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Argentina and the U.S. Dollar

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Fephisto Posted: Wed, Jun 27 2012 12:57 PM

For those who don't know:

This thread isn't so much speculation about whether Argentina is headed for hyperinflation (given their history, I wouldn't put it behind them), but rather....why do Argentines prefer dollars over, say, gold or silver coins?

I have some family in Argentina, and I've been there a few times, so this isn't hyperbole.  Most Argentines are happy to--in fact, they prefer to--trade in dollars.  Moreover, in my experience they treat it with a similar respect to gold here.  So I asked my uncle this question, here is his response (translated):

As you said, the people in argentina save in dollars because it's a strong currency and they can exchange it in any bank or market, gold and silver are only traded in special exchange house that they don't have in the smaller towns, only in the large cities, another reason to buy dollars is that you can save it anywhere, in exchanging gold you have to hold it in a bank (my note:  I'm not clear on this, is there a law in Argentina that requires this?  Or just the relative safety issue...I guess I can ask).

All the machines and tractors we have we bought in dollars, the credit that we obtain in obtain to buy this equipment is also in dollars and until the central bank offered us credit in dollars where the interest is much lower than the interest in pesos, thus we always work with two moneys.

I've heard it often repeated that given the choice in the market, people will tend to a gold, why do you think this isn't the case in Argentina, and that people have--despite possibly more regulatory hurdles--chose to trade in dollars instead?  Is there some other law that can flesh out this story?

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Anenome replied on Wed, Jun 27 2012 7:58 PM

It really makes me angry that a first year economics student (at least one exposed to Austrianism, etc) could better handle running an economy than the people actually elected and doing so in Argentina. Just another example of the failure of a Bismarckian-Democracy, of the ability of leaders to bamboozle the public and ruin everything.

So, why would they prefer dollars to gold? It's actually difficult to own gold. It's neither easy to transact in gold. It's also hard to find people willing to transact in gold in the regular course of business. Try buying a coke in gold.

How can you be sure something is pure gold? Traders no longer learn the skills needed to know whether something is pure gold or not. Perhaps it's actually lead dipped in gold with a tungsten core. How would you know without melting it down? There are ways, but they aren't in practice anymore. Thus transacting in gold requires a different skillset and creates added layers of uncertainty.

It's probably also more expensive to transfer into gold than into paper money. I dunno how much traders would take as a cut to sell pure gold-bar. I know buying gold-coin is a typical ripoff :P

The simple fact is that most modern economies are paper-oriented, and trying to transact in gold would be outside their experience, and thus they would have to ask a larger price to cover any mistakes they might make.

All they really need is a paper currency which is relatively stable, and for the foreseeable future that's going to be the US dollar. Because no one trusts the Chinese, thus their yuan will not supplant the dollar world-wide any time soon. And the Euro has been badly-mishandled and burned a lot of people who had invested heavily in it.

And bitcoin isn't established enough yet to be stable.

I predict that in the future, if the US dollar becomes unstable due to the incredible debt we're stacking lately, which seems inevitable now, that people will begin flowing into bitcoin and/or similar digital currencied which are not tied to debt and not inflateable, for store-of-value sake and to get around legislation such as in Argentina.

If I had to get a lot of money out of Argentina today, it would actually be a perfectly viable option to drop it all into bitcoin, travel out of the country the next day, and transfer back out into US dollars. I'll bet Bitcoin is plenty secure enough to do that today. It's just people don't right now want to be in bitcoin for the long term, as its stability is not yet proven. That problem will ease quite naturally in time. And it's just about the only way to get value out of a locked down economy like Argentina is become, precisely because it's anonymous and crypto.

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