong political insitutions at work.

Any experts please comment!
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Roberto
Board Administrator
Username: Admin

Post Number: 1484
Registered: 12-2004
Posted on Thursday, January 31, 2008 - 11:04 pm:   Edit PostPrint Post

The example of Pinochet doesn't deny the factor of political instability as a pre-condition for hyperinflation. I am not familiar with their economy in the times of Allende but it will be interesting to see if they had political unrest as well as inflation getting out of hand.

The military junta in Argentina also reigned over the economy which was on the brink of collapse right before the coup. De-facto governments are actually as strong (for a while) as strong democratic institutions when it comes to reforms. In the US, Congress can definitely stop the executive from getting out of hand.
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Arial
Intermediate Member
Username: Arial

Post Number: 135
Registered: 10-2006


Posted on Friday, February 01, 2008 - 7:31 am:   Edit PostPrint Post

I didn't mean to deny political instability as a pre-condition. I hope no one thought that. I admitted that could be if the instability of the government causes financial irresponsibility, which causes inflation. My point was that if the unstable government successfully employs sound financial practices, you would not have hyperinflation, regardless of the government.

I just don't see how it would effect hyperinflation otherwise. Inflation is more dollars chasing the same goods.

All markets operate on supply and demand. If you have too much of anything, the item becomes worth less--until it is worthless. Including dollars.

Thanks for taking the time to reply. I am in the throes of preparing to leave for Argentina (Oh JOY!) but thanks for the links and info. I will be sure and look into your point.

Be sure to read the book America's Great Depression (available for free download at www.mises.org or order from Amazon). Another good one is When Money Dies: The Nightmare of the Weimar Collapse by Adam Fergusson and Dying of Money: Lessons of the Great German and American Inflations by Jens O Parsson. Great economic foundation! Which can help us make good decisions. If you have things you think I should read, just let me know. My goal is to always look at all information that is available.
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Roberto
Board Administrator
Username: Admin

Post Number: 1487
Registered: 12-2004
Posted on Friday, February 01, 2008 - 11:34 am:   Edit PostPrint Post

Thank you, Arial. Just downloaded the .pdf file. Interesting site... I see your point. Yes, sound financial practices seems to be at the center of the problem.

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