Can the US Learn from Argentina?

For years leading up to the millennium year change, the Argentine currency (peso) was pegged to the US dollar. As a result the Argentines 'lived high on the hog' so to speak. With their over-valued peso/dollar they bought goods from around the world like drunken sailors…indeed like the proverbial 'last of the big spenders."

Unfortunately, its principal trading partners - especially Brazil - was not so foolhardy. Slowly and methodically Brazil devalued its own currency (real). And as one might expect Argentine exports dwindled to a trickle, while imports went exponential. It was a formula for economic disaster. The current account and trade deficits soared. Factories began to close all over the country, because the "rich Argentinos" were buying foreign made products with their too dear peso/dollars. It logically followed that unemployment went ballistic as factories lost orders.

The pernicious social effects of the too dear currency were catastrophic. The official unemployment rate approached 20 percent and more than 40 percent of the population lived under the poverty line.

This evolving economic apocalypse frightened the wealthy elite who began to send their peso/dollars abroad for safekeeping. This emptied the Argentine Central Bank coffers of foreign reserves which were heretofore used to amortize the nation's humongous foreign debt of US$141 billion (the greatest per capita foreign debt in the world with the exception of the US)

What happened next?

CIVIL UNREST and ARGENTINE DEVALUATION !

Civil unrest throughout Argentina ensued, forcing the resignation of four presidents within the space of barely two weeks -- thus allowing an alliance of Peronist politicians to take control.

Finally, the newly installed government of President Eduardo Duhalde announced the devaluation of the Argentine peso by nearly 30 percent on January 7, 2002 -- just days after the country formally entered into default on its $141 billion foreign debt. "We are in collapse. Argentina is bankrupt," the government's economy minister Jorge Remes Lenicov declared.

By mid--2002 the peso had lost 73 percent of its former fictitious "utopian" value. The Argentinos came back to reality earth.

This begs the question

What happened in the aftermath of the Argentine economy, subsequent to the massive devaluation that 'washed' away its cancerous debt? After many painful months of living in an antiquated barter economy (eg where a shoemaker traded his footwear to a farmer for food) , exports began to rise, factories to reopen, resulting in increased employment. Moreover, expatriated Argentine money started to funnel back to the country. Effectively, the Gaucho nation began to agonizingly pull itself out of the quagmire. But WHERE do you think was the biggest phenomenal comeback? THE STOCK MARKET, of course!

In the two years leading up to the massive 2002 devaluation, smart well-informed Argentine money well knew the too dear peso/dollar could not maintain it's the 'unholy alliance' - as it was strangling the economy. Consequently, smart well-informed Argentine money began selling its publicly owned stock. During this period the Argentine Dow equivalent (MERVAL) plummeted nearly 70 percent from 650 to 200. Understandably in December 2001 Buenos Aires was ripe with rumours of a forth-coming devaluation. Again those in the know began to snap of MERVAL listed stock at bargain basement prices. This marked the exact nadir of Argentina's bear market.

One month later (January 2002) the official devaluation was announced. The now poor peso was no longer pegged to the dollar…it was allowed to float. With prospects of an improving economy, money subsequently poured into Argentine stocks. In fact MERVAL soared 300 percent in the next 19 months to the present. - To my knowledge this is the greatest percent performance of any stock exchange in the world. BTW, Friday's close was at a record high.

MERVAL Miracle

Upshot of the Argentine Lesson

It is my considered opinion the US is traversing the same ruinous road as Argentina in the last two years before taking its 'bitter medicine' to cure its ills of lost exports, lost jobs, record current account deficit, plunging Central Bank foreign reserves, a ravenous bear market in stocks, burgeoning debt and general overall economic disarray.

To cure US economic malady, its too dear currency must be devalued

Yes, I know the US dollar has already lost over 22 percent in the past two years (121 to 94 basis US Dollar Index). But that's not enough to allow American exporters to again be competitive in world markets. The greenback needs to be driven down to 85 or better yet to 80, where it was when Robert Rubin took the helm as Secretary of the US Treasury…when in my opinion IRRATIONAL EXUBERANCE was born.

I am totally convinced the present Administration in Washington is (and will continue) to orchestrate a weaker dollar (its public denial notwithstanding). Moreover I am convinced the US dollar will be at least 15 cheaper (read more competitive) by the end of this year.

US dollar demonstrates a methodical and orderly decline

There is no iota of doubt what the trend shows…indeed forecasts.

One last noteworthy observation. Just as the Argentine peso value of gold went ballistic pursuant to devaluation, so will the US dollar value of gold increase as the greenback becomes cheaper. A peek at the chart of the peso value of gold may provide a preview of the POG in dollars in the not too distant future:

Peso value of gold

Dollar value of gold

In my view the dollar value of gold chart is predicting a much cheaper dollar going forward…MUCH CHEAPER !

Can the US Learn from Argentina?

I say yes…in fact the US has been learning and implementing the Argentine lesson for some time…but the job ain't done yet.

June 2003