Back in December Jeff Tucker posted a video on LvMI blog here... In it, Tim Terrell talks about instances of hyperinflation throughout history. He references Joe Salerno's work on the confiscatory deflation of Argentina in the late 1990s, and he said something that didn't make sense to me. So I went back and read Prof. Salerno’s assessment as well as his longer paper "An Austrian Taxonomy of Deflation"... I don’t follow. How was it the peso was losing value as the money supply decreased? How was the wealth transferred from the deposit holders to the bankers? In an inflationary situation, the people who get the money first benefit at the expense of those who get it later because the former are able to buy real goods at the initial price level, and by the time the new money gets to the rest of the population prices have risen, and therefore purchasing power has been effectively transferred. How does this occur in a deflationary environment? How was the value of the peso continuing to decline as it’s supply was decreasing? Can anyone help clarify?
Does anyone know enough to answer this?
What's described here is not "deflation" but a good old run on the bank or a typical collapse of a fractional reserve scheme (this one "backed" by yet another fictional asset, the USD). As depositors demand their property back, the depositary base shrinks, decreasing the money supply. As it becomes evident that the property titles ($70 billion worth of peso) do not correspond to the property that backs them ($5 billion) the value of the peso (in USD) declines. Hope this helps.
I was actually reminded of this thanks to this new thread. z1235's response still does not make complete sense to me. For one thing, Salerno names what is happening as one of the four types of deflation, and z1235 says it is in fact not deflation. Either way that is more of a semantics issue. I'd still like an explanation of how when the supply of something decreases, it's value also decreases. Are we just saying there was a realization that the peso was in reality worth so much less that it's net value still decreased even while the factor of deflation was pushing it up?
Are we just saying there was a realization that the peso was in reality worth so much less that it's net value still decreased even while the factor of deflation was pushing it up?
I think that's it. These paragraphs seems to say that the official exchange rate was way too high:
By January 6, the Argentine government, now under President Eduardo Duhalde and Economy Minister Jorge Remes Lenicov, conceded that it could no longer keep the inflated and overvalued peso pegged to the dollar at the rate of 1 to 1, and it devalued the peso by 30 percent, to a rate of 1.40 pesos per dollar. Even at this official rate of exchange, however, it appeared the peso was still overvalued because pesos were trading for dollars on the black market at far higher rates.
The Argentine government recognized this, and instead of permitting the exchange rate to depreciate to a realistic level reflecting the past inflation and current lack of confidence in the peso, it intensified the confiscatory deflation imposed on the economy earlier.
BTW I think z's semantics are more accurate.
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That makes a little sense, but I'm not quite following how wealth was transferred from the deposit holders to the bankers. I'm looking for a breakdown more than what Salerno provides. He basically gives the facts of the case, but he doesn't really explain the economics of it.
And as far as semantics go, technically, if you define "deflation" as a decrease in the money supply, the term is accurate even for a "run on the bank", so long as you're including anything above M1 as "money supply".
I'm not quite following how wealth was transferred from the deposit holders to the bankers
Since the peso had already depreciated by 40 percent against the dollar on the free market in the interim, this meant that about $16 billion of purchasing power had already been transferred from dollar depositors to the banks.[9] As the confiscatory deflation continues in force, and depositors are barred from redeeming their property titles, the loss of wealth endured by depositors is likely to grow as the peso depreciates further.
The idea is simple. The depositor puts in a peso, redeemable at the time for a USD. Later, he senses things are going to go bad, so he wants his peso back. The banks refuse, and redeem the peso for a USD to put in their own pockets, or buy stuff with the peso before the devaluation. After time passes, and the peso has dropped, they give the depositor back some [not all] of his peso, now worth less. He will get the rest of his peso back in dribs and drabs as time goes on and it loses more and more value.
By "redeem the peso for a USD" you mean actually go and exchange it on the market somewhere?
Since they are all fiat moneys, the country with the strongest military power/influence in the world has the most valuable currencies.
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