Saturday, March 14, 2009

Going to Argentina


Monday morning I leave for Argentina to visit friends and family for three weeks. My Argentine wife—who has been there for the past week while I have been skiing—and I lived there for four years in the late 1970s, and that is when I acquired a permanent interest in inflation, economics, and finance. During the time we lived there, inflation averaged about 7% per month, and was routinely in the triple digits per year. I remember one month in particular when prices rose almost 50%. I also remember when we went to Argentina in 1986 for a three week visit, and prices tripled during our brief stay. I went to the corner grocery store daily, and noted how prices were posted on chalk boards and were changed sometimes once or twice a day.

The image above is a photo of a 1 million peso note I keep as a reminder of how inflation works. When it was first introduced, sometime around 1978, it was worth the equivalent of about $2,000 dollars. When it went out of circulation about ten years later (caution--my memory may be failing me and I might be off a few years), it was worth the equivalent of about 20 cents. I asked some friends to collect a bunch of the notes for me, and I still keep them tucked away in a drawer. Who knows--they may be worth a bit more than 20 cents someday, if only as a curiosity.

When we were in Argentina in 1986, I remember my 6-year-old son was fascinated by all the banknotes that people carried around in order to conduct their daily transactions. They had denominations of 3-8 digits, and most were essentially worthless. Prices were routinely quoted in "palos" with a palo being slang for a million, much as we would say "5 bucks." A friend gave him a grocery bag full of old peso notes that he had collected, and my son went almost crazy with delight. "Wow, Dad, how much can I buy with all this money?" he asked me. "Well, Ryan, with all that money you might be able to buy a pack of chewing gum," I replied, even though the nominal value of the notes must have been in the tens of millions. I then tried to explain to him how inflation worked, but I quickly realized he just couldn't understand what had happened.

In 1979 we sold our house in Neuquén Argentina, in preparation for returning to the U.S. There was no such thing as a mortgage at that time, and hardly anyone had a checking account. If you wanted to buy a house, the best terms you could find were "0-30-90," which meant that you had to pay one-third of the purchase price at the time of signing the purchase contract, followed by the second third a month later and the third third in three months. The man who bought our house graciously agreed to pay me the full amount in cash at the signing of escrow. Before going to the escrow office to finalize the deal, we went to his office. There he took out several grocery bags full of money and started counting the bills; after counting each stack he passed it over to me, and I counted it, then he placed the stack back in one of the bags. I wish I could remember what the price of the house was in pesos, but all I remember is that the bills were of large denomination and they filled three grocery bags. It took us about 25 minutes to count it all. In dollar terms, we got about $30,000 for the house. After we had both counted the money and signed the escrow papers, he accompanied me to the bank, mainly in order to help me carry all the money and to serve as an informal body guard—can you imagine carrying cash equal to the price of a house in grocery bags while walking 6 blocks to the bank? I handed over the bags of money to the cashier and explained that I wanted to convert the pesos to dollars and wire the total amount to my account in the U.S. It took the cashier another 25 minutes to count and verify the bills. I was fortunate that at the time it was legal to convert pesos to dollars and to wire dollars to an overseas bank account—it hasn't always been like that.

Things have progressed significantly in Argentina since that time, but inflation and other bad government policies have left permanent scars on the economy. I hope to be posting interesting tidbits from Argentina during the next several weeks, commenting on how the country is faring under the leadership of the Kirschners, who are, like Venezuela's Chavez, in the process of nationalizing one industry after another. Already I know that there are too many things happening in the U.S. these days that remind me of what it was like to live under a regime that wants to control prices, regulate industries, and nationalize failing companies. Stay tuned, as thanks to the internet and Bloomberg I'll still keep posting comments on developments here in the U.S. as well.

11 comments:

Tom Burger said...

Enjoy your visit, Scott. I look forward to your posts from Argentina.

WilliamSSmith said...

Thanks for this discussion. My wife, son and I visited Malawi last year for three weeks. Malawi was the poorest country in Africa until Mugabe really got going. It used to be that Zimbabwe provided food relief to Malawi -- now its the other way around.

Anyway, the joke in Malawi is: Mugabe loves his country so much he made all the citizens billionaires.

Another story: while shopping for a replacement tire (for the flat) the shopkeeper told me he was visiting his brother in Zimbabwe the following week. "You know what he wants me to bring? -- 20 loaves of bread!"

ronrasch said...

The charts that you have presented show that the US is building massive deficits. I don't think that we will become like Argentina but inflation is coming. My daughter sees it in her receiving job at a high end clothing store. Clothing prices are up from last year. I see it at Walmart in the prices of desktop computers, mp3 players, and shortages of motor oil in the wal-mart brand line. Only anecdotal stuff but confirmatory. On the other had home prices in cleveland are still very depressed.

Scott Grannis said...

ronrasch: It is indeed hard to say whether or not we have deflation or inflation. I saw many higher prices in Park City this year relative to last year. But home prices are clearly down. I heard that buyers of $5-6 million homes under construction were walking away from 20% deposits they had made, which means the prices of those homes must have fallen at least 20%, but no transactions have occurred to confirm that. Gold at close to $1000/oz and massive central bank ease are the best indications we have so far that inflation is more likely than deflation.

Donald said...

Thats an interesting story. If you know, I would be interested in what asset held its value/purchasing power during this crisis in Argentina ?

Scott Grannis said...

Donald: To begin with, the "crisis" in Argentina has been going on since Perón was President. It was in full swing when we arrived there in 1976. There was a brief pause in the crisis, and substantial progress was made, during the period in the 1990s when the Menem administration managed to fix the peso at 1 to 1 to the dollar. Crisis set in again following the massive peso devaluation of 2001.

I'm going to make an educated guess that the best asset to have bought, if you were living in Argentina, was gold. Gold has undoubtedly held its purchasing power over the course of the many crisis years better than anything else. That speaks volumes about the pernicious effects of high inflation over time.

utahcribs said...

Very interesting, I will send this to all of my clients and friends so they understand what real trouble sounds like.. Argentina? Go climb a couple mountains they are unbelievable down there..

http://utahcribs.wordpress.com/

Mark Alexander said...

Looking forward to your posts about Argentina. I own shares in an Argentinian Agricultural company (Cresud Inc. CRESY) and would be interested in anything you know/discover regarding it's long term prospects. They own hundreds of thousands of hectares of farm land in Argentina, but the gov't hasn't been too favorable toward Argentinian farmers lately.
Enjoy your trip.
thanks

M. Vivaldi said...

Scott, It's great to know that your going to Argentina! One of these days i'll write about the argentinean economy in my new blog. It is certainly a very interesting topic to talk about.

For the moment I suggest to take a look at this one minute video:
http://www.youtube.com/watch?v=UvyeysQoYFk (original)
http://www.youtube.com/watch?v=b3kab5BwQd0 (english subtitles)
note: this was in 1989, since then they took another 4 zeros of the Austral and changed the name to Peso Convertible.

Scott Grannis said...

Vivaldi: thanks for that link! It brings back memories. We used to watch Tato Bores all the time when we lived in Buenos Aires. He was one of the best.

Scott Grannis said...

Mark: I've been tempted many times to buy CRESY, but for the past several years (actually, since 2001) I have not wanted any exposure to Argentina because I have lost confidence in the government. They do not respect capital or investors. With the price falling and falling, perhaps at some point it will become irresistible. I'd want to see a change in the political climate first.

And I realize that the U.S. is now plagued by this same risk...