Don’t Cry For My Money Argentina

Earlier this week, news hit the wires that traders at some of the world’s biggest banks manipulated foreign-exchange rates which are used to set the value of trillions of dollars of investments. How often? Well, it happened on a daily basis in the foreign-exchange market for at least a decade, as reported by Bloomberg. It appears that the $4.7-trillion-a-day currency market (which is the biggest in the financial system) is one of the least regulated. Bloomberg writes “the inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.”

At the same time people in Argentina are suffering from new capital controls. Casey Research reported this week how Argentines are doing everything they can to circumvent a new dollar clamp which is imposed by the Uruguayan government. They take risks traveling to Uruguay to extract US dollars from their peso-based Argentine credit cards. Casey writes “the day-tripper “tourism” has become so extreme that Cristina Fernández has passed a new credit-card limit to Argentines. An Argentine overseas now may extract only US $800 per month. More pointedly, if the destination is a neighbouring country (read: Uruguay), the limit is $100 every three months.”

Argentina provides us with a very useful lesson. Over the decades, its politicians have repeatedly collapsed the economy through the classic progression of governmental overspending/creation of massive debt/dramatic inflation/currency controls. Historically, this progression has always led to an eventual collapse of the economic system (wherever and whenever it has occurred, not just in Argentina). We can therefore observe the developments as they occur in Argentina and project out as to what may be on the way in the First World.

At this point, anyone whose primary address is in a First World country might wish to ask the question, “Is there a dollar clamp in my future? Will my government soon be at the stage that my national currency will be inflating dramatically; and if I choose to divest myself of it, shall I find that I am unable to do so, as a result of hastily implemented government controls?” The answer is unequivocally “Yes.” Governments are in the habit of claiming that their first priority is the safety and well-being of their citizens. However, when a citizen of any country chooses to exit from the relationship, either physically or monetarily, governments have a nasty habit of turning, suddenly and forcefully, vindictive.

That’s how an economic system works; profits can only be made because someone is bearing losses. It’s a zero sum game.

Argentina is a prime example of currency depreciation and capital controls. The sad thing is that their citizens are suffering from that disease for a decade already. In 2001, Argentina’s economy was in deep trouble, suffering from high unemployment, high debt, and a recession. Literally in one day life became a hell. On December 2nd, the bankrupt Argentian government imposed measures freezing everyone’s bank accounts. Can you imagine how it is to have access to your bank account, and the next day being completely cut off?

Within a matter of days, people were out in the streets doing battle with the police. The government soon defaulted on its debt, and the currency went into freefall. What follows is a testimonial from an Argentinian student who was living in the US at that moment. It was reported by SovereignMan this week.

Everything became scarce. The electricity went out all the time. Even food on the grocery store shelves ran low. You would eat what you had available at home.

And in a way, food became a medium of exchange. Within just a few days, people went from having confidence in their currency to not trusting it at all. No one wanted to accept paper money anymore, especially for something as valuable as food. And if they did, it would be at 2-3 times the normal price. With all of this unfolding, I flew back down to see my family.

My father called me and said he had stashed his life savings in US dollar cash in a bank safety deposit box. He needed my help getting it out. When we arrived to the bank, there were thousands of people in the streets rioting. The police were there in paramilitary gear. It was so tense, we had to bribe someone just to get inside the bank. Fortunately we were able to get access to the box. But… we had to walk 3 or 4 blocks to the car. It was half panic, half adrenaline rush walking past an angry crowd with my father’s life savings shoved down our pants.

Looking back, this was crazy. But at the time, it was the only way. Then came the even harder part– getting it out of the country. We had friends who would take rowboats full of cash to neighboring Uruguay. But this was incredibly risky.

At the time, the only legitimate way to get money out of the country was buying ADRs (Argentine public companies listed on the New York Stock Exchange). And the only reason we were even able to do this was because we had the contacts. But we got killed on the fees. The commission alone was 20%, and then, of course, the stocks we purchased took a dive.

So my father ended up losing about half of his savings trying to get it out of the country at the wrong time.

What’s funny is that we eventually ended up suing the government. They had destroyed everyone’s life savings, and even seized pensions as well. The government dragged out the legal process for years, almost a decade. They were hoping that all the retirees who were suing them would simply die off, and the problem would go away. Eventually, we won the case (along with thousands of others). But the judge gave the government a ‘suspended sentence’. So, no penalty.

He continued describing how life is to without money.

The best way I can describe it is despair. And this is really the worst emotion you can have. Because when you’re in a state of despair, you’re hopeless. It’s a terrible position to be in. Life becomes hell because you do not know whether you are going to be able to put food on the table the next day.

And in such a state of despair, you’re not in a position to make good decisions. It’s all about survival.

Of course, we kept thinking, “why didn’t we see this coming? Why didn’t we do something sooner?”

If only we had moved some money out of the country before, or taken steps to safeguard his pension, life would have turned out much differently.

It’s like that old saying– better to be a year (or decade) too early than a day too late. Because one should never underestimate the speed with which things can unravel.

Why are we sharing this with our readers? Because we fundamentally believe that this issue (occurring in one of the emerging countries in the world) could equally occur in a developed country. Are we sure? No, but it is becoming very likely given the economic and monetary trends. Our sytem is flawed. An unprecedented number of financial scandals is the proof that the system has reached a tipping point. Nobody knows how this will end, but chances are that it will end badly. Think of the Argentinian story; that’s how life could look like during such a period. Holding physical precious metals outside the banking system could literally save you in such a situation.

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