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Brazil and Argentina had very similar economic plans to get out of hyperinflation from the 80's - both created a new currency whose value was attached to the US

Brazil and Argentina had very similar economic plans to get out of hyperinflation from the 80's - both created a new currency whose value was attached to the USD. There was a subtle difference: Brazil forbade domestic contracts in dollar (with a few exceptions, mainly leasing contracts for imported vehicles). So when the market forces kicked in and Brazil was forced to devalue its artificially priced new currency, the impact was not that big. In Argentina, most contracts were underwritten in dollars, so the government delayed devaluation as much as possible. As the result, when it finally adjusted the exchange rate to more realistic values, the guy who bought one home was bound to pay 3 or 4. The government solution was the first default (by passing a law saying you could pay these contracts with a huge discount). This is why they are in this mess, some creditors are fighting to receive the full value.

epx 12y ago
Also, Brazilian Real was born to be around 1:1 with USD, but the exchange rate was never fixed, it floated from day one. Argentinian coin (don't remember the name) was 1:1 by force, which made the delay even more catastrophic.
- estebank 12y ago
  > Argentinian coin Argentinian Peso. Before that it was Austral.
  - lazyant 12y ago
    and before austral it was peso
- speeder 12y ago
  It was fixed from 1994 to 1998 if I remember correctly, it became floating after the Asiatic crisis.
chimeracoder 12y ago
> Brazil forbade domestic contracts in dollar (with a few exceptions, mainly leasing contracts for imported vehicles). This is an interesting and often overlooked aspect of monetary policy in the US. In the US, we are used to the dollar being the single currency domestically for virtually all domestic transactions, and even used to it being used abroad (which extends our purchasing power greatly) as well as in most black market transactions (which essentially acts as a free loan to the government). It makes monetary policy changes that much more effective, because there is no other currency to compete with directly (not by fiat, as in Argentina, but by custom). If alternative currencies like Bitcoin take off, the US government will have a very strong incentive to regulate them directly or manipulate them indirectly, because their very presence and widespread use would weaken the ability of the government to use monetary policy as an economic tool.
- growlix 12y ago
  Can you (or someone) explain how black market transactions in USD act as a free loan to the US government? This isn't intuitive to me.
  - chimeracoder 12y ago
    Anytime a dollar is printed, the person who receives the physical dollar bill is a creditor to the US government. The government is in debt to the holder of the bill, just as they would be in debt to a purchaser of a government bond. This is why counterfeit money is so bad - it's literally forging a debt of the government that never existed (essentially forging the government's name on a contract that says "I promise to pay the holder of this note $1" when they never did). Anytime a dollar bill is inadvertently destroyed, this is equivalent to the creditor forgiving the government's debt. This is a form of seigniorage[0][1]. The USD is the currency of choice for many black market transactions across the world. These transactions are usually conducted in cash, and the cash is oftentimes stockpiled (kept in cash instead of deposited into banks) or used for other black market transactions. In many cases, very little (if any) makes its way back into the domestic legal market. "Free loan" is a little hyperbolic, but it's a way of saying that the US has a number of overseas creditors who are unlikely to either demand that the US make good on its debt or sell that debt to someone who will. It increases the demand for USD internationally, which allows the US to print more USD[2] without any (or most) of the normal consequences of issuing debt. There's a body of academic literature that goes into the impact of black market transactions on monetary policy. I'm running out the door so I can't look for it, but if you're interested it should be easy to find (though a lot of it may be paywalled by JSTOR and the like). [0] https://en.wikipedia.org/wiki/Seignorage https://en.wikipedia.org/wiki/Seignorage [2] Sidenote, but this is why protests in which people burn dollar bills (OccupyWallStreet was one, though there are others) are so ironic - they're simply giving free money to the government, which is someties the exact opposite of what they are trying to convey with the protest. [2] Here I use the term "print" both figuratively and literally, unlike before
fiatjaf 12y ago
This is badly wrong. Brazil's plan wasn't to create "a currency with value attached to dollar", nor it was Argentina's plan. Argentina made a currency board, a regime in which the central bank could only emit 1 peso more if 1 dollar more entered the country (and reached the central bank's vault). In Brazil, Argentina's plan was called "dolarization" and was dropped by André Lara Resende, Persio Arida and Edmar Bacha when they were thinking about the brazilian plan, Plano Real. In fact, what Brazil did was only to control government costs, stop printing money and stop the indexation of prices and contracts by creating a virtual currency whose value changed every day in the rate of inflation (so all things could be priced in this virtual currency, whose nominal value was fixed). After that, that virtual currency became real, was printed and called the Real, becoming the new brazilian currency. The Real had no need of dollar indexation to succeed, and its price in dollars wasn't fixed at all, the brazilian central bank only made a promise to keep its price in parity, with open-market operations, for some time, to boost confidence, then it would let the price fluctuate. This was stated and clear from the beggining of the plan's implementation.
- scardine 12y ago
  It was way oversimplified, but I was not trying to write a PHD dissertation on economics. :-) Both plans were perceived by the laymen as a new currency worth 1 dollar and that helped stopping the inertial indexation of their economies (there! somebody from a stable economy will hardly understand what indexation was like).

epx 12y ago

Also, Brazilian Real was born to be around 1:1 with USD, but the exchange rate was never fixed, it floated from day one. Argentinian coin (don't remember the name) was 1:1 by force, which made the delay even more catastrophic.

estebank 12y ago
> Argentinian coin Argentinian Peso. Before that it was Austral.
- lazyant 12y ago
  and before austral it was peso
speeder 12y ago
It was fixed from 1994 to 1998 if I remember correctly, it became floating after the Asiatic crisis.

chimeracoder 12y ago

> Brazil forbade domestic contracts in dollar (with a few exceptions, mainly leasing contracts for imported vehicles). This is an interesting and often overlooked aspect of monetary policy in the US. In the US, we are used to the dollar being the single currency domestically for virtually all domestic transactions, and even used to it being used abroad (which extends our purchasing power greatly) as well as in most black market transactions (which essentially acts as a free loan to the government). It makes monetary policy changes that much more effective, because there is no other currency to compete with directly (not by fiat, as in Argentina, but by custom). If alternative currencies like Bitcoin take off, the US government will have a very strong incentive to regulate them directly or manipulate them indirectly, because their very presence and widespread use would weaken the ability of the government to use monetary policy as an economic tool.

growlix 12y ago
Can you (or someone) explain how black market transactions in USD act as a free loan to the US government? This isn't intuitive to me.
- chimeracoder 12y ago
  Anytime a dollar is printed, the person who receives the physical dollar bill is a creditor to the US government. The government is in debt to the holder of the bill, just as they would be in debt to a purchaser of a government bond. This is why counterfeit money is so bad - it's literally forging a debt of the government that never existed (essentially forging the government's name on a contract that says "I promise to pay the holder of this note $1" when they never did). Anytime a dollar bill is inadvertently destroyed, this is equivalent to the creditor forgiving the government's debt. This is a form of seigniorage[0][1]. The USD is the currency of choice for many black market transactions across the world. These transactions are usually conducted in cash, and the cash is oftentimes stockpiled (kept in cash instead of deposited into banks) or used for other black market transactions. In many cases, very little (if any) makes its way back into the domestic legal market. "Free loan" is a little hyperbolic, but it's a way of saying that the US has a number of overseas creditors who are unlikely to either demand that the US make good on its debt or sell that debt to someone who will. It increases the demand for USD internationally, which allows the US to print more USD[2] without any (or most) of the normal consequences of issuing debt. There's a body of academic literature that goes into the impact of black market transactions on monetary policy. I'm running out the door so I can't look for it, but if you're interested it should be easy to find (though a lot of it may be paywalled by JSTOR and the like). [0] https://en.wikipedia.org/wiki/Seignorage https://en.wikipedia.org/wiki/Seignorage [2] Sidenote, but this is why protests in which people burn dollar bills (OccupyWallStreet was one, though there are others) are so ironic - they're simply giving free money to the government, which is someties the exact opposite of what they are trying to convey with the protest. [2] Here I use the term "print" both figuratively and literally, unlike before

fiatjaf 12y ago

This is badly wrong. Brazil's plan wasn't to create "a currency with value attached to dollar", nor it was Argentina's plan. Argentina made a currency board, a regime in which the central bank could only emit 1 peso more if 1 dollar more entered the country (and reached the central bank's vault). In Brazil, Argentina's plan was called "dolarization" and was dropped by André Lara Resende, Persio Arida and Edmar Bacha when they were thinking about the brazilian plan, Plano Real. In fact, what Brazil did was only to control government costs, stop printing money and stop the indexation of prices and contracts by creating a virtual currency whose value changed every day in the rate of inflation (so all things could be priced in this virtual currency, whose nominal value was fixed). After that, that virtual currency became real, was printed and called the Real, becoming the new brazilian currency. The Real had no need of dollar indexation to succeed, and its price in dollars wasn't fixed at all, the brazilian central bank only made a promise to keep its price in parity, with open-market operations, for some time, to boost confidence, then it would let the price fluctuate. This was stated and clear from the beggining of the plan's implementation.

scardine 12y ago
It was way oversimplified, but I was not trying to write a PHD dissertation on economics. :-) Both plans were perceived by the laymen as a new currency worth 1 dollar and that helped stopping the inertial indexation of their economies (there! somebody from a stable economy will hardly understand what indexation was like).