Global inflation has hit many economies hard recently, but few countries have seen inflation spikes as Argentina. The world champion football is quickly on its way to achieving another first-place position as the most recent data indicates a CPI increase of over 100% YoY in March 2023. Argentina’s peso is collapsing quickly and destroying the purchasing power of its citizens. The last time the country experienced such high inflation was over thirty years ago after the collapse of the previous currency (the Austral) as it was replaced by the Argentine Peso in 1991.
Protecting purchasing power is leading to the dollarization of the economy
The high inflation rate undermines confidence in the domestic currency as Argentines seek to protect their savings in more stable currencies, especially the U.S. Dollar. The country’s tumultuous economic past has traditionally led to Argentines seeking refuge in the U.S. Dollar to protect their purchasing power. Upon receiving their paychecks, Argentines immediately purchase necessary errands with any additional funds saved in U.S. Dollars.
Protectionist measures caused a thriving black market with a parallel dollar rate
The outflux of Argentine Pesos has led the government to limit U.S. Dollar purchases to $200 per month to protect the local economy. Credit or debit card purchases abroad are taxed heavily with an additional 30% tax rate. A demand for U.S. Dollars or Euros in cash has been created, even leading to a thriving black market with multiple parallel currency rates. The best-known rate is the Blue Dollar rate used at “cuevas” (caves) or underground exchange houses. U.S. Dollar bills are exchanged at the Blue Dollar rate set at 1 USD = 385 ARS whilst the official exchange rate stands at 1 USD = 205 ARS(at the moment of writing).
The US Dollar undermines the existence of Argentina’s Peso
Dollarization is taking hold of the Argentine economy as large purchases such as real estate or cars are now only done in U.S. Dollars, often paid off with big bags of cash. Rental apartments are also increasingly charged in U.S. Dollars. Argentina’s Peso is rapidly losing its status as money. For something to be considered money, it must adhere to three different characteristics:
- Money is a store of value
- Money is a unit of exchange
- Money is a unit of account
Argentina’s Peso lost its status as a store of value a long time ago and slowly also beginning to lose its status as a unit of exchange and account. The government started issuing new bill notes of 2000 ARS (approximately 5 USD). The Central Bank is also considering whether to issue 5000 ARS bills.
Turning fiat money into pieces of art
Illustrative for the currency collapse has been the trend of artists turning Argentina’s Pesos into art. Venezuela is the only country to top Argentina’s inflation rate in Latin America. For years it has been fighting hyperinflation, which turned the Venezuelan Bolivar bills into worthless pieces of paper. Argentina’s Peso bills are on a similar path as they have become a canvas for artists and are later sold at a higher value than the actual Peso bill. As Argentina’s Peso is losing its money characteristics, it is gaining status as a unit of art illustrated below:
Argentina’s Peso decline illustrates the consequences of reckless monetary policy
The situation in Argentina should be taken as an example of the fragility of fiat systems when Central Banks are allowed to continue reckless monetary policies characterized by money printing. Distrust in institutions continues to increase, illustrated by a further depreciation of the Argentine Peso. On its way to experiencing hyperinflation, Argentina faces the risk of the fifth currency collapse in its history. Central bankers worldwide should consider the Argentine crisis as the canary in the coal mine illustrating the consequences of reckless money printing.
