Economaton

I bought some Argentine pesos in June while visiting as an experiment in currency speculation. Argentina’s economy was (and is) booming, with 2007 real GDP growth estimated at 8.4% by The Economist. This was very evident on the ground there, where the signs of economic vibrancy are many and obvious. Compared to the rather anemic economy of the United States, ( estimated at just 1.8% real GDP growth in 2007), I found it strange that the peso was slowly losing value to the dollar under these circumstances.

The political, business, and economic culture of Argentina bears mention at this point, as it is rather different from that of the United States in many important ways that the US-based reader may find surprising. Corruption is endemic and open, in both business and government. Most people don’t pay income taxes (which is technically illegal but not really enforced) or even have bank accounts, and conduct most transactions (even large ones) in cash. Credit reports don’t exist, so consumer-level interest rates are absurdly high — around 25% annually to finance a car or a house.

It was well known even at the time that the government was faking the inflation numbers — Ambito Financiero, the major Argentinian financial newspaper, was running angry editorials about it daily, and Argentine peso futures yielded a negative interest rate, becoming positive at October expiries, after the impending presidential election. Many government statisticians had been fired without explanation in January; they told the media that it was because they had refused instructions to falsify the inflation data. Price controls had been instituted on skyrocketing food prices, despite official claims of a modest 7-8% rate of inflation by Kirchner’s government. (The official statisticians’ union said this week that consumer prices rose 22.3% and food rose 36% in 2007.) Everyone, not just those with financial or economic knowledge, knew the official numbers were lies, and I was amazed that the government could continue reporting its figures with a straight face.

After the economic crisis passed in 2002, Argentina became very attractive to foreign investors. Argentine assets could be had at firesale prices for those paying in dollars or Euros, and the government encouraged massive foreign investment to shore up the economy. The process seems to continue unabated today. My theory is that the government is printing money 24/7 to maintain net capital inflow and keep the price of Argentine exports artificially depressed. This, of course, also leads to the massive inflation described above.

The political situation in Argentina is always unstable. A whole lot of people have been left behind by the economic boom. Many are in real danger of starving to death soon. Massive street protests by socialists, labor unions, and the unemployed are common in Buenos Aires. Inducing massive inflation (and lying about it) for some temporarily faster economic growth does not seem like a good idea under such conditions. The Economist primly notes only that “Twin fiscal and current-account surpluses underpin the economy’s resilience, but heterodox policies pose risks. After a strong economic rebound in 2003-07 from the deep recession of 2001-02, discretionary, interventionist policies could begin to weigh on private investment.”

So I bought pesos, reasoning that showing strong economic growth was a play for the political theatre. Then-president Néstor Kirchner’s wife Cristina Fernández de Kirchner was running to replace him as President, and surely he wanted to help her out. They couldn’t possibly be considering maintaining such an insane monetary policy after she’d won, especially as the United States was running its own printing presses full time and devaluing the US dollar. My dead reckoning guess was that a dollar ought to be worth around ARS 2.75, realized over 6 to 9 months after the election. Turns out I was very wrong. The peso is still sliding, and shows no signs of change.

I underestimated the willingness of the Kirchners to maintain obvious lies about the inflation figures for so long, in spite of widespread public condemnation at home and abroad. I reasoned that they would surely let the peso appreciate after the election, so as to prevent hyperinflation and restore normalcy to food prices. It turns out that they’ve done no such thing; and why should they? Anyone with money in Argentina keeps it in dollars or Euros.

So, given that information, shorting pesos now seems like a good bet.. I’m thinking of taking my pesos and buying roubles. More on that soon.