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EM Crash? Blame Argentina!

Emerging markets are slumping. Argentina makes a good stooge...
 
SOME PEOPLE think it was the 15% drop in the Peso that triggered the recent selloff in the emerging markets...and back in the US of A, writes Bill Bonner in his Diary of a Rogue Economist.
 
On the last two days of last week, the Dow lost nearly 500 points. And on Saturday, after-hours trading signaled worse to come. It looked as though the Dow would drop more than 300 points when the doors opened on Monday.
 
That didn't happen. Instead, the Dow fell just 40 points...and recovered more midweek, before edging back for that same tepid loss as the week ends.
 
So, we sit tight, wondering if the beginning of the end is coming now...or later. And when it happens, we won't blame Argentina.
 
Argentina seems much too quirky and particular to be a leader of anything. For example, it's the only place we know where you get better banking services out on the sidewalk than in the bank. Every time we go we take a big wad of green pieces of paper with Ben Franklin's picture on them. Driving directly to the town square in Salta (close to the family ranch), we then simply stop the truck and beckon over one of the many black-market moneychangers standing in front of the bank.
 
This time a year ago, one Ben Franklin would bring you nine pieces of paper with former Argentine president Julio Argentino Roca's picture, in purple.
 
Roca was no match for Franklin. Reports from Salta tell us that the rate has gone over 13.
 
The official rate changes, too. It was only five Rocas to a Franklin a year ago. As of last Friday, it is 8. But wait...There are more official rates. There's one for savers, now 9.2. And one for travelers, currently 10.8.
 
Why so complicated?
 
It's a long story. But the simple version is that the city of Buenos Aires is big and sophisticated. And like New York or San Francisco, it has socialist tendencies.
 
Here's how it works: The urban intelligentsia provides the ideas. The urban proletariat provides the votes. And farm exports provide the money.
 
But the rural productive sector can never quite provide enough money to satisfy Buenos Aires' longings. Farmers and other producers labor under such binding restraints – such as import/export restrictions – that even in a roaring bull market, such as we had three years ago, Argentina lost agricultural market share.
 
Now, without much money coming in, the government prints money to pay its bills and lies about inflation. The money supply in Argentina has been increasing at a rate of about 40% a year. And yet, the keepers of Argentina's official numbers maintain that consumer prices have been rising less than 10% a year.
 
When everyone had caught on that prices were obviously rising much faster than a 10% annual clip, the Argentine feds tried to control prices...as well as the statistics that measure them. Last year, they enacted a 'voluntary' price control measure at the supermarkets.
 
This was the work of Argentina's 42-year-old minister of the economy, Axel Kicillof. He is probably a decent guy. He taught economics at the University of Buenos Aires. The papers say he "reinterpreted Keynes from a Marxist perspective." With this intellectual toolkit, he says he has the leaks under control.
 
Most likely, our man on the scene, Miguel, has a clearer picture. He reports:
"I dropped my Kindle reader and broke it," he reports. "I wanted to order another one from Amazon. But the government just announced a 50% import tax. That's in addition to the 35% penalty I would pay on credit card purchases from overseas. You also have to go to [an office of the tax collector] and wait for hours to do the paperwork. It's not worth that much."
So, Amazon lost a sale. And the Argentine economy lost a connection to sanity.
"This is just the beginning," Miguel continues. "We're headed into another real crisis. The people are restless and the government is desperate. We've got major union negotiations coming up. It wouldn't be at all surprising to see riots...looting...and some kind of bankruptcy or default."
 

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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