Argentina appears to be on the verge of a currency crisis yet again. And what’s interesting is how if you consider the factors that have led to that outcome, it’s amazing how all of them also exist in regards to the U.S. dollar.
Recently The Wall Street Journal reported that Argentina has “turned to the International Monetary Fund for financial backing to help stem the peso’s depreciation and rising discontent over high inflation and reduced government spending.”
“It is not good for the future of Argentina,” said Guillermo Nielsen, a former Argentine finance minister who led the country’s debt restructuring with the IMF at the turn of the century. “Argentina went back into heavy indebtedness under Mr. Macri” and now debt-servicing payments will rise, he added.
Heavy indebtedness along with debt-servicing payments that are set to rise? That certainly describes the U.S. Treasury Market. Where not only are debt levels higher than ever, with forecasts for even faster rates of debt accumulation going forward, but interest costs are set to explode as rates continue to rise.
“The efforts to halt the depreciation of the currency come amid investor concerns about the central bank’s independence and government’s ability to contain inflation, which is currently above 25%. The central bank’s target for this year is 15%.
“It’s going to be a long tough road to regain and fully restore policy credibility much of which was unnecessarily damaged,” said Patrick Esteruelas, head of research at Emso Asset Management.”
That sounds similar to the United States, where the Federal Reserve’s credibility is already completely shot in the sound money community, while more in the mainstream are continuing to awaken to the reality that the Fed really has no exit plan. And certainly when the latest stock, bond, and real estate bubbles collapse, it will be fascinating to see how long the road to restore faith in the Fed turns out to be. In fact it may be far more likely that when these bubbles crash, that could well be the final knockout blow to the Federal Reserve system as we currently know it.
“Argentine equities have dropped 14% this month, and the Argentine peso has weakened 12% against the dollar since the government began intervening in currency markets in late April.”
The U.S. equity markets have finally slowed down and weakened for the first time in almost a decade as interest rates have risen. While a look at the Dollar Index shows the world’s reserve currency has lost over 10% of its value in the last year and a half.
Of course keep in mind that this is only measuring the dollar against a basket of other weak paper currencies. Of which almost 70% represents Euros and Japanese Yen, that emanate from nations that are currently running negative interest rates.
“But many economists are increasingly concerned with Argentina’s growing debt to cover its widening budget gap, resulting in rising interest payments.
Argentina’s external debt has grown from $178.9 billion in 2015 to a projected $252.9 billion in 2018, according to the IMF or 39% of GDP. With much of that debt denominated in dollars, Argentina’s weakening currency will make it more difficult for Argentina to pay that debt back.”
If those growing debt levels don’t sound good to you, you’re hardly alone. But what’s really stunning is how that’s just a drop in the bucket compared to the level of debt that’s been piled on in the United States. Where the current debt-to-gdp ratio is already over 100%, and that’s without even factoring in unfunded liabilities like Social Security and Medicare. Where economist Laurence Kotlikoff estimates a true burden of over $200 trillion dollars, in an economy with a GDP of less than $20 trillion.
It’s amazing how if you remove the names and dogma how stunning U.S. numbers have become. In fact it actually reminds me of a turning point in my own career, whereupon studying the fiscal condition of the U.S. and becoming concerned, when I talked to others that I still worked with at the time on Wall Street, the only response I ever received was, “well, things like that don’t happen in the U.S.”
Perhaps it’s only fair to acknowledge that in the past decade, to this point, those folks have been correct. Yet I imagine that was also what many said about the housing market before it collapsed, and the laws of nature and economics have a way of addressing statements like that in the long-term.
I continue to believe that the United States is not immune from factors of supply and demand, and while the seminal Minsky moment has not yet occurred, every indication is that it is rapidly approaching.
So while further turbulence in Argentina may not be sufficient to significantly impact the pricing of gold and silver, my guess is that when the U.S. finally enters its debt crisis moment, those who own gold and silver will be the ones most well protected from the fallout.