4 ms·
I'm no expert, but my understanding is that: 1. Low value of exports leads to a trade imbalance and long term decline in foreign currency reserves. 2. The gov
by mastax 4y ago
I'm no expert, but my understanding is that:
1. Low value of exports leads to a trade imbalance and long term decline in foreign currency reserves.
2. The government prints money to spend not on productive investments to solve 1. but on vanity projects or more-or-less bribes for their constituents to stay elected, leading to inflation.
3. Many historical periods of high ARS inflation leads to a lack of confidence in the local currency debt market.
4. 1+3 mean that Argentina needs to borrow in foreign currency, mostly USD.
5. Over time the debt accumulates and even more borrowing is necessary to pay interest.
6. Recently, rising US interest rates lead to a stronger USD, exacerbating the problem.
7. As debt rises so does the default risk and investors won't lend except at higher interest rates to compensate.
8. Eventually the country risks a default. Nobody wants that because the country wouldn't be able to import anything due to a lack of foreign currency (see Sri Lanka) and the creditors don't want that because they won't get paid back. So the IMF offers a bailout on the condition that the country will implement reforms to reduce spending so that it won't need to be bailed out again - austerity.
9. Austerity is unpopular and the government is replaced with one who promises to raise spending again and stick it to the IMF.
10. GOTO 1
This probably describes most countries in the world.
- tristor 4y agoThis is pretty accurate, but somewhere between step 8 and 9 or step 9 and 10 is "Argentinian government 'resets' the currency, causing even deeper loss of confidence"
- wbsss4412 4y ago11. Due to extremely taxes and an extremely unfavorable official exchange rate, citizens hoard dollars illegally and it exacerbates their currency reserve problems. Note that 11 is really an issue of both government policy and the culture. Tax evasion is both a response to inflation and a result of a culture that doesn’t see an issue with putting private benefit over public good.
- xkcd1963 4y agoOn the other hand, its antagonising to see such malfancioning of the state and keep feeding the machine with taxes
- wbsss4412 4y agoYes, it’s a really a breakdown of civil society as a whole. Any individual person is going to through their hands up at the whole thing and go along with it because it appears there’s nothing to be done.
- conanbatt 4y agoThere is more nuance to some of these steps but roughly right. It's very important to understand that this is a very important weakness of the monetary system in every country, and only countries with little political power are forced to austerity by larger powers (Greece, Argentina and the IMF, etc). Argentina is just a chronic abuser of foreign debt and money printing.
- forinti 4y agoThere is an additional ingredient which is very important in Latin America: the very rich see their countries as cash cows and are not particularly interested in changing things. There is practically no industrial class in Argentina any more. Their main business is to export soy and meat.