Argentina on the Brink of Hyperinflation

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Argentina is in deep crisis with inflation rising above 50% a year, the highest it has been since the 80s.

Prices in Argentina are rising at times at 5% a month and rarely fall below 2% per month with the situation appearing to worsen.

Galloping inflation in Argentina, May 2019
Galloping inflation in Argentina, May 2019

The above chart goes all the way back to 1992 just as a period of hyperinflation was ending in the late 80s.

We can then see the economic crisis and the debt crises that begun for Argentina in 2001, ending a couple of years later.

The debt crisis is finally resolved in 2015-16 with debtors paid back 30% of face value and here we should be seeing some respite. Instead inflation jumps, close to 7% just for the month of July 2018 and nearing 5% month on month for this March.

Monthly inflation in Argentina, May 2019.

The value of Argentinian Peso has plunged, from circa 4 ARS to a dollar about 5 years ago, to now one dollar getting you 45 Argentinian Peso.

ARS/USD May 2019
ARS/USD May 2019

We can see things are sort of normal until 2016 when there’s a jump, but really it’s summer 2018 when things get out of hand.

Last year was a terrible year for most investment classes and some national currencies as the dollar strengthened considerably.

Why this is continuing in Argentina, however, is not very clear but the economy is doing very badly.

It contracted by -4.7% in July 2018 without even accounting for inflation. It fell another 1.2% this quarter.

Interest rates in Argentina, May 2019

Wow. Interest rates in Argentina are at a crazy 70%. That’s 20% more than inflation and that’s the base rate.

Borrowing money in this country is basically impossible, unless you like loan sharks. This is very probably a cause of inflation, instead of a cure as central bankers claim because there’s no other obvious reason, although debt has jumped.

Argentina government debt levels, May 2019.

So now we know what happened in July. The government went on a spending spree, flush perhaps with a new credit card after getting access to the open market following the resolution of the last debt crisis.

All of which would have been a nice story, and at least fair as Argentinians would have gotten something, if it were true.

It isn’t. Argentinians are on the streets protesting government spending cuts and increased taxes. What the above chart tells us is only that the value of pesos against the dollar halved because Argentinian government debt is in USD.

No one gives them money in pesos denominated debt because pesos is losing value. They have to borrow in dollars, while getting an income in pesos.

So then the problem is the central bank because the only unusual thing here is the very high interest rate.

As we now know, money is not created through loans, or multiplied through savings, or by just printing. Most money is created digitally and that’s through the interest rate.

The higher the interest rate, the more money is created. Officially this hasn’t yet been confirmed, they haven’t yet explained what role interest plays, but from what else they have explained of the financial system, we think money is “printed” through interest rates.

In Argentina, basically 70% of a loan becomes real money. In US, the base rate is 2.5%, so a loan of $100 creates only $2.5 in new money, the rest is burned.

Obviously if you’re creating a lot of new money, then prices will rise and the value of your money against other money will fall.

Including against bitcoin which itself had a terrible 2018, but still managed to retain its value better than the Peso.

Bitcoin trading volumes in Peso, May 2019.

That has the dollar sign, but it’s actually in ARS. Looking at this you’d think the popularity of bitcoin in Argentina is skyrocketing. Let’s look at the real chart:

Bitcoin trading volumes in Argentina, May 2019
Bitcoin trading volumes in Argentina, May 2019

Now this looks a bit different for a number of reasons. Bitcoin’s price was a lot lower in 2016, so Argentinians bought more. Now it’s a bit higher, but volumes are rising there, although it is just between 24-60 bitcoins.

It is not therefore skyrocketing, as the fiat chart indicates, but it is rising with Ripio, a crypto exchange, claiming they have some 200,000 Argentinians as customers.

Buying bitcoin in Argentina, May 2019
Buying bitcoin in Argentina, May 2019

Ripio appears to be more of a broker. They have an exchange where BTC/DAI and ETH/DAI is listed, but no one seems to be using it presumably because they need DAI first.

On the brokerage service, bitcoin appears to be at a premium of about $100, but they say there’s no commission.

Ordinary Argentinians usually escape to the dollar, with bitcoin being more of a savings account or an investment, a place to keep spare money.

Bitcoin would also be more useful to take value with you. Following a number of previous confiscation by banks, Argentinians keep their dollars in cash. That cash can of course be seized, and if they keeping it in a bank, the bank might just not give them back their own money.

With bitcoin, it would probably be a lot more easy to take your savings out of the country, with the young especially now probably thinking of leaving this very nice sort of Mediterranean nation due to monetary mismanagement by their central bank and the elected.

Copyrights Trustnodes.com

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