The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Blame Evita?

Last week, inflation in Argentina reached 501 percent – staggering but not even near the worst in Argentine history. Partially as a result, the Argentine president promptly resigned.

I was in Argentina two months ago and noticed that prices were cheap when spending American dollars. (The only over-priced items we noticed was anything to do with their World Cup victory this year.) With soaring interest rates, the value of their currency is plummeting. Sadly, things are about to get much worse for the people of Argentina.

Their debt-to-GDP ratio is higher than the U.S. but not substantially. The differing reasons for their financial collapse and our relative immunity are interesting. Most importantly, the dollar is the world’s only reserve currency, keeping the dollar stronger than it would be otherwise. However, the nature of our deficits is quite different than theirs. Our debt is largely related to supporting people who don’t need it (high income earners), many of whom don’t need any support. The debt of Argentina largely reflects massive supplements to hold down the cost to consumers of oil, milk, & bread, which is quite high compared to ours.

Ignoring the reserve currency issue, which deficit is easier to control: Supplements to high income earners (think Social Security recipients) or raising the cost of staples (think oil, milk, & bread)? I think we should be more sympathetic toward the tough decisions facing Argentina.

For Americans, it will be much cheaper to vacation in Argentina, but don’t forget a currency crisis like this usually fosters social unrest.