American Consequences - August 2020

He was referring to “Modern Monetary Theory,” which argues that governments can pay for huge spending by simply issuing more currency without needing to worry about deficits. However, as Tomas explained, there’s a big difference in Argentina... “Here it’s not modern, and there’s nothing monetary about it. It’s just the central bank printing money, giving it to the Treasury, and the Treasury never has to give it back. It’s the only way to survive.” When I visited Argentina’s capital, Buenos Aires, last September, the mood was dark. Today, it’s apocalyptic. Over the past six months, the printing presses have been running overtime in Argentina. In a desperate attempt to pay the bills, the government has increased the total monetary base – that’s the total amount of currency in circulation or in the commercial bank deposits held by the central bank – by more than one-third in recent months. It doesn’t help... Most of those wet-ink pesos are quickly converted into dollars. That’s been reflected in the 20% drop in the Argentine peso against the U.S. dollar since the beginning of the year. And in reality, the drop is a lot worse. The dólar blue rate – the black market rate – is around double the official exchange rate. The official exchange rate is around 72 pesos to

According to the Financial Times in mid-July, the head of the World Bank, David Malpass, pushed the G-20 to “open the door to consultations about the debt overhang itself and effective ways to reduce the net present value of both official bilateral and commercial debt for the poorest countries.” And that would very likely lead to pushing for similar by private creditors. (Who’s that?... that’s you .) The worst-case scenario for this process? Argentina in Free Fall As recently as June 2017, investors had enough faith in Argentina’s turnaround that they bought $2.75 billion of a 100-year bond . It was faith... or maybe they were blinded by greed and the 7.9% yield on the bond. Either way, they simply ignored the country’s history of default. (The IMF went one better, extending $57 billion in loans to Argentina just a year later.) Now, Argentina is in free fall. A nationwide lockdown has decimated the Argentine economy, which is forecast to contract by about 12% this year. But what’s different for Argentina is that the economy was already in dire shape, after shrinking 2.5% last year – and posting inflation of 48%. When I visited Argentina’s capital, Buenos Aires, last September, the mood was dark. Today, it’s apocalyptic. My friend Tomas, an economist and private investor in Buenos Aires, told me recently over the phone, “We’ve had MMT here in Argentina for the past 70 years.”

American Consequences

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