Argentines prefer having U.S. Dollars Under the Mattress over having Argentine Pesos in the Bank

Posted by PITHOCRATES - June 16th, 2012

Week in Review

No one likes austerity.  The Greeks hate it so much they may vote to leave the Euro.  So they can keep printing money.  To pay for a bloated public sector and generous state benefits.  For it is the easy way out.  It’ll put people back to work on the government payroll.  And solve all of their problems.  Well, not all of their problems (see Argentina loses a third of its dollar deposits by Jorge Otaola posted 6/8/2012 on Reuters Africa).

Argentine banks have seen a third of their U.S. dollar deposits withdrawn since November as savers chase greenbacks in response to stiffening foreign exchange restrictions, local banking sources said on Friday.

Depositors withdrew a total of about $100 million per day over the last month in a safe-haven bid fueled by uncertainty over policies that might be adopted as pressure grows to keep U.S. currency in the country.

The chase for dollars is motivated by fear that the government may further toughen its clamp down on access to the U.S. currency as high inflation and lack of faith in government policy erode the local peso…

Feisty populist leader Fernandez was re-elected in October vowing to “deepen the model” of the interventionist policies associated with her predecessor, Nestor Kirchner, who is also her late husband.

Since then she has limited imports, imposed capital controls and seized a majority stake in top energy company YPF…

Many are taking what dollars they can get their hands on and stashing them under the mattress or in safety deposit boxes, fearing moves by the government to forcibly “de-dollarize” the economy. Officials have strongly denied any such plan…

She wants Argentines to end their love affair with the greenback and start saving in pesos despite inflation clocked by private economists at about 25 percent per year…

But savers in crisis-prone Argentina are notoriously jittery. Memories of tight limits on bank withdrawals and a sharp currency devaluation remain fresh a decade after the country’s massive sovereign debt default.

To put this another way, if you have an inflation rate of 25% you’d have to have an interest rate on your bank savings account of at least 25% just to break even.  But you’re probably not going to get 25%.  Let’s say you only get 5%.  With this information you now have to make a choice.  You can buy a $1,000 wide-screen television now even though you don’t have the room for it.  Or you can wait 4 years to buy it when you will have the room for it.  Well, your savings will only earn about $200 interest in those 4 years.  Bringing your account balance to about $1,200.  But at a 25% annual inflation rate that television will cost about $2,500 after 4 years (increase the price of the television 25% each year).  So the smart choice is to buy the set now because your savings will lose so much of their purchasing power in 4 years that you won’t be able to buy it then.

This is the cost of Keynesian economics and fiat money.  When governments can print money they do.  Some more than others.  But the more they print the more inflation they create.  And the more faith people lose in their currency.  Which is a very bad thing to happen with fiat money.  Because the only value fiat money has is the faith people put into it.  And when they lose that faith they put U.S. dollars under their mattresses.  Because they know those dollars will hold more of their purchasing power than Argentine Pesos.

Populist leaders are popular for a reason.  They appeal to the angry mob.  Blame their problems on others.  And enact popular policies that will lead a nation to their ruin.  The Argentines have seen it a few times.  One of their leaders even invaded the Falkland Islands once to distract the people from their horrible economy.  One wonders if their current leader may do the same.  Especially as they’re now looking for oil down there.

All the Keynesian economists belittle anyone who talks about austerity and spending cuts.  They say the answer is to spend more not less.  Despite the fact that every country in a financial crisis got into that crisis by spending more not less.  But Keynesians like inflation.  Because it’s a hidden tax.  And a great way to transfer more private wealth to the government.  They especially love that part about your savings losing their purchasing power.  Because they owe a lot of money.  And it’s easier to repay old loans in those highly depreciated dollars.  Especially when you can print them.

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