There has been a lot of talk lately of places such as Argentina and Venezuela, where the country is going through a process of high inflation and currency devaluation.
The symptoms of this have been present for at least the last year. It is well known, that the blue-chip (official exchange rate) of the Argentinian peso, is well below the black market rate (what should be the real exchange rate if the government were not heavily intervening.)
Now as always, most experts or government analysts seem to miss the point and lessons of these episodes.
The terribly socialist Argentinian government has been engaging in large deficit spending financed by their central bank. The relationship as always is clear. The central bank creating money, on demand, brings about inflation and loss of value of the currency.
Furthermore, for a long time, the Argentinian government has been trying to impose price controls, it has forbidden the free exchange of pesos for dollar and what do you get from all this? Toilet paper rationing, that’s how bad it gets.
But worst off all, as always, is the fact that many Argentinians may believe the lies of the president when she says that rising prices are a symptom of corporate “greed”.
A very similar thing happened in Spain when a few months back energy prices shot through the roof. The Spanish press and government antagonized the electricity companies for rising prices and as always proposed a blend of government subsidies and price controls to combat this.
The fact of the matter is, these spikes in energy prices were not the result of corporate mismanagement or something like that, the first and most clear evidence being that this was a worldwide phenomenon.
How can you blame rising energy prices on the CEO of Endesa if this is happening everywhere? You can’t, you can only blame the Federal Reserve for its reckless actions.
Yes, that’s right, the Federal Reserve, central bank of America, is responsible for the increase in energy prices today like it was in the 1980s. Unfortunately, since the dollar is the worlds reserve currency all oil purchases are made in dollars.
Some of this impact has been offset due to the appreciation of the euro vs the dollar during the last year, which you would expect since like I always say we have a slightly more responsible Central Bank.
However, and though I don’t have hard evidence of this, my belief is that most of the forex exchange rates, as almost every other thing, are “regulated”, to a certain extent by the State, as are gold prices, which might again help explain the disparity between gold and inflation that I talked about in my last post.
Also, there is the fact that the Euro has to try and maintain a loose “link” to the dollar. Because while many things that the government does for an economy don’t work, devaluations do. Devaluations can, and do, make the countries exports more competitive, but like they figured out in the 1930s, this comes at the expense of someone else, creating a zero-sum game.
Finally, let me go back to the Argentina case. The inflation and devaluation are going to be a real problem for Argentina now. Why? Because their central bank, and all central banks around the world, don’t manage their currencies correctly.
Argentina is now raising their interest rate target, which is the standard procedure in this case, but this could work or it could blow up in their faces, like it did in Brazil.(both things) If the Argentinians were to adopt a gold standard they could easily tame inflation and recover a stable value for their peso, unfortunately they won’t.