Argentine Inflation – Understanding it with pictures and the implications for other countries

Introduction

Many Argentines give up 35% of their earnings to exchange their pesos to US $s because they do not trust the government and its monetary policies.  There is also a history of every 10 to 20 years of the currency becoming worthless.  The current inflation rate is 15%, and from 1944 through 2015 Argentina had an average inflation rate over 200%.  My first visit to Argentina was in 2001, and I have returned many times since then.  This blog post has three different lessons that I hope will give you an idea of the crazy economics here.

Lesson One – 2001 – The Argentina Peso has parity with the US Dollar (AR $1.00 = $1.00 US)

Argentina Peso vs US Dollar – Lesson #1 In 2001 the Argentina Peso had the same value as one US Dollar. To convince people to keep their money in the banks and increase government credibility, you could deposit money in the banks and have you account denominated in pesos or dollars. Argentina kept the peso equal to the dollar between 1991 and 2002 as a way of reducing hyperinflation.  In December 2001, the government walked away from the one to one convertibility. The government closed the banks, would not people access their accounts, and suspended the equality of the dollar and the peso. It was years before people were allowed to access their accounts. When the AR government suspended the convertibility of the peso, it immediately went to 4 pesos to one dollar, and stayed at that rate for several years. People who had the deposits in US $s in AR banks were not allowed to withdraw their money in dollars. So they could only withdraw in pesos. So deposit accounts were paid back by the banks at 25% of their original value. Do you trust your government guarantees with your money. The guarantee can be changed at anytime.  Below is a picture showing the value of the AR peso from 1991 to 2001.

From 1991 to 2001 the Argentine peso had convertibility with the US Dollar at a rate of one to one. The picture show an AR$100 note, and a US $100 note.
From 1991 to 2001 the Argentine peso had convertibility with the US Dollar at a rate of one to one. The picture show an AR$100 note, and a US $100 note.

Lesson Two – October 2015 – Official Argentina Peso Exchange Rate with US Dollar  is AR$ 9.5 to US$ 1.00 (assume 10:1)

The official exchange rate for the peso to the dollar today is a one US dollar to AR$ 9.5 pesos (essentially 10:1). The picture show US $100 vs AR $ of 950 pesos. Remember in 2001 it was one dollar to one peso. The real problem now is that most people in Argentina think their money is really worth nothing, or treat it as funny money. Lesson 3 will provide the true value of the peso. Just because the government says this is the value of your money, you cannot find ANYONE outside of AR that will exchange money at the official rate.  Below is a picture of what the government says the current value of the peso is in October 2015.

Argentina's official exchange rate in October 2015 is AR$ 9.50 to US $ 1.00 (essentially 10:1). This picture shows AR$ 1,000 and US$ 100.
Argentina’s official exchange rate in October 2015 is AR$ 9.50 to US $ 1.00 (essentially 10:1). This picture shows AR$ 1,000 and US$ 100.

Lesson Three – Many people in Argentina convert their Argentine Pesos to US Dollars at the rate of AR$ 15 to US $1.00

The unofficial exchange rate today between the peso and the US dollar is 15 pesos vs 1 US dollar. It is called the “Dollar Blue” rate. Many people in Argentina exchange all of the money into US dollars as soon as they get paid. Why would any sensible person change there money from pesos to dollars at the rate of $15 to one vs $9.5 to one losing about 35% in value from the official exchange rate? Do you think people in AR are stupid? People here are not stupid. In fact most Argentines are very smart. It is credibility. There is no credibility here in the money. This is why people give up 35% of the official value of the peso they have worked so hard to get.  Hence the Argentine peso is worth only about 65% of the official exchange.  Below is a picture of AR$ 1,500 pesos and US $100 notes.

AR$ 1,500 and US $100 are shown in this picture. This is Blue Dollar exchange rate in Argentina. This is the rate people gate if they want to exchange their pesos for dollars. Why do they take a 35% loss from the official exchange rate to get US$s? They do it because the want to keep it in a currency they value.
AR$ 1,500 and US $100 are shown in this picture. This is Blue Dollar exchange rate in Argentina. This is the rate people gate if they want to exchange their pesos for dollars. Why do they take a 35% loss from the official exchange rate to get US$s? They do it because the want to keep it in a currency they value.

Other Current Money Exchange Issues

This same Argentina currency issues are starting to happen in BrazilBrazil. When I first went there in 2000, it was R$ 1.70 reals to $1.00 US. Today it is 3.83 Reals to one US Dollar. If you think this kind of stuff only happens in South America, you are dreaming. It has happened twice in Germany in the last $100 years.

Why could I go to college in the the 1960s US for less than $500 / year full time, and today it would be about $15,000 / year. As recently as 1970 you could purchase a fully loaded Chevrolet Impala for about $5,000, and today it would cost about $30,000.

When people talk to you about inflation and the causes of information it is a subject that most people do not really understand, but they DO UNDERSTAND HIGHER PRICES.

Some Current Thoughts and Issue

The minimum wage should be raised the the US to $15,000 / hour

I don’t want to get into the morality of what people should earn / not earn, but you might want to ponder these examples:

  1. Retired people on board and care facilities that normally cost $5,000 US or more.  Most of the time workers in these facilities are getting $9.00 / $10,00.  So all of a sudden their pay goes to $15.00 / hour.  If you think the rates charged to people living in board and care facilities is going to stay $5,000 / month US, you are living on another planet.
  2. Fast food workers and restaurant workers typically get minimum wage.  Wages typically make up about 70% of the operating expenses of a restaurant’s budget.  Many cities are raising their minimum wage to $15.00 / hour.  So what will happen to the price of restaurant meals in these cities.  Some restaurants will be able to raise their prices, but it will be interesting to see what happens in the places that cannot raise their prices.  I bet their will be a lot of unemployed restaurant workers in Los Angeles, Seattle, San Francisco, New York City, and other places that raise wages to $15.00 / hour.  I hope that I am wrong, but I don’t think so.

These are two of the many examples that come to mind.

Summary

There are many things that cause inflation.  However, if your government does not manage the economy and its currency well, all of the citizens begin to loose faith in the currency.  After people loose faith in their currency, all kinds of things happen to turn the currency into funny money.  You only have to look at Argentina, and the start of it in Brazil to understand what funny money really is.

If you don’t think it can happen in United States, you are kidding yourself also.