Many Americans have no idea what happened to the Peso in Argentina less than eight years ago. In 2001, the Argentinean people feared the worst and began to withdraw large sums of money from their bank accounts, causing a run on the banks. The government quickly enacted measures (informally known as the Corralito) that froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.

But what happened to the Peso?  Argentine citizens who the day before had $100,000 USD in their bank accounts, overnight had only $50,000 USD in their accounts.  Could this same hyperinflation happen in the U.S. as inflationary pressures increase from the new economic stimulus measures?

But what are some of the similarities between Argentina in 2001 and what is happening right now in the U.S.?

• In the late 1990′s, Argentina entered a deep recession. The government responded by lowering interest rates and increasing government spending. The U.S. government responded similarly in 2008. Both the U.S. and Argentina received warnings from the IMF that their monetary policies were unstable.

• In both countries, the recession continues leading to a liquidity crisis, debtors begin to default on borrowed funds falling like dominoes, followed by bank failures also like dominoes.
• In 2000, Argentina responded to the credit crisis by continuing spending.  Barack Obama’s plan to stimulate the economy is to continue deficit spending.
• Argentina was having trouble finding investors in other countries to lend it money. To make its debt more attractive, it increased the yield of its Treasury Bonds.  The same is happening in the U.S.
• Eventually Argentina was unable to make debt payments which resulted in currency devaluation.  If the U.S. cannot find new buyers for its debt, a similar result will be currency devaluation.

However, the alternative view is that the U.S. is NOT headed down the same inflationary path. Why?

Each dollar the Fed creates by buying government bonds adds to the money supply.  Each dollar is subsequently loaned numerous times (the multiplier effect), and those credit dollars are money just like the original dollar the Fed created. The credit dollars also add to currency inflation. The popular fear about inflationary effects from huge federal deficits comes from the theory that, due to scarcity of credit, the number of credit dollars is currently reduced; so currency inflation will not occur. Even if that theory is correct now, the money supply will increase when credit availability returns to normal.

Who agrees or disagrees with this alternative view? Or who agrees or disagrees with the first view that the U.S. is indeed heading down this path?

If anyone understands Argentina’s progression toward hyperinflation, please add to this thread.

Posted by Corey Curwick on March 9, 2009