Inflation Scare in Argentina

This past week Argentina’s currency experienced its largest devaluation since 2002. This substantial devaluation has a caused a rise in inflation and uncertainty to grow within the economy. Argentina’s currency devaluation is not only a result of US tapering and weak numbers from China, but also long-term domestic policies that have created a large distrust in the Argentinian government.

According to the Wall Street journal many economists believe that the inflation is a result of “heavy state intervention, price controls and corporate nationalization that have underpinned their policy making for more than a decade.” (WSJ – Inflation Fuels Crisis in Two Latin Nations) To further the distrust in the central government, the state released inflation index for 2013 was reported at 10.9%, while an independent figure measured by an independent group of economists came in at 27%. (WSJ – Dispute Leads to Revise Index) As a result many local businesses are struggling to price their products and are being forced to close shop. One local coffin maker in Argentina said, “I have to tell customers that I can give you a coffin today, but you’ll have to pay for it later, at who-knows-what-price.” This confusion in pricing has resulted in decreased consumer spending and investments in Argentina. Bank of America Merrill Lynch recently forecasted that the decrease in investments and spending as a result of higher interest rates and inflation will lead to a 3% contraction in GDP this year. (WSJ – Inflation Fuels Crisis in Two Latin Nations)

Argentina has reacted to the inflation scare by issuing strict warning to business owners to not increase prices. The government warned that fines would be placed on businesses that continued to raise prices. If Argentina continues to mandate pricing, they may be able to temporarily curb inflation but businesses that rely on imports will be unable to sell products for profit. This will inevitably lead to further economic contractions.

As government discontent and uprising continues, one alternative plan for Argentinean citizens would be the adoption of Bitcoin or another cryptocurrency for payment. This would free businesses from the political constraints and corruptness of the central government and would provide them with better pricing transparency. Even though cryptocurrencies are known for being volatile, a large scale adoption from a country like Argentina could give the chosen cryptocurrency stability. Regardless, the high level of inflation currently present in Argentina is just as volatile, if not more volatile, as those of the cyrpotcurrencies. For small business owners that are at the mercy of pricing ceilings cryptocurrencies could be the only solution for these business owners. As inflation continues to rise and reach levels believed to be unstable by economists (about 50%), inflation will likely rise exponentially. When this occurs watch for Argentina to move towards cryptocurrencies.

5 thoughts on “Inflation Scare in Argentina

  1. lippmanb

    I wrote about this too. I find it fascinating that the government is artificially maintaining price levels. I have always considered the idea, but I am interested in seeing how it plays out.

  2. wyna

    Good post. I guess Argentina has a lot on hands right now. Considering it was not too long ago when they have defaulted in 2002 and enacted the debt restructuring program in 2005, this might scare some more Argentinians. I wonder what the outlook would be like after price fixing too.

  3. dslavin

    Interesting post. I wrote about Argentina’s inflation problem recently as well. Another thing I thought was interesting is that Argentina’s government lied about it’s 2013 inflation rate to the public. It claimed its inflation rate was 10.5%, but estimates by the Foundation for Latin American Economic Research (FIEL) said inflation was 26.4% in 2013. Until Argentina is able to sort out social unrest and make its government more transparent, I don’t see the situation getting any better.

  4. mdbold

    The problem with adopting bitcoin is that it is highly volatile and unstable. Even fiat currency like the dollar has some intrinsic value (ie you can use it to pay taxes), but bitcoin has nothing. The Argentinians need something more secure.

  5. xcharles

    Very interesting topic. However I agree with mdbold- the actually practically of bitcoin is small. It doesn’t help that it fell 30% back in December. The section I found most interesting in your post was Argentina’s government regulation. Although restricting their imports may bring down inflation, the end result is harsh for the businesses that have to pay the price.

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