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To see our future, look at Argentina

Posted by John Reed on

Copyright 2012 by John T. Reed

I was not surprised to see Argentina in Anna Eisenmenger’s list of the six countries that helped her Austria during their 1920s hyperinflation. In my financial research for my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd Edition,

I reported that Argentina was the number six economy in the world in the early 20th century and a contender to remain so or even rise in the rankings.

But they went off the rails and stayed there choosing instead to enter the funniest banana republic competition instead. What do we care?

Following Argentina’s example

We are belatedly following their example. Today’s (4/19/12) Wall Street Journal has an op-ed titled “The Tragedy of Argentina.” Many of its words will be familiar to readers of this web site and my hyperinflation book.

The devaluation and default wiped out a decade of savings by middle-class Argentines and retirees, while rewarding those with enough dollars to hide them in foreign banks.

Devaluation is the same as printing money, but it is the word to be used in countries like Argentina that tie their currency to some fixed exchange rate or weight of gold or silver. Argentina had ended their previous bout of hyperinflation by vowing to adhere to a “one peso, one dollar” exchange rate. Their devaluation reneged on that promise.

It was only a decade for the Argentines because they do this to their citizens about that often. When it happens in the U.S., it will be the first time since the Great Depression that savers lost their whole life savings, not just a decade’s worth.

Or Mexico’s

Here is an email from a reader:

Talking over lunch with a colleague, he related a story of living in Mexico when they nationalized the banks. He said all dollar-denominated deposits were then devalued by ~50%. The context of his story as he sold a car, deposited the $$, went home for Xmas, and came back to half his money, since nationalization happened in the mean time.

I did a little research to confirm it, and found that it seemed accurate…dollar deposits were to be paid out in pesos at a gov't-determined exchange rate. BTW, there's a St. Louis Fed article about the Mexican nationalization that said the only 2 banks that stayed private were Citi and a bank owned by the Mexican labor union.

So this real-life example reinforces what you have said about ensuring you go offshore for foreign currency deposits.

Some good currencies out there

I, last year, figured out that it is extremely prudent to move most of your cash to well-managed foreign currencies, namely Australia, Canada, Denmark, New Zealand, and Switzerland. And I am in the process of doing just that. You should, too. See my recent headline news articles.

The op-ed author, Pierpaolo Barbieri, an Argentinian-American, referred to, “those with enough dollars to hide them in foreign banks.”

I do not understand the phrase “enough dollars.” I have now put money in Canada and New Zealand. Neither bank had a minimum deposit. Maybe you had to have a lot in Argentina to move them offshore as a practical matter because of some Argentinian laws like capital controls.

America does not have capital controls—yet. We had them before. And we are about to get them again. See my article “A financial Berlin wall is going up and you are on the wrong side of it.” Until we get them, you can move your money out of U.S. dollars and out of the U.S. per se.

‘Hide them?’

Barbieri refers to hiding money in foreign banks. That is not necessary. It’s also illegal. If you have more than $10,000 in foreign financial accounts, you must say so on your U.S. IRS Form 1040 schedule B, on Form TD F 90-22.1 and if it’s over $50,000 (filing single) or $100,000 (filing jointly), Form 8938.

I have filed them. You should, too. But as I said, whatever the need to “hide” the money in Argentina, there is no such need at present in the U.S. You move it offshore and you tell the U.S. government that you did.

Capital controls

More Barbieri:

The government has instituted draconian controls over all imports. Vintage 1970s-style capital controls are back…

A standard accompaniment of hyperinflation is restrictions on imports—although I wonder why they would be needed. Americans will not be able to afford imports when we have hyperinflation. Typically, foreign companies will refuse to take hyperinflated currency. That would force Americans to pay for imports with foreign currency—a rare valuable thing that the federal government confiscates in hyperinflated countries—or barter. I understand quite well why governments of hyperinflated countries do not want anyone other than the government getting to spend the rare foreign currency in the country.

Capital controls prohibit possessing foreign currency and often gold bullion (gold other than jewelry and rare coins), and spending, accepting, importing, or exporting gold or foreign currency.

Now that all imports require approval, essential drugs have vanished from the pharmacies—though somehow friends of the government are able to import whatever they please.

‘It can’t happen here’

Debt deniers say, when confronted with these stories, say “We’re not Argentina” or “We’re not Greece.” When Greece was one of the top countries in the world, so were we. Britain was number one back then, not us. Back then, to say we’re not Argentina might have inspired a debate—both in the western hemisphere, both large countries that were former European colonies, both have lots of resources, both have large populations.

Since the early 20th century, we surely left Argentina in the dust. But that does not mean we cannot make the same mistake they made 50 years later than they made it.

But is it true that the U.S. never diminishes?

When I was in high school and college, America put men into orbit. Only one other country did that: the Soviet Union. A year after I graduated from college, we put men on the moon. No other country ever did that or even came close to it.

If anyone had said then, the 1960s, that American would not be able to put men into orbit or on the moon in 2012, everyone would have thought he was crazy. “We’ll be on Mars by then and maybe on one of Jupiter’s moons.” But the sad truth is America’s manned space program is over. We cannot afford it anymore. We have to give the money that used to put men on the moon to put seniors on cruise ships and pay for their medical care. We are shrinking the U.S. military to pre-World War II size for the same reason.

Ratios, not size

Before I went to business school, I thought size equaled strength in business. One of the big lessons I learned there was that ratios, not size, matter.

Joe owns a one million dollar rental property free and clear. His net worth therefrom is $1,000,000

Bob owns a $100 million rental property free and clear. He also has a $99 million mortgage. His net worth is also $1,000,000 therefrom.

Joe is strong and Bob is extremely weak, even though they both have the same net worth and Bob “controls” 100 times more property than Joe.

Joe sleeps well at night and has the ability to borrow money if need be. Bob can’t catch a wink of sleep, couldn’t borrow another nickel, and will be bankrupt if his net rental income drops 1% or more.

Greece is Bob. Argentina is Bob. We used to be Joe—for example in 1933 when our debt-to-GDP ratio was 17%. Now it’s 104% and we are Bob, Greece, and Argentina. Our size and past are irrelevant. When he have the same ratios as Greece and Argentina, we are Greece and Argentina. The only difference is a bad one. They are small enough for others to bail them out. We are so big that no one can bail us out. That is is an exaple of one way where size does matter. Wall Street had too big to fail. We are too big to save.

Move your cash out of the U.S. dollar and out of the country.

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