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Competing Currencies Can Solve Argentina’s Inflation Crisis

By: Iván Cachanosky - @ivancachanosky - Oct 23, 2014, 10:39 am
argentina peso inflación
From 1940 to 2013, accumulated inflation in Argentina reached 4,835,716,461,499 percent. (Flickr)

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The government monopoly of the issue of money was bad enough so long as metallic money predominated. But it became an unrelieved calamity since paper money (or other token money), which can provide the best and the worst money, came under political control.

The above excerpt from Friedrich Hayek’s 1977 book, The Denationalization of Money, is undeniably relevant to Argentina’s current financial situation. In Argentina, the state monopoly on monetary creation and circulation began in 1935 with the foundation of the Central Bank of the Republic of Argentina (BCRA). Article III of the Bank’s charter states “it is the primary and fundamental mission [of the BCRA] to preserve the value of the currency.” But how successful has the BCRA been in fulfilling their obligation?

Unfortunately, the answer to that question is troublesome, and the aforementioned Article was removed from the document in 2012. From 1940 to 2013, the accumulated inflation rate reached an astronomical 4,835,716,461,499 percent. That’s 4.8 trillion percent in just 73 years.

The first question these numbers raise is: what is the point of a Central Bank monopolizing a currency, if it produces the same detriment it was established to prevent? It is shocking to think of the number of zeros that have been dropped from Argentina’s currency over the years: 13 zeros over the the span of five different peso varieties.

Anyone born in 1950 or before lived and experienced these five currencies. Unfortunately, none of these currencies managed to inspire enough confidence for people to rely on them, prompting Argentineans to instead invest in more stable foreign currencies or risk losing their purchasing power. In the case of Argentina, stability continues to be found in the US dollar.

Inflation in Argentina does not show signs of slowing down any time soon. The most recent data collected in the Consumer Price Index released by Congress indicates that Argentina is already on its way to 40 percent inflation in 2014, the product of restricted income sources and continued increases in public spending. Financing for these things is likely to come from inorganic increases to the money supply, compounding a problem that is likely to worsen if an agreement is not reached with holdout bondholders in January.

In short, the existence of the BCRA has been marked by dismal performance, and government strategy insures that inflation will continue to rise. The greatest problem is the lack of credibility. Throughout the region, Venezuela and Argentina are the only two countries with inflation problems, with the rest of Latin America maintaining an inflation average around 4.6 percent. The only country that comes close to 10 percent annual inflation is Uruguay with 8.36 percent, and that number is trending downwards.

The point is that inflation is not a regional problem; it only affects Argentina and Venezuela. It is neither the result of greedy businessmen in these countries, as government officials would have you think. Rather, it is poor economic policies that have caused high inflation in Argentina. The question is how do we reduce inflation in a sustainable way that will bring us closer to the 5 percent average in South America?

If the problem is based in confidence and credibility, it is these issues that we must work to improve. The nature of the monopoly directing monetary policy is the main cause of these problems. In other words, the ideal solution would be to eliminate the mandatory use of government-issued currency, allowing people to freely use the currency of their choice.

By definition, a legal monopoly without competition does not possess the necessary incentives to function efficiently. However, if business contracts could be signed and operated in other currencies (dollars, pounds, euros, real, yen, etc.), the national currency would be forced to compete with others in the market, resulting in more responsible monetary policy.

If the Central Bank does not do a good job, the national currency would be replaced by an alternative that inspires confidence. The resulting situation would benefit everybody. First off, if the BCRA performs well, the national currency would recover lost credibility and cease losing value. In other words, we’ll start to see less inflation or a smaller increase in the price index.

If, on the other hand, the BCRA does a poor job, the public would have fall back options to avoid losing their purchasing power. However it ends up, the average citizen wins.

Forcing people to save a currency that has accumulated 4.8 trillion percent in inflation throughout history is induced suicide. Worst of all, the people with the least financial resources end up suffering the most from the high cost of living. Inflation is compounded by the mandatory use of state currency, and people find themselves powerless to combat the situation, while their purchasing power continues to fall month after month.

Eliminating the mandatory use of government-issued currency means opening the door to other opportunities that would shelter consumers in case of national currency failure. Taking our history into account, we know that the Central Bank faces serious obstacles in the successful execution of its duty, which gives us greater incentive to seek better options, and if possible, improve the Central Bank through competition.

Translated by Peter Sacco and Alex Clark-Youngblood.

Iván Cachanosky Iván Cachanosky

Iván Cachanosky holds a bachelor's degree in business administration and a master's degree in applied economics. He's currently an instructor at CMT-Group. Follow him on Twitter at @ivancachanosky.

Naïve New York Times Fails to Recognize Cuba’s Real Enemy

By: Contributor - Oct 23, 2014, 9:19 am

By Karel Becerra A few days ago the New York Times asked for an end to the “embargo on Cuba." However, they should have asked for an end to the embargo on Castro. Cubans have nothing to impound: no properties, no houses, no cars, no furniture not even intellectual property; everything belongs to the communist government. This misunderstood contradiction means people such as the Times editorial board see a generous leader fighting against imperialism and a country “that has suffered enormously since Washington ended diplomatic relations in 1961." Meanwhile, the Cuban people who know the truth see a civil society impoverished by a dictatorship in Cuba that has held power for over five decades. The Times presents two main arguments: "shifting politics in the United States" and "changing policies in Cuba." Therefore, they contend, it is now "politically feasible to re-establish formal diplomatic relations and dismantle the senseless embargo.” The first argument is supported by a telephone survey of a sample of one thousand respondents in nation of 300 million citizens and a Cuban community of over one million. It lacks of scientific rigor and is meaningless. The second argument falls flat after a mere glance at Cuba's Official Gazette, where allowed private activities are nothing but "topping palms, fixing shoes, and selling plastic bags." The Times adds that, as part of these reforms, it is now possible for Cubans to "sell properties like cars and houses,” although they fail to mention buying them. Even the Times knows it is impossible for a Cuban who fixes shoes or sells plastic bags to pay US$25,000 to buy a car. However, the Times argues that "in recent years, a devastated economy has forced Cuba to make reforms." Here begs the question: if the reforms have been forced on the government, they are not really open to a freer market, so why ask for an end to the embargo? The Times' logic only holds if they can show that lifting the embargo would have a negative impact in the economy, since then Castro would be forced to make additional reforms. The Times ignores the facts that shape the real world. Castro’s regime only reacts under pressure, from inside or from outside.  The pseudo reforms in Cuba are nothing but "a process that has gained urgency with the economic crisis in Venezuela." Yet, the Times editors ignore the interference of Castro in Venezuela, which has contributed to their sister nation's economic crisis. Last but not least, the Times tries to defend Odebrecht, a Brazilian enterprise involved in cases of corruption. This has occurred while investing billions of dollars in El Mariel, helping to build a seaport in Cuba with Brazilian capital. Do the Cuban workers receive their salaries directly from the investing company? Will Cuban entrepreneurs be able to import or export their products? The answer to both is no! The Mariel seaport investment only serves the regime and its heirs. This investment constitutes explicit support for Castro’s regime and its planned successors. No matter how hard the Times tries, there is no way to hide that fact. But apparently the "great project [will] be economically viable only if American sanctions are lifted." After five years of construction, it has become evident that they need an end to the embargo! It seems that a dam was built without a river. Well, that's how socialism works: mourn and blame someone else. "End the economic embargo! Lift the sanctions!" go the cries of the Times. First the seaport and now the river to North American markets. Fortunately for the people of Cuba, they are running out of time and the river is not available for navigation. Karel Becerra is a Cuban exile in Argentina and the current secretary of international relations at the NGO Independent and Democratic Cuba. Edited by Fergus Hodgson and Marta Menor.

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