Tag Archives: inflation

Argentina’s Central Bank is in Trouble

It’s losing more than $1 billion a month

There are a couple reasons Argentina hasn’t been able to keep its central bank account in check.

For one, an artificially strong currency has made foreign goods more attractive, and led the country to become more reliant on imports. While Argentina still enjoys a trade surplus, it has been shrinking because of growing energy imports. Argentina has had trouble borrowing money from abroad since defaulting on its debt in 2001, so it has to finance the bulk of its growing imports with its reserves.

Then there’s Argentina’s high inflation, which has coerced Argentines into holding on to US dollars rather than spending them, and using any pesos they have on hand to buy more US dollars. Those dollars, however, aren’t making their way to the central bank. Argentines are using their foreign cash to buy goods abroad or keeping it as collateral in case the country’s monetary system collapses again.

Argentina plans to spend another $8 billion of its reserves to pay off debts through the end of this year, which will leave very little wiggle room for its central bank to finance the country’s fiscal affairs. Soon the country could find itself incapable of paying its creditors and financing its imports—a recipe for another economic crisis.

Is China headed towards an economic crisis

Paul Krugman thinks so

With efforts to cool the economy falling short, China has been trying to limit inflation with price controls — a policy that rarely works. In particular, it’s a policy that failed dismally the last time it was tried here, during the Nixon administration. (And, yes, this means that right now China is going to Nixon.)

So what’s left? Well, China has turned to the blame game, accusing the Federal Reserve (wrongly) of creating the problem by printing too much money. But while blaming the Fed may make Chinese leaders feel better, it won’t change U.S. monetary policy, nor will it do anything to tame China’s inflation monster.

Could all of this really turn into a full-fledged crisis? If I didn’t know my economic history, I’d find the idea implausible. After all, the solution to China’s monetary muddle is both simple and obvious: just let the currency rise, already.

But I do know my economic history, which means that I know how often governments refuse, sometimes for many years, to do the obviously right thing — and especially when currency values are concerned. Usually they try to keep their currencies artificially strong rather than artificially weak; but it can be a big mess either way.

What’s at Stake?

Several people sent me this link about what is at stake with the United States running $1 trillion deficits.

The non-partisan Congressional Budget Office has also said the U.S. budget deficit will swell to a record $1.186 trillion in fiscal-year 2009 and come in at $703 billion in the 2010 fiscal year, which begins October 1, 2009.

The actual budget gaps for both years may be significantly wider as Washington prepares to jolt the economy with stimulus spending that could total $775 billion over two years.

The following are several scenarios that could result from runaway budget deficits:

FALLING U.S. CREDIT RATINGS:

United States EconomyA string of trillion-dollar deficits could undermine investors’ faith that the U.S. government always pays its debts and put in danger the country’s triple-A credit ratings. This could lead foreign investors to shun U.S. Treasuries, the bonds the government sells on the open market to finance its borrowing. Treasuries are currently expensive by historic standards since the financial and economic turmoil of the past year has boosted their global appeal as a safe-haven investment. Serious danger to U.S. credit ratings could send the debt market downward and burst what some are calling a bond-market bubble.

SKY-HIGH INTEREST RATES:

A loss of faith in U.S. government bonds would send interest rates throughout the economy soaring since Treasuries serve as the benchmark for loans in the private sector. A rout in that market would dramatically lift the cost of borrowing for buying homes, cars and paying for university education. If it happens any time soon, this in turn would jeopardize the Federal Reserve’s efforts to stabilize the ailing economy.

Note: This is why I locked in mortgage…

DUMP THE DOLLAR:

A crisis of confidence in U.S. debt would devastate the dollar. The world’s reserve currency, the greenback is used globally by countries and companies to pay for a wide range of basic commodities, most notably oil. If investors dumped U.S. debt, they could do the same with the dollar. A dollar crisis might end its status as the preeminent currency of world commerce, deeply undermining its value and further raising the cost of borrowing for the United States.

SOARING INFLATION:

A plummeting dollar and sky-rocketing interest rates could push the inflation rate through the roof. The United States imports far more than it exports and would be hard pressed to pay for oil and manufactured goods it buys from abroad with the greenback’s value withering. Currently, though, rapidly falling prices, or deflation, appears to be a much more imminent problem than the more distant prospect of inflation.

FALLING GLOBAL STATUS:

A dollar and debt crisis would undoubtedly undermine the global standing of the United States, much of which is based on the fact that it is the world’s largest economy. If the United States lost the international reserve currency and the faith of global investors, little else might be left and the beacon of free-market capitalism might also dim.