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Earlier this month, Puddy and I traveled to Argentina for a business trip. We traveled south a few days early and toured Buenos Aires before our conference. The city was busy since it was the week of the
tango festival. Of all the things we learned, while we were in country,
the most important was that they tango differently in Argentina than we do in the United States.
We found Argentina a delightful tourist destination. The beautiful city
of Buenos Aires compares favorably among other cosmopolitan cities that we
have visited in our travels. The metropolitan area has a population of
12 million people. We found the people polite, well
dressed, prosperous and friendly. The U.S. dollar goes a long way down
there. Our stay at a five star hotel was less than a hundred dollars a
day. A wonderful dinner of brochee de lomo, with appetizers and wine at
a first class restaurant, was less than $35 U.S. dollar total, for both of
us. All this lead my partner for life to ask, "Why is
everything here such a bargain?"
I was not able to give a simple answer. Like all difficult questions, a
little history is helpful in order to fully understand the situation. The
history of Argentina is a bit similar to that of the U.S. It was established by a major European power, Spain. Cheap land caused
many second sons to travel to the new land. A war for independence from
Spain was fought and won. Immigration, from Europe around the end of
the 19th century, brought another big influx of Europeans (mainly
Italians). Cattle became a huge export. First, leather goods, and
then, with the advent of refrigerated ships, beef was exported around the
world.
Around the beginning of the 20th century, the per capita income in Argentina was similar to that of France. Around the middle of the 20th century, Argentina began to suffer due to military rule and internal conflict. In the late
20th century, the government was printing so much money to pay its bills,
that in the late 1980's, the monthly inflation rate was 200%. The
government then sold off industries to private concerns, encouraged private
enterprise and pegged the peso to the U.S. dollar. The peg to the
dollar seemed to inspire confidence in the peso and tamed the terrible
inflation problem. But pegging the peso to the U.S. dollar
prevented the state from exercising any monetary policy. The government
continued to borrow from the IMF to support the dollar peg and to pay for
government programs. To make matters worse, the government increased
the country's economic problems by raising taxes. Medicare/Social
Security Taxes were 32%, the vat was 21%, and the income tax on high incomes
was an additional 35%. This increased tax caused more people to drop
out into the underground economy and therefore reduced government income even
further.
Finally in 2001, the government could no longer pay even the interest on its
debt and it defaulted on 93 billion dollars of debt. Citizens began to
lose confidence and withdrew cash from the banks causing a run. In December
2001, the government froze all bank accounts. Early in 2002, the
peg on the dollar was pulled. The government also transferred all
dollar denominated accounts to pesos and limited cash withdrawals. When
the citizens could finally get to their money in the banks it had been
reduced to about 25% of its former value. While most of the upper class
had a portion of its savings banked outside of the country, much of the
middle class did not. In effect, the Argentine government robbed the
middle class.
Argentina appears to be coming back. The economy has been growing and
wages are starting to catch up. The middle class is even growing
larger. A debt restructuring plan was approved. However, the big
stigma that remains is the disregard the government once had for private
property during the theft of the middle class savings. I visited a
couple of major banks while in Buenos Aires, but the banking executive I
finally spoke with excused himself from comment due to his sudden poor
English, when the subject arose concerning the "recent
unpleasantness." While Argentines have started to use banks
again, many do not save their nest eggs in banks in Argentina. They either save outside of the country or save in hard U.S. dollars held
outside of the banking system. Even though the exchange rate was 3:1,
we found most retailers wanted U.S. dollars and would give a 10% discount for
payment in cash in U.S. dollars, instead of payment in pesos or by credit
card.
As Richard Maybury says, "True economic freedom only exists where his
two laws are observed:
1.
Do all you say you will do (contract law) and
Do not encroach on other people or their property."
Clearly rule #2 was broken. Until the government
admits this wrong, there will always be a fear that it will happen
again. This will continue to hamper the recovery of this great
country. Only an apology or the passing of a generation will put this
fear to rest.
Before you tell yourself that this will never happen in the U.S., remember that FDR stole 40% of the middle-class savings, when he devalued the dollar
three generations ago. My wife's grandmother NEVER forgot or forgave
FDR's theft until the day she died, at 98 years of age.) Nixon
did further damage when he pulled the dollar peg on gold entirely. Just
look at how much the dollar devaluation accelerated afterwards. In each
case, there was a theft of the savings of the citizens. In Nixon's
case, it was a slow theft. In Argentina, it simply happened much
faster. Protect your long-term savings and get out of shrinking fiat
dollars.
Larry Laborde
Silver Trading
Company
www.silvertrading.net
Larry lives in the occupied South with his wife Puddy and sells
precious metals at the Silver Trading Company. Larry can be contacted
at llabord@aol.com. You can view
his web site at www.silvertrading.net.
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