Governments lying? No way brah.


Part 2: The Effect On The People.


In our previous discussion, we went through how Argentina is able to keep its peso strong despite outside sources showing that the actual inflation rate is much higher than what the government claims. The current official rate has the dollar equaling about 5 pesos. Normally what this would call for, given the fact that this rate is fabricated by government, is that people will begin trading in their pesos for dollars.The Argentinian government recognizes that and so has implemented capital controls to prevent the outsourcing of American dollars from Argentina, making it almost impossible for people to get dollars at this rate.


In order to stop the outflow of foreign currency, the Argentinian government stopped people from being able to automatically convert their savings from pesos to dollars. They also implemented a law where anyone that wants to buy dollars has to request permission from the tax authorities in Argentina first. The daily quota for converting pesos to dollars was 5 million. The problem with that is that the daily market moves about 40 million dollars a day, making the AFIP able to cover about 12% of what is necessary. There was, for a time, a loop hole in this law where credit card purchases abroad would under go the official US exchange rate for pesos. In April of 2012 though, this loop hole was closed by applying a 15% tax surcharge on all overseas credit card purchases. The head of the Federal Administration of Argentina (AFIP), Ricardo Echegaray claims that this change is to ensure that the affluent taxpayers pay their fair share of taxes.


On a larger scale, the Argentinean government admits to an annual inflation rate of about 11.1% when in actuality it is 25% and rising. Argentina currently has the lowest level of foreign direct investment among the largest South American economies and as a testament to this, Vale, a Brazilian mining group has recently halted a 5.9 billion dollar investment into Argentina.


What is the result of all of this regulation to stop the outflow of foreign currency you may ask? For one thing, there is a boom in the black market for dollars. As of December of 2012, people are paying 7.52 pesos per dollar as opposed to the official Argentinian rate of 4.96 pesos per dollar. These regulations have done many things, but one thing we can be sure about is that it has scared people into thinking that the Argentinian government has only just begun to take radical measures and that it is better to sell your pesos for almost half their value than to end up with nothing later. Another negative affect has been the drop in tourism. No one wants to come to Argentina because of the ridiculous inflation bloated prices, especially when Europe itself is going through an economic crisis. This also means that people want to take their money out of Argentina and find cheaper goods else where.


The Argentinian Government’s actions have led to the illegal but necessary revitalization of the black market for dollars. Despite the hardships that are being felt by the Argentinian people, this is in the end Argentina’s problem. Are there other aspects of this black market that you can see negatively affecting the interest of the U.S.? As this black market would seem to be a natural development when government restriction on a desired item happens, should we just allow the invisible hand to regulate this or are there economic motivations for us to intervene via sanctions or other forms of political pressures? Are there even any treaty violations right now? It would seem that Argentina’s loss is our gain, they are advertising the desirability of the dollar reaffirming the fact that the dollar is still the most stable form of currency to be relied upon at least in South America.


Sources: FT, FT #2, FT #3

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