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The new president of Argentina is devaluing the peso by a large amount.
How is this supposed to help the economy there?
Is it to fight inflation but does it have to do with the idea of converting to US dollars?
Isn't this going to affect most of the people? I just read about a local woman saying that all her wages are going to spent on just getting to and from work.
Argentina has basically been lying to its people about the value of the currency, and in doing so forcing the government to spend tremendous amounts of money to defend the Argentine Peso to a value nobody believes....hence the large difference between the street exchange rate and the one offered in official channels. What this effectively does is it cuts off capital from industries that are exporting (agriculture) while indirectly subsidizing the price of imports. This hurts the country overall, but is done to keep social stability.
What the new President has done was to rip off the false band-aid, because frankly the government cannot afford it anyway and the choice is really to do so voluntarily and signal to markets that Argentina will play by the rules of supply and demand, or continue to be cut down, favored class by favored class, until Argentina is utterly destroyed economically.
In issuing that the favortism of the Peronists is over and that Argentina is open for business, there is a very good possibility that foreign investors will come to the region and supply capital to develop the area. For example, a good friend of mine has a winery here in the US. They bought land in Argentina to develop vineyards and wanted to import juice at first and eventually build operations in Argentina. However, there were such difficulties working with the government that they eventually gave up and sold their investment for a loss. Once an area becomes "uninvestable" only the very bravest of companies will go for the most lucrative of rewards and at the smallest amount of capital possible because there is no protection of their investment. When things are stable, more people are willing to invest, and to invest more, because their business will be protected by law.
So in the winery example, the socialist may look at it and say, this is an imperlist capitalist looking to profit from our land. In a way, that is true. They see an opportunity that requires capital, and capital is much cheaper in other countries than it is in Argentina at the moment. This becomes a significant problem for domestic would be entrepreneurs. If foreign capital is effectively blocked and domestic capital is too expensive, there the investment simply never happens. Why foreign capital is better than no capital is that winery will create domestic demand for other things. Directly, it will need labor and can pay locals. However, it will also need labels, bottles, crates, machinery, pipes, agricultural products etc. If bought domestically, this helps locally owned industries. If imported, this allows for more efficiency for other producers of products to do the same.
Basically, trade is healthy for all parties involved. If the currency is imbalanced, it disrupts trade. As trade falls off more, this imbalance only worsens, and puts the government in business not of governing for all, but of choosing winners and losers. Thus the emphasis of organizations ceases to become creating a superior product or service, but rather to win favor from government officials that regulate their industry.
In the short term, this devaluation will hurt Argentines used to a higher standard of living. Their purchasing power, on paper, will appear to have shrunk. In reality, this will be something to study, but it should not be as bad. Prices will adjust immediately, giving sticker shock, but the process should regulate consumption. As Argentines consume less and export more, the imbalance of trade and capital should swing to a surplus and things will get better over time. The risk is that such a swing of things to happen often accompanies instability. If Argentines resort to crime and strikes and become somewhat ungovernable, the hoped for stability in capital markets that would bring in investment will fail. If Argentina can hold the line for a few years, things will get better. It's a big if....but in all honesty, saying there's another way is a lie by other parties. Argentina is out of money. You can buy her bonds for pennies on the dollar. This needed to happen, and it speaks to the spirit of Argentines everywhere that the country is ready to face it head on.
The other problem Argentina will become tempted with, is that as exports become the best economic choice, it may take away from domestic supply. After all, if I can sell a lb of beef for more, even after taxes and shipping, overseas, the liklihood will be to do so. This happened awhile ago under the Shah in Iran, where domestically grown rice was both a staple in diets, but also in high demand overseas. The result was that the rice was exported, but cheaper rice was imported....until market conditions changed. While scary on the face of things, what will happen is that domestic production, because it is now more profitable, will increase. As supply grows, the price achieved will go down and eventually hits a point where it makes more sense to sell domestically than to export all.
It will take a few years to work out. These will be rough years for Argentina, but if they can pull it off, they will become a much stroger country that should develop quickly. Argentina is big, has many resources and an educated population. In its earlier years prior to its fling with the left, it was among the richest nations in the world. It can do so again. But, the Argentine population will definitely see constrained spending power for the next couple of years.
The black market exchange rate before he took office was 1000 peso to 1 US dollar,but the official rate is 400?
so now he made it 800 pesos to 1US ,which is not bad at all.
Besides,most Argentinians already have been hoarding dollars in tin cans,mattresse,secret safes,it has the largest holding of US dollars outside US,so makes no difference to them.
THe woman who said it would take one month pay to ride the bus,is a rare exception,telll her to Drink stronger coffee and WAKE UP.
I bet she has a cookie jar full of US dimes,nickels,quarters and dollars.
The black market exchange rate before he took office was 1000 peso to 1 US dollar,but the official rate is 400?
so now he made it 800 pesos to 1US ,which is not bad at all.
Besides,most Argentinians already have been hoarding dollars in tin cans,mattresse,secret safes,it has the largest holding of US dollars outside US,so makes no difference to them.
THe woman who said it would take one month pay to ride the bus,is a rare exception,telll her to Drink stronger coffee and WAKE UP.
I bet she has a cookie jar full of US dimes,nickels,quarters and dollars.
Probably not. There will be victims here. This will be felt most acutely by the old that are on a fixed pension. The value of their Argentine Peso based pension will diminish quickly. It should serve as a warning to all who care only about their government based stability without caring about the government stability overall....but for the most part these are innocents and charity will be needed.
BUT...and this is key. It was happening anyway. The only protections were government subsidies that it can no longer afford making people think it was possible to go without. Social engineering is its own art form....sadly.
Argentina had a choice to make and it saw through it. Go the way of Venezuela without the oil....or re-embrace capitalism fully and hopefully become the Hong Kong of the 21st century.
The UK devalued the pound in the 1940s and turned its economy around by sparking economic growth. Argentina’s neighbor, Chile revamped its economy and used peso devaluation in the 1980s as part of that strategy. When the sovereign debt crisis arrives at the U.S. government’s doorstep we will likely see calls for a similar move here.
The new president of Argentina is devaluing the peso by a large amount.
How is this supposed to help the economy there?
Is it to fight inflation but does it have to do with the idea of converting to US dollars?
Isn't this going to affect most of the people? I just read about a local woman saying that all her wages are going to spent on just getting to and from work.
The devaluation helps bring the official exchange rate for currency in line with the black market or unofficial rate. I've been to Argentina and you could get twice the official rate exchanging dollars on the street with black market vendors as you could get at a bank.
The truth is that Argentina is broke. Its an economic basket case. It takes about 1000 Argentine pesos to equal one American dollar. The government has subsidized its people for years with everything from low cost internet to mass transit that is virtually free. Higher education and medical care are essentially free too. Well, they aren't collecting nearly enough tax revenue to pay for all this, so the country slides deeper and deeper into debt literally by the month.
Many dark days lie ahead for the Argentine people. I hope they can avoid the equivalent of a violent revolution.
Finally, the USA is not on the same path. Inflation here is 3.2% and falling. In Argentina that figure is about 150%.
The new president of Argentina is devaluing the peso by a large amount.
How is this supposed to help the economy there?
Is it to fight inflation but does it have to do with the idea of converting to US dollars?
Isn't this going to affect most of the people? I just read about a local woman saying that all her wages are going to spent on just getting to and from work.
As others have said, this is a reset to closer to where it is actually trading. It does not help inflation in the short run. In fact, it doubled inflation overnight. That said, it is the first step in getting things on the right path. The next steps are going to be far more difficult.
This guy is very good at explaining it all. He points out not everyone will be a loser in this move to tie the Peso to the Dollar. Some people, - people who own mortgage free homes and cars and stuff - will come out ahead. Others, with cash in the bank, will lose money.
And some, who simply work from hand to mouth, will see no difference as their paycheck rises the same as prices.
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