FerFAL: Here's What It Looks Like When Your Country's Economy Collapses

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Argentina is a country re-entering crisis territory it knows too well. The country has defaulted on its sovereign debt three times in the past 32 years and looks poised to do so again soon.

Its currency, the peso, devalued by more than 20% in January alone. Inflation is currently running at 25%. Argentina's budget deficit is exploding, and, based on credit default swap rates, the market is placing an 85% chance of a sovereign default within the next five years.

Want to know what it's like living through a currency collapse? Argentina is providing us with a real-time window.

So, we've invited Fernando "FerFAL" Aguirre back onto the program to provide commentary on the events on the ground there. What is life like right now for the average Argentinian?

Aguirre began blogging during the hyperinflationary destruction of Argentina’s economy in 2001 and has since dedicated his professional career to educating the public about his experiences and observations of its lingering aftermath. He is the author of Surviving the Economic Collapse and sees many parallels between the path that led to Argentina's decline and the similar one most countries in the West, including the U.S., are currently on. Our 2011 interview with him "A Case Study in How An Economy Collapses" remains one of Peak Prosperity's most well-regarded.

Chris Martenson:  Okay. Bring us up to date. What is happening in Argentina right now with respect to its currency, the peso?

Fernando Aguirre:  Well, actually pretty recently, January 22, the peso lost 15% of its value. It has devalued quite a bit. It ended up losing 20% of its value that week, and it has been pretty crazy since then. Inflation has been rampant in some sectors, going up to 100% in food, grocery stores 20%, 30% in some cases. So it has been pretty complicated. Lots of stores don't want to be selling stuff until they get updated prices. Suppliers holding on, waiting to see how things go, which is something that we are familiar with because that happened back in 2001 when everything went down as we know it did.

Chris Martenson:  So 100%, 20% inflation; are those yearly numbers?

Fernando Aguirre:  Those are our numbers in a matter of days. In just one day, for example, cement in Balcarce, one of the towns in Southern Argentina, went up 100% overnight, doubling in price. Grocery stores in Córdoba, even in Buenos Aires, people are talking about increase of prices of 20, 30% just these days. I actually have family in Argentina that are telling me that they go to a hardware store and they aren't even able to buy stuff from there because stores want to hold on and see how prices unfold in the following days.

Chris Martenson:  Right. So this is one of those great mysteries of inflation. It is obviously 'flying money', so everyone is trying to get rid of their money. You would think that would actually increase commerce. But if you are on the other end of that transaction, if you happen to be the business owner, you have every incentive to withhold items for as long as possible. So one of the great ironies, I guess, is that even though money is flying around like crazy, goods start to disappear from the shelves. Is that what you are seeing?

Fernando Aguirre:  Absolutely. Shelves halfway empty. The government is always trying to muscle its way through these kind of problems, just trying to force companies to stock back products and such, but they just keep holding on. For example, gas has gone up 12% these last few days. And there is really nothing they can do about it. If they don't increase prices, companies just are not willing to sell. It is a pretty tricky situation to be in.

Chris Martenson:  Are there any sort of price controls going on right now? Has anything been mandated?

Fernando Aguirre:  As you know, price controls don't really work. I mean, they tried this before in Argentina. Actually, last year one of the big news stories was that the government was freezing prices on food and certain appliances. It didn't work. Just a few days later those supposedly "frozen" prices were going up. As soon as they officially released them, they would just double in price.

Chris Martenson:  Let me ask you this, then: How many people in Argentina actually still have money in Argentine banks in dollars? One of the features in 2001 was that people had money in dollars, in the banks. There was a banking holiday; a couple of weeks later, banks open up; Surprise, you have the same number in your account, only it's pesos, not dollars. It was an effective theft, if I could use that term. Is anybody keeping money in the banks at this point, or how is that working?

Fernando Aguirre:  Well, first of all, I would like to clarify for people listening: Those banks that did that are the same banks that are found all over the world. They are not like strange South American, Argentinean banks – they are the same banks. If they are willing to steal from people in one place, don't be surprised if they are willing to do it in other places as well.

Click the play button below to listen to Chris' interview with Fernando Aguirre (36m:42s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/ferfal-heres-what-it-looks-like-when-your-countrys-economy-collapses/

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I’m a little confused. Inflation is technically defined as an increase in money supply and/or velocity relative to goods and services available. How is inflation in Argentina being driven?
Prices of food, stuff and energy is going up. Presumably wages are not keeping pace because the high unemployment is keeping a lid on them. This, together with a dry up in credit, is a deflationary force. How do inflationary and deflationary pressures work themselves out in the near term ?
Thirdly, people still in a job, who somehow manage to see their wages increase and see their debts being inflated away are the winners, are they not.
Ed

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No schadenfreude.
Lessons from history. Seeing that we have broken into German let us stick with the theme. Hitler decided that the Jews were the beneficiaries of the transfer of wealth in the Weimar. That did not end well well. (No rants -Just the facts please madam.)

Ferfal advises getting away from the situation. This was burned into African my soul. Hence the Yacht. As the spot-fires break out around the planet we move from place to place finding less disadvantageous situations.

This is the way of Abel. We cannot expect the children of Cain to understand, nor to approve.

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Just been thinking about what I posted overnight. You talked about inflation being this or that. Inflation is an increase in money suppy and/or velocity of money but you didn’t mean that. You meant to say that prices were going up by this or that. The increase prices are not been driven by inflation but by currency devaluation. Surely the price of locally produced goods stay the same? You just can’t afford foreign imports.

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[quote=climber99]Just been thinking about what I posted overnight. You talked about inflation being this or that. Inflation is an increase in money suppy and/or velocity of money but you didn't mean that. You meant to say that prices were going up by this or that. The increase prices are not been driven by inflation but by currency devaluation. Surely the price of locally produced goods stay the same? You just can't afford foreign imports.[/quote]Prices of all manner of things, imported and domestic, are rising sharply in Argentina right now.  Inflation is projected to run at 40% in 2014.  But that's an official projection; others project it much higher.
There are lots of things that can cause prices to rise, so rising prices alone tell you very little about the dynamic at play.
For example, if oil now costs $100 to get out of the ground and to market, and that cost spike feeds through into all of the uncountable downstream products and processes, then we'll see prices rising all over the place for reasons that have nothing to do with monetary policy or velocity.  Both could be perfectly managed and contained, and yet prices will rise.
The next dynamic relates to monetary policy.  If too much currency is issued, then you tend to get rising prices, but where that currency goes is a subject to human whim.  Will those humans herd into real estate and cause housing prices to spike, or will they all crush into tech stocks?  Or will it be tomatoes?  At first, it is usually one place or another, or even a set of places, but it tends to be spotty.
Similarly, if the currency is only devalued internationally, then import prices will rise, and that, like the oil example above, will feed into every downstream process and good that links back to an imported product.  This is Japan's current condition.
The wild card in all this is what happens when you cross the important social/psychological barrier where there is a loss of faith in the currency and the leaders in charge of said currency.  That's when velocity and inflation tend to spike, and that's exactly where Argentina is today.
Import prices spike.  Domestic prices spike.  Nobody wants to hold local currency.  The government responds by dictating prices for goods so shelves get stripped bare.  Ownership of hard currencies is forbidden or tightly regulated, and so they spike on the black market relative to the 'official' price.
All of this describes where Argentina is.  Its issues are no longer easily remedied because they involve math, psychology, broken trust, a dysfunctional political system, and heaps of prior bad decisions.

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Hmm. Sounds familiar.

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Thanks Chris. Yep, faith in the currency and its governance is all important and once lost it is very hard to regain. Ultimately a country must live within its means in terms of domestic energy production and natural resources. A currency should be pegged to this somehow and should be independent of political, corporate or bank manipulation to keep its integrity.

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Did you notice that the Germans have a phobia about debt? Reference. They call it schuld or guilt. And they pay cash for everything. Credit cards are shunned. They save money so that their banks have a healthy reserve to lend to business ventures.
Their economy is sustained by medium sized business.

When at work they focus on the job.

Trades are highly regarded. (I have heard an anecdote about an accountant who became a teacher because the pay was better.)

They do not work excessive hours and get 6 weeks annual leave. Loyalty is exchanged between employer and employee.

There is no agonizing about the gender roles. Motherhood is considered vital to the economy and is supported by giving the man an adequate salary so that he can support his family.

They are not obsessed by Real Estate and rents are low. (No-one is going to get "Rich, Rich beyond their wildest dreams" by flipping houses and screwing young families.)

They are community focused with clubs and sports. (Singing clubs are popular. The family that sings together, stays together.)

And here is the controversial bit- they have a clear idea about who they are and who they are not, who is family and who is not.

They share this characteristic with the Japanese, another economic powerhouse. The Japanese have run into a demographic problem, and may have to abandon their exclusivity, in which case they will no longer be Japanese- and their economy will take on aspects of their neighbours.

Traditions are not arbitrary colour, they are the collected wisdom of experience. Japan has been forced to abandon their traditions and until they develop new ones, they will crash and burn. I draw a clear line between the loss of their traditions and their lack of fertility.

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Any one have a contact with the community in Argentina? I think it's backed by Doug Casey. Would be fascinating to keep this real time thread alive and talk to someone at that community. 
I understand that connections to the police were necessary to get permitting and cut through the red tape.

I wonder if this upper class experiment is somehow isolated from the inflation.

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Arthur…Great Historical perspective on Hitler and the wealth transfer during that period…So who are the beneficiaries today? and will they be similarly persecuted if a totalitarian Government takes hold?And…Arthur…  Thank you for your latest posts that communicate to the simple folks like me. Often I feel like you are 2 galaxies removed and beyond my comprehension. No question you are brilliant…I just get frustrated when I can't figure out what the blazes you are saying.  My uncle was a topological mathematician at Yale who was on the Einstein team, and I never understood a thing he told me.
 

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Inflation is caused by several factors. In the case of Argentina the out of control printing sure isnt helping, but as Chris says "faith" has a lot to do with it. People in Argentina simply have no faith in the country's economy and they are right to feel that way because the Argentine government is a complete wreck, with an economy that was for years based on the export of soybean, the "green gold" as its called in Argentina. With prices dropping and less than ideal production numbers they are quickly running out of places to get money from. Taxation is already though the roof for those that actually pay because they dont have "friends" in the gov. Pension funds have already been nationalized, imports are already heavily restricted, even banned for more than two purchases per year per person, which cannot exceed 25 USD. With such a grim scenario, it isnt a surprise to see the kind of social unrest we've seen recently and the recent devaluation.

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It would depend on what you consider upper class. If you mean maybe a high earning doctor, a lawyer with his own firm or a successful business owner of some other kind that makes a couple million a year, then he's affected by all this. The ones that arent affected nearly as much are the handful of extremely wealthy elite. Not only do they have more than enough money, they also have the political connections to protect their interests and make sure many of the laws and regulations implemented dont apply to them. You see, inflation affects the different classes in different ways.Say food and gral. grocery prices go up 30%. Say you have a poor family that basically works to put food on the table and little else, maybe spending 80% of their income in doing just that. In that case, the 30% inflation affects 80% of their budget. On the other hand, maybe a very wealthy person spends just 10% or 5% or less of his income on food and groceries. In that case the 30% inflation affects a much smaller percentage of his expenses. In the case of Argentina the middle, and upper middle class are the ones that are specifically targeted. Not only do they have money to actually be taken away from them, they are considered political enemies from an ideological point of view, so taxes on income, taxes and fees to be paid on their capital, price of private medical care, prices of private schools, they all go up, often more than the medium inflation. A good example of such a thing is the recent car super tax (passed in Dec 19, 2013) affects most new car purchases, with a tax of 50% of its retail price. Such a blow affects the person that could actually buy a new car, which in Argentina doesnt include the poor or lower middle class.
I personally feel Argentina is a bad place to be in right now, with the bans and restrictions to transfer money back and forth forcing people to use alternative methods which, leaving the person on unstable legal grounds. It is particularly bad to do this for a foreigner, even more so an American which the Kirchner government considers the impersonation of the evil capitalist, their favorite scapegoat.

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Hi FerFAL,
 

Can you please talk about the real estate values (multi-family, commercial, strip malls, condos, single family homes, etc) in the different parts of Argentina?  Is the market stagnant or is there a lot of buying/selling?  Are prices rising with inflation?

 

Thanks for your interview and passing on your experiences.

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As FerFAL says, the people of Argentina are inured to the situation and used to suffering. So, as things go from bad to worse they just hunker down and make the best of it. I fear that in America most people are not prepared for any kind of suffering. Many Americans are pampered and soft and will suffer greatly when a reduced standard of living is forced on them.
There is also the black market currency to consider. In Argentina the black market operates in dollars which retain their value. We Americans will not have another currency to fall back on. It is unlikely that the Euro or any other country's currency will maintain its purchasing power when the dollar crashes.

For the above reasons, I fear that a financial crash will play out in the US rather differently than in Argentina. We will need new and different means to cope.

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Sure, right now it is very hard to sell any real estate. officially you are no longer allowed to use USD for transactions. It was and still is very common for them to be done in cash, given the Argentines distrust of banks. Now, everyone that owns real estate is just holding on waiting to see what happens. The dollar ban had an impact in the real estate market that dropped sharply, from 20% to 40% depending on the area, in the last couple years, activity dropped 25% in the city of Buenos Aires, but overall most real estate brokers agree that they see their business going down. NO more credit also means no one has money to buy so that makes things even worse. If you have to sell property today in the capital city of Buenos Aires, expects to lose about 5% to 10% compared to 2011 prices, and make that 20% or more outside of Buenos Aires city. The recent devaluation may translate into higher real estate prices though, we'll see that in the weeks to come given that bricks have always been a somewhat safe refugee during times like these. At the same time the gov. with its restrictions to operating in dollars and harassment of anyone that buys anything, even cars, wide screen Tvs or just travels abroad, does make things worse.

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First, I wanted to thank Fernando and Chris for a helpful review of the state of things in Argentina.
I would give Fernando copious credit for his tireless work on preparing folks with lessons learned from actual life experiences, which is invaluable.

I am glad Ferfal challenges thinking in the preparedness community, because in general, and as readers will know from previous posts, I support the dialectic of having two sides of argument discussed thoroughly and thoughtful.

So in that vein, allow me an opportunity to push back at a few notions and themes that Ferfal presents.

(By the way, I think he is likely correct about most everything he describes, after a very painful transition occurs, and given a modicum of stability in the government and the world in general).

Here are some flaws in his thinking.

To his credit he alludes to differences in Argentina culture and American culture.  I have visited Argentina (beautiful country and I met many gracious and highly intelligent Argentinean colleagues during my visit).  But I clearly don't understand Argentina like Ferfal does, but I don't think Ferfal understands America like I do.

While humans share so many commonalities, in short, Americans in specific have a very strong independence streak, and will, IMHO, reach a breaking point that will not be pretty (I think all humans have a breaking point, but frankly some cultures value traits highly that Americans place low value on, like submission, getting along, suffering i.e. Russians, over independent living.  The motto "live free or die" speaks to this.

Admittedly the liberal big government progressives in America have attempted to beat these values out of our citizens and tried to replace them with collectivism, but it has been with limited success.

The second culture difference is that, how shall I say this delicately, Americans tend to get things done.  Especially when presented with a mission.  Moon shots, Manhattan projects, Yankee ingenuity, Rosie the Riveter, Iwo Jima, whatever.  You can draw your own conclusions about what this means.

Ferfal's point about looting suggests an element of rebellion in Argentina, but that frankly sounds more like criminality than people joining together to make a political point.  And in fairness, Fernando didn't describe looting as a political act.  I'm just using that as a culture example of response to tyranny and government chaos.

All this leads to the conclusion that if and when things like currency failure occur, I don't think it will be accompanied by an Argentinean shrug of the shoulders e.g. "oh well, we just have to suffer with this Marxist government and cope with another 50% inflation".  I believe it will be met with much more reaction.

Again, I love Fernando's points about physical fitness, having multiple skills etc.  I just don't think he has any idea how severe an American response to Kirchner-like policies will be when faced with a likely drop in standard of living to true poverty levels.

The issue about the dollar and escaping to another country are off base.  In Argentina, Fernando talks at length about how Argentineans escape the destruction of the peso by using dollars as a store of wealth.

May I ask, to which currency will Americans turn when the dollar is destroyed?  About the only money left is gold, silver, and hard assets.  So dismissing barter so quickly by Fernando seems premature, because Americans will have no other choice for a period of time.  Euros, Swiss francs, Yuan?.  Don't see that happening.  I'm sure a new "dollar" will be introduced, but there will clearly be a transition of some length of time, of some severity.

And after the dollar collapses, the whole world will be "in transition" i.e. in disorder.  Will millions of Americans be welcomed with open arms in countries around the world?  I don't think so.  Maybe the 0.1%, because they can buy their way in.  Unless you are in that league, I would not count on it.

In addition to getting yourself and your family and community prepared, as unpopular as this opinion may be on this site, I submit you better look at your government and change that too by voting for decent, humble, honest, small government candidates.

This is the only government and economy you have.

H

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Hrunner,
Moon shots, Manhattan projects, Yankee ingenuity, Rosie the Riveter, Iwo Jima all happened a generation ago. Things have changed. The values of the present generation are much different. Modern Americans have a sense of entitlement which is not supported by their willingness to work hard. Other strings on this site have stories from employers who have jobs available but cannot find workers who have any kind of ambition or work ethic.

Our public schools have indoctrinated the present generation to not question authority and believe in a government which they expect to right all wrongs and provide a cradle to grave safety net.

47% of the population depend upon some kind of government financial support. When that is withdrawn we can certainly expect rioting, but only a very tiny minority will have the gumption to build something new and better from the ruins.

I expect that, in the aftermath of a dollar meltdown, TPTB will announce a new form of fiat currency which will be touted as the cure for all ills and the sheeple will trample all over themselves to get back on the government teat.

Members of PP will be more or less prepared, but we will be surrounded by millions of desperate people who have been completely blindsided and are utterly unable to cope on any level.

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Not all of us, for the record. As a teacher in the public - and now private - sectors, I always went beyond the given curriculum to force my students to question assumptions, challenge evidence, seek their own path, and think critically and skeptically. I asked them to look for the history beyond the official history we were being spoon-fed. When I taught Public Issues classes I always pushed students to be conservative, moderate or liberal after thinking through the issues for themselves, rather than labeling themselves what others had told them they should be. I also regularly reward students for challenging even MY authority, if they can do so thoughtfully and respectfully, which they almost always do.
Also, for the record, I'm generally pretty liberal, but I don't believe that I have the right to pass my beliefs on to my kids. I want them to THINK, ANALYZE, and DO. Not follow. Then again, fiscally I'm a bit more of an old-school "hand-up not hand-out" liberal, even though socially and environmentally I swing much, much further left.
So, there are kids being taught to resist indoctrination. Take heart in that, at least.

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Boomer41,
Your point is well taken. 

I hold out hope there is a significantly-sized group to lead the way to the next era.

 As I watch the decline of our culture, I can't help but think we are a 'victim of our success', or perhaps as Chris might say, "a victim of our cheap energy".

To say another way, in the era of fossil fuels, we have the luxury of cheap energy and productivity based on technological advances, which in turns gives us the ability to hand out goodies to the folks while the music plays.

I watch the slow train wreck of increasingly large and oppressive government, while the propagandized masses fall into it's loving arms, grabbing entitlements with both hands, apparently supporting  violations of fundamental freedoms, suppressing free speech, demonizing and name-calling people and groups such as 'Tea Parties' rather than have a rational debate of ideas and install measurable metrics for measuring success of dubious social programs. 

I feel we in the concerned citizen camp are analogous to a mother calling to her children playing in the pasture at sunset, saying 'come in, it's getting dark, the wolves are coming', but the children, blissfully unaware, think she's crazy and ignore her.   Then the wolves appear at the edge of the forest.

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Let the nationalization (i.e. destruction) of the Argentina soybean industry begin.
Right on time, this article from the Financial Times:

"Peso plunge forces Argentine soya hoarding  
By Emiko Terazono in London, Gregory Meyer in New York and Benedict Mander in Buenos Aires,  

“Pesos are no use – the worst thing you can do is hold pesos.” 

[Key excerpts]

"Faced with a sharp fall in the peso as emerging markets are battered amid concerns over the fallout of central banks’ unwinding of monetary stimulus the country’s soyabean growers have packed their dollar-denominated crop into “silo bags” rather than sell it for cash, determined to hold onto it as long as possible.  
 

A new harvest is now set to start in April. With Argentina accounting for about a tenth of the world’s soyabean exports and almost half the soya meal trade, farmers’ decisions on whether to keep hoarding will ripple through global futures markets.  

The consensus: widespread soyabean storage will continue."

 "Argentine growers have only sold 6 per cent of their soyabean crop to crushing plants and exporters, according to the latest figures from Macquarie.  This compares with 11 per cent at the same time last year, and 25 per cent for the y ear before that."

 http://www.ft.com/cms/s/0/65c6785a-9266-11e3-9e43-00144feab7de.html

This is how food shortages and eventually starvation begins.  Next is nationalization.  Next is crop failure.  Next is starvation.

However, it does make me want to go long soybean futures.

H