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bart
08-12-06, 08:08 PM
Troubling similarities between Argentina & the US

Jim Sinclair recently linked to my page on troubling similarities between the US and Weimar, and as a result I've also received some interesting feedback on a similar page (http://www.NowAndFutures.com//us_argentina.html) about troubling similarities between the US & the Argentinian 2001-2 devaluation.

The biggest and quite common misunderstanding is that Argentina's money supply and credit were growing hugely right before the large peso devaluation - here's the chart. The data comes from Argentina's central bank.


http://www.nowandfutures.com/download/argentinaM1-3CreditReserves1993-2005.png

jk
08-12-06, 09:54 PM
the biggest difference, however, is that argentina's debts were denominated in someone else's currency.

bart
08-13-06, 12:50 AM
the biggest difference, however, is that argentina's debts were denominated in someone else's currency.

Yes, but I'm not sure what you're driving at. Perhaps that it would have happened later or not at all?

Finster
08-13-06, 12:36 PM
Yes, but I'm not sure what you're driving at. Perhaps that it would have happened later or not at all?

What is the "it" that you're referring to here?

FWIW, the closest anology I can think of between our current monetary positioning is with the 1970's US or GB. In 1971, the gold window was closed, and in 2003, the Fed ran rates down to 1% and printed like crazy. We've seen oil and gold prices soar, much like we did in the 1970's. The main difference we have now is that US workers have little pricing power due to global labor arbitrage, but it's not clear what the effect of that will be, aside from a general decline in the standard of living as the inflation drives up the cost of foreign-sourced consumption.

GB got hit harder, as inflation there exceeded even that in the US. So perhaps an even closer analogy for the next few years could be found there.

bart
08-13-06, 02:11 PM
What is the "it" that you're referring to here?

FWIW, the closest anology I can think of between our current monetary positioning is with the 1970's US or GB. In 1971, the gold window was closed, and in 2003, the Fed ran rates down to 1% and printed like crazy. We've seen oil and gold prices soar, much like we did in the 1970's. The main difference we have now is that US workers have little pricing power due to global labor arbitrage, but it's not clear what the effect of that will be, aside from a general decline in the standard of living as the inflation drives up the cost of foreign-sourced consumption.

GB got hit harder, as inflation there exceeded even that in the US. So perhaps an even closer analogy for the next few years could be found there.

The "it" was the sudden Argentinian peso devaluation in 2001-2. Mostly I posted that chart just because a number of folk seemed to think that a devaluation like it must be recently preceded by excess money and/or credit creation - it doesn't.

I hadn't thought about the '70s and what happened with the British pound in the currency devaluation context... interesting comparison. It was about $2.60 in 1971 and dropped to about $1.50 in 1976 - almost 45%.
It then rebounded to about $2.40 in 1981, dropped well over 50% to $1.10 in 1985 and has been in a broad trading range of $1.40-$2.00 since then.

I did recall that Milton Friedman had some interesting things to say in the area too - the extract below is from 1998 ( from http://www.imfsite.org/recentfin/rescue.html ).


If Argentina has a balance of payments deficit--if dollar receipts from abroad are less than payments due abroad--the quantity of currency (high-powered or base money) automatically goes down. That brings pressure on the economy to reduce foreign payments and increase foreign receipts. The economy cannot evade the discipline of external transactions; it must adjust. Under the pegged system, by contrast, when Thailand had a balance of payments deficit, the Bank of Thailand did not have to reduce the quantity of high-powered money. It could evade the discipline of external transactions, at least for a time, by drawing on its dollar reserves or borrowing dollars from abroad to finance the deficit.

Such a pegged exchange-rate regime is a ticking bomb. It is never easy to know whether a deficit is transitory and will soon be reversed or is a precursor to further deficits. The temptation is always to hope for the best and avoid any action that would tend to depress the domestic economy. Such a policy can smooth over minor and temporary problems, but it lets minor problems that are not transitory accumulate. When that happens, the minor adjustments in exchange rates that would have cleared up the initial problem will no longer suffice. It now takes a major change. Moreover, at this stage, the direction of any likely change is clear to everyone--in the case of Thailand, a devaluation.A speculator who sold the Thai baht short could at worst lose commissions and interest on his capital since the peg meant that he could cover his short at the same price at which he sold it if the baht was not devalued. In contrast, a devaluation would bring large profits.

Many of those responsible for the East Asia crises have been unable to resist the temptation to blame speculators for their problems. In fact, their policies gave speculators a nearly one-way bet, and by taking that bet, the speculators conferred not harm but benefits. Would Thailand have benefited from being able to continue its unsustainable policies longer?

Capital controls and unified currencies are two ways out of the trilemma. The remaining option is to let exchange rates be determined in the market predominantly on the basis of private transactions. In a pure form, clean floating, the central bank does not intervene in the market to affect the exchange rate, though it or the government may engage in exchange transactions in the course of its other activities. In practice, dirty floating is more common: The central bank intervenes from time to time to affect the exchange rate but does not announce in advance any specific value that it will seek to maintain. That is the regime currently followed by the United States, Britain, Japan, and many other countries.




Interesting times ahead...

Finster
08-15-06, 09:52 AM
The "it" was the sudden Argentinian peso devaluation in 2001-2. Mostly I posted that chart just because a number of folk seemed to think that a devaluation like it must be recently preceded by excess money and/or credit creation - it doesn't.

I hadn't thought about the '70s and what happened with the British pound in the currency devaluation context... interesting comparison. It was about $2.60 in 1971 and dropped to about $1.50 in 1976 - almost 45%.
It then rebounded to about $2.40 in 1981, dropped well over 50% to $1.10 in 1985 and has been in a broad trading range of $1.40-$2.00 since then.

I did recall that Milton Friedman had some interesting things to say in the area too - the extract below is from 1998 ( from http://www.imfsite.org/recentfin/rescue.html ).

Interesting times ahead...

It comes down to exactly what you mean by "devaluation". Devaluation relative to what? In the case of the Argentinean peso, its international exchange rate had been pegged to the USD. In the case of the USD, there is no peg against which to define a devaluation.

Unless of course you look at something like the Chinese yuan, and that is a devaluation explicitly sought by the US!

Setting aside such pegs, we have things like the euro, pound, loonie, etc. And there, the devaluation has already been going on. Then there's all the other things besides currencies - real stuff - against which the dollar has been devalued, copper, gold, oil ... just about everything that isn't nailed down.

Not that there isn't more in store. Even a relatively precipitous drop. Just that it may be difficult to define parallels between the likes of the peso d' Argentina versus the American variety...

bart
08-15-06, 02:40 PM
It comes down to exactly what you mean by "devaluation". Devaluation relative to what? In the case of the Argentinean peso, its international exchange rate had been pegged to the USD. In the case of the USD, there is no peg against which to define a devaluation.

Unless of course you look at something like the Chinese yuan, and that is a devaluation explicitly sought by the US!

Setting aside such pegs, we have things like the euro, pound, loonie, etc. And there, the devaluation has already been going on. Then there's all the other things besides currencies - real stuff - against which the dollar has been devalued, copper, gold, oil ... just about everything that isn't nailed down.

Not that there isn't more in store. Even a relatively precipitous drop. Just that it may be difficult to define parallels between the likes of the peso d' Argentina versus the American variety...

Oh kind and most merciful one... this most unworthy one submits a chart to help demystify the area: ;)

http://www.nowandfutures.com/download/ArgentinaGold2001-2005.png

Finster
08-15-06, 08:45 PM
Oh kind and most merciful one... this most unworthy one submits a chart to help demystify the area: ;)



A ... chart!!!

I am shocked ... shocked I tells ya!

But ... O bart of chart ... what do we learn? In the first chart, we have the peso versus X - presumably the USD (or some basket of currencies). In the second chart, we have gold versus the peso. Unless there was a large movement between gold and the USD (or such other basket), the second chart is trivial - but an inversion of the first. In a nutshell, both charts show virtually the exact same thing, a large movement in the peso relative to just about everything else.

So this is what you are suggesting? That the USD falls precipitously against everything else? In other words, an extension and acceleration of the status quo?

bart
08-15-06, 08:58 PM
A ... chart!!!

I am shocked ... shocked I tells ya!

But ... O bart of chart ... what do we learn? In the first chart, we have the peso versus X - presumably the USD (or some basket of currencies). In the second chart, we have gold versus the peso. Unless there was a large movement between gold and the USD (or such other basket), the second chart is trivial - but an inversion of the first. In a nutshell, both charts show virtually the exact same thing, a large movement in the peso relative to just about everything else.

So this is what you are suggesting? That the USD falls precipitously against everything else? In other words, an extension and acceleration of the status quo?


Shirley you jest (ok, I won't call you Shirley... ;))?

A chart and comparative maven such as yourself doesn't have another alternative suggestion for some devaluation relativity?


Humble as I am, I submit another chart 'o bart for your most merciful consideration to aid us all in our quest for gems of wisdom:

http://www.nowandfutures.com/images/economic_cycle.png

Finster
08-15-06, 09:23 PM
Shirley you jest (ok, I won't call you Shirley... ;))?

A chart and comparative maven such as yourself doesn't have another alternative suggestion for some devaluation relativity?


Humble as I am, I submit another chart 'o bart for your most merciful consideration to aid us all in our quest for gems of wisdom:



Well (doing shirley imitation;-), first we have a devaluation of the peso against the US dollar. So to be strictly true to the comparison, if we are to examine the devaluation of the dollar, we would naturally look at the devaluation of the US dollar against the US dollar.

Currently, the dollar is trading very close to 1.000 US dollars. What level do you foresee it will fall to?

bart
08-15-06, 09:30 PM
Well (doing shirley imitation;-), first we have a devaluation of the peso against the US dollar. So to be strictly true to the comparison, if we are to examine the devaluation of the dollar, we would naturally look at the devaluation of the US dollar against the US dollar.

Currently, the dollar is trading very close to 1.000 US dollars. What level do you foresee it will fall to?

I thought it might be you - you hereby get the first *back in your cage* award of the day... ;)


http://www.nowandfutures.com/grins/cage3.jpg

Finster
08-15-06, 09:35 PM
I thought it might be you - you hereby get the first *back in your cage* award of the day... ;) ............

:D