"The wide boulevards and grand 19th-century buildings are now tired and grungy and the streets smelly. Angry graffiti and tattered posters deface walls, adding to the general feeling of lawless decay. It takes a long time to destroy a nation's wealth but a decade of kirchnerism - government by President Nestor Kirchner and now his widow, Christina - seems to be doing the job."
- Mary Anastasia O'Grady
The Wall Street Journal, Jan. 12
Buenos Aires has long been one of my favorite cities. It has fallen on hard times, and there is a lesson for the United States in the situation now unfolding in Argentina. Not for the first time in its colorful history, Argentina is experiencing the price inevitably paid for irresponsible and corrupt manipulation of a nation's money supply.
The purchasing power of the Argentine peso is in near free fall. Though the official inflation rate in 2013 is 10.5 percent, many non-government economists put it at two and one half times that. It is accelerating as we speak, nearing the point of no return. And where is that point? When a monetary authority loses all power to stop or even slow an inflationary spiral.
The black-market rate of exchange for the U.S. dollar, as of last week, is said to have topped 13 Argentine pesos. Official rate: 7.75. All this despite a significant draw-down of the central bank's dollar reserves, which now stand at just $29 billion - this in an economy that is the second largest in all of South America.
A small lesson in monetary history: When paper (fiat) money replaced gold and silver coins as a means of exchange, that paper was at first backed by a government promise to redeem it on demand with - you guessed it - gold and silver. Readers of a certain age surely remember the silver certificates that circulated side by side with dollars backed only by "the full faith and credit of the United States." Both gold and silver certificates have long since been removed from circulation.
The "gold standard" (abolished by President Nixon in 1971) was a U.S. promise made to foreign governments holding U.S. dollars or treasuries as reserves backing their own currencies. The promise was to sell gold at a fixed price (in 1971, approximately $35 an ounce). Because of this promise, dollars were long considered as "good as gold." No more. Have you checked how many dollars it now takes to buy an ounce of gold?
The gold standard acted as a governor works on an engine, keeping it from running out of control and destroying itself. With gold backing of the dollar removed, the U.S. monetary authority (the Federal Reserve) was free to print as much money as it and the federal government desired. The mechanics of this works as follows: The Treasury, facing shortfalls in what the government spends, issues interest-bearing notes and bonds; the Federal Reserve buys these with newly created dollars, expanding the money supply. The Fed sets the interest rate (currently near zero) paid on the new Treasury debt.
A fundamental law of economics is that the more there is of something useful, the less it is worth. How has the Federal Reserve gotten away with creating so much money for so many years? How has Washington managed to run up a $17 trillion debt without setting off a hyper-inflation? Good question.
Roughly half of U.S. national debt is held overseas. All is well until monetary authorities let their money lose serious purchasing power, as in Argentina, Turkey, Russia, and a dozen or more other major holders of that debt. They lose purchasing power, as suggested above, when too many pesos, lire, rubles, etc. have been printed to fund too much government spending. How do they mop up the excess? How do they keep inflation under control? The short answer is they sell dollars, U.S. dollars, the reserves they hold in lieu of gold and silver.
Where do these dollars go? Some help bid up the price of U.S. exports. Some are held overseas as a relatively more stable store of value. Some are funneled into the money supply back here at home.
What does the Federal Reserve sell to mop up excess dollars, dollars burning holes in the pockets of people who see their purchasing power melting away?
Well, there's all that Treasury debt the Fed has bought, debt that foreign central bankers are increasingly reluctant to buy. Who can blame them, when it pays near zero percent? The Fed can jack up that rate, but what will that do to an already wobbly economy? Is Buenos Aires a sign of things to come in Washington? In New York? In Charleston?
Note: For many years the Buenos Aires Herald was owned by the Charleston papers. Robert Cox, retired assistant editor of The Post and Courier, is a former editor of the Herald. His story of the period when he edited the Herald is recounted in "Dirty Secrets, Dirty War," a book written by his son, David, and published by the Evening Post Publishing Co. It's an excellent and informative read.
R.L. Schreadley is a former Post and Courier executive editor.