Back in the 1970s, prompted in part by fears of mounting inflation in the U.K., the British author Adam Fergusson wrote When Money Dies, a history of inflation in Weimar Germany that was also intended as a warning to Brits (inflation was then gathering speed) of the consequences of a breakdown of fiscal and monetary discipline. Not altogether surprisingly, it was a book that came back into focus amid widespread concern over where the measures adopted to deal with the global financial crisis might take us. Copies were changing hands at high prices, and the book was republished in 2010 (FWIW, I reviewed it back then for the Wall Street Journal here).
The reason I mention this book? Not because I expect the U.S. to tip over into hyperinflation any time soon — a rare moment of optimism, I know — but because of reading various recent accounts of what life is now like in Argentina. Inflation there, for now, is running at around 7 percent a month, still well short of hyperinflation (a threshold typically deemed to have been crossed when inflation crosses 50 percent a month), but already showing signs of what happens when money — or, in this case, a money, the Argentinian peso — dies.
A money that people can trust (more or less) is central to the functioning of an efficient market economy. When that trust collapses, people revert to barter, or turn to currencies on which they can rely. I saw both in the course of visits to Moscow in the early 1990s, a time of wild inflation. Inflation in Russia peaked at over 2,000 percent in 1992, and only returned to double figures in 1996. Payment in dollars, or other hard currencies (but the more recognizable the currency the better) was widely preferred over the ruble, and for those without access to them, life was very hard indeed. Outside metro stations, for a while anyway, informal markets sprung up, where people sold what they still had.
The effects of the inflation scourge is plainly evident in Villa Fiorito, around 15kms (9 miles) from downtown Buenos Aires, where unemployed women gather in the hopes of bartering goods for food in a plaza.
Every afternoon, women set up their blankets and carefully lay out all kinds of goods, including clothes, toys and used kitchen utensils with the hope of exchanging them for food to feed their families.
When a currency starts falling fast, price signals (at least those denominated in that currency) fall apart. No one knows what, in that currency, things are worth.
When prices rise fast enough for long enough, consumers can lose any sense of what they should’ve been paying in the first place.
That’s an extreme case of what’s known in economics jargon as “unanchored expectations” –- and in Argentina, it’s the daily reality.
[A]s prices soar and scatter, people are losing their bearings. No wonder, when a two-hour domestic flight costs the same as a month of college tuition, a pair of sneakers is equal to the minimum monthly social-security payment, and a new iPhone goes for half a year’s average rent or more. Price-tags also vary wildly from store to store, and tracking down the daily essentials at the least-unaffordable rates is a drain on time and energy for working Argentines. . . .
In the oceanside city of Mar del Plata in April, the same bag of coffee beans cost 200 pesos at one store and 500 pesos at another, according to the latest annual survey by Universidad FASTA. . . .
Under the circumstances, running a business can be very risky indeed. How does the owner price what he or she has in stock? Thus it can make sense to stop trading for a while. And that’s one of the reasons (outright hoarding is another) that shortages are a regular feature of an inflation-wracked economy.
Prices are fluctuating so much that in recent weeks many companies have halted sales to see where prices settle, making it difficult to find certain items, including cooking oil and car parts. Some farmers are also holding onto their wheat and soybeans, betting prices will rise — and blunting the economic benefits of a commodity boom that should benefit an exporter like Argentina.
The whole New York Times piece (by Jack Nicas and Ana Lankes) is well worth reading, not only for the sense it gives of life in a country where the currency is collapsing, but as an account of what happens when markets fall apart. From time to time, I’ll read criticism of “market fundamentalists” (a species, in reality, rarely seen in the wild), but it’s worth paying attention to what happens when the fundamental elements that make a market work — and, as noted above, a reasonably trustworthy means of exchange is one of them — fall apart.
And so, as Russians did 30 years ago, Argentinians are turning to currencies they can trust, such as, in the country’s north, Bolivia’s boliviano (which has been pegged to the dollar for a while now, although there are — ten cuidado — questions as to how long that peg can be maintained), and, of course, the dollar, a well-established standby, given Argentina’s disastrous economic history, for decades. There are restrictions on how many dollars Argentinians can buy, and the official exchange rate (a bit over 130 pesos to the dollar, compared with the, ahem, unofficial rate, the dólar blue, of about 290) is, once again, an absurdity, giving a boost to a black market of considerable sophistication ($100 bills, I read in the Times’ report, carry a premium, as they are more difficult to forge) and size, with support systems to match. That’s needed as many large transactions are in cash, dollars that is. Among the people interviewed for the NYT piece is the CEO of Ingot, a safe-deposit-box company. Business, he says, is booming.