The Boiling Point

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A story out of Argentina this week wrenched my heart. It was not the front-page news about the country’s worsening currency crisis; it was a back-page story about a father in Argentina trying to buy shoes for his daughter. Sure, there was an economic crisis going on, but at least he could buy her new shoes for her birthday, right? Well, he should have bought them a month earlier – the Argentine peso’s value is falling so fast that all he could afford to buy now was a pair of used shoes.

“Do you know how I feel buying my daughter used shoes?” the man asked.

This just shows that history can repeat. Back in 2001, my friend Willy, who now lives in America, was a journalist in Argentina. He had a wife, a daughter and a nice career. But he could see that the corrupt government was spiraling into a crisis. So he quickly exchanged all of his pesos for dollars at the official 1-to-1 exchange rate. Then he sold his apartment for $32,000. It was a fire-sale price, but he was determined to flee for Miami and start a new life.

The sale went through on December 1. On December 2, the bankrupt government essentially froze everyone’s bank account. And that included Willy’s money in the bank. By the time he could get the cash in hand, through the magic of government accounting, his $32,000 had turned into $8,000.

Willy now cleans pools in South Florida for a living; he considers himself lucky. He did get out. But obviously, most Argentines are still in Argentina… and they are suffering through a brand-new currency crisis. I’m thinking they don’t feel so lucky. Joel Bowman has been chronicling the stories of ordinary people caught in the awful crisis that is unfolding now in Argentina. A trip to the grocery store is an adventure full of unpleasant surprises. The price of everything, and I mean absolutely everything, is going higher and higher.

A 19% Plunge in One Month

The peso plunged 19% in January alone. Inflation is running so hot that it unofficially exceeded 28% in 2013 (the official rate was 10.9%). The Argentine government is so afraid of currency fleeing the country, it is limiting the amount of times its citizens can shop on to twice a year. And then they can spend only $25 at a time!

And still the peso plunges.

When a currency collapses, people try to convert it to anything – ANYTHING – that might hold its value. That’s why we hear stories about Argentines lining up to buy refrigerators and TVs even when they don’t need them. They can’t buy foreign currency – that’s been banned for the past two years.

How about gold? The government only allows people to buy 100 grams per day, per person. AND you have to document the source of the currency you are using to buy the gold.

A Spreading Contagion

All that sounds bad, right? Now, here’s where it takes a turn for the worse. Because unlike the last crisis that ended in 2002, this one is not just an “Argentina thing”; it is spreading around the world. Take a look at this chart showing the decline in emerging market currencies during the last year.


Sure, the Argentine peso is a basket case. But the Turkish lira is not faring much better. (And remember, these horrible results are based upon “official” exchange rates. Using the unofficial, black-market rates, these currencies have lost even more of their value than the above chart shows.) Continuing our tour through the monetary intensive care unit, the Indonesian rupiah is flat on its back, as is the South African rand. In fact, there are 10 emerging market currencies that have crumbled more than 10% in the past year. One of them, the Indian rupee, circulates among 1 billion people! In other words, the loss of value is very real and very meaningful. Lots of fathers are struggling to buy new shoes for their children.

To be sure, some of these countries have been through this kind of crisis before. The Asian currency contagion of 1997 is still fresh in some people’s minds. But today’s currency crisis seems more widespread. It’s not just Asia, it’s not isolated to Argentina – this one threatens emerging markets all over the world.

This kind of thing destabilizes not only these countries, but also their neighbors. So there’s a good chance there could be a currency crisis coming to a country near you.

There is street violence in Ukraine and Thailand. South Africa is facing a wave of civil unrest. Turkey is nearing the boiling point. Do you think none of that is currency-related? Think again. People get upset and angry when their money is worth less and less every week. When millions and millions of families suddenly can’t afford shoes, or even food, for their kids, an entire nation can reach a boiling point very quickly.

What Goes Up as Currencies Go Down

But there are some assets that do well when emerging market currencies hit the skid. One that may surprise you is the U.S. dollar. But think about it; if you’re selling your native currency, you have to buy something else, right? And the greenback IS the international currency… for now.

However, the U.S. dollar has its own problems, so don’t rest too easy – a day of reckoning may be coming for the almighty dollar as well.

Another asset that does well in a currency crisis is gold. After all, when fiat currencies are in crisis, a hard “currency” like gold is going to do well. You can bet that Argentines wish they could buy more than 100 grams per day.

My hope is that Argentina works out its problems and gets back to a semblance of normalcy; I don’t wish bad times on anyone. But these problems can’t be ignored, either. I’m the type who prepares for the bad times, who gets ready for a rainy day. And buddy, some parts of the world are sure looking cloudy right now.

All the best,

Sean Brodrick
For Free Market Café

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