Inflation in Dollars

The Treasury of the United States has just sold preferred Citibank stocks, which it had purchased during the time of this entity’s bailout. The Treasury offered to sell $2.2 billion worth of stocks. There were ten bids for every stock offered, a total of more than $20 billion.

Is the future of the American financial system so promising in the face of an economic situation where it can’t even get back on a sustained growth path? This was the question posed to an expert on international finance.

The answer was precise: “No, but if the reference interest rate in the United States is 0.25% annually, any risky business is more attractive.”

The Treasury-Citi episode is one of the many faces of the particular present global economic reality that this world faces, and of which Argentina is not on the margin.

The fact that the American interest rate is on the floor, the dollar is losing ground world-wide, gold is reaching record highs ($1,310 the ounce) and the prices of raw materials are behaving bullish again are other facets of an exceptional situation for some developing countries.

It is not the case, for example, of Greece, Ireland or Portugal who, in these past few days, have seen a large jump in the cost of insurance against default. The markets believe that these countries have a greater possibility of declaring cessation of payment.

This is not the case in Argentina, who, in these past weeks, has benefitted from the “0.25% effect” of the American interest rate. Money flowed into Argentina to buy bonds that have a yield greater than 10% annually. This is a strong attraction for investors because the yield/risk relationship is advantageous for them.

Argentina will not enter into default or anything related, but, as a consequence of the lack of confidence that the financial world still has, will pay a high interest rate to obtain money.

This cocktail favors the entrance of financiers’ dollars, added to the dollars from exportation that entered with intensity starting in August and that keep flowing in. The increase in the production of grains and oils, and that of the prices of petrol and combustibles, permits a rise in exports that fills Argentina with dollars. This is a new context that will introduce strong changes in regards to the perception of the economy of the future.

In the 1980s Lorenzo Sigaut, the then-Minister of the Economy, famously predicted that “He who bets on the dollar loses.”

The economic collapse that began as a consequence of the “slight” devaluation of the Argentinean peso to get out of the currency slump caused by former president Martinez de Hoz resulted in a strong flight of dollars, the end of the president and ruin for the subsequent government.

Today the situation is quite different, and Amando Boudou, the Minister of the Economy, already predicted that in 2011 the U.S. dollar will be valued at 4.10 Argentinean pesos. Aside from the fact that Boudou’s prediction it is very credible, the hard facts are that Argentina has $51 billion in reserve, and the jump in agriculture productivity guarantees an important offering of currency at the medium term.

The future of currency issue even appears so solid that the government has taken the decision to let the Argentinean peso become slightly overvalued if it ever became necessary.

But now politics has taken precedence, and the high exchange rates have taken a back seat. Because of this, today Argentina that has one of the highest inflation rates in the world and is one of the most affected by the “inflation of dollars.”

In this vein, the peso/dollar exchange rate has become almost pegged, and there are very sensitive increases in prices.

According to a calculation by Bein & Associates done last year, Argentina had the greatest regional leap in terms of inflation measured in dollars.

The result of this is that, during this past year, for example, salaries, cars, fuel, garages, insurance and even a short taxi trip in the capital increased the price in pesos and, because the dollar has been relatively tranquil, also in dollars.

It is difficult to think that this theme will begin in the correct path until after the presidential election of 2011. There is no call for action or desire.

An immobile dollar generates many beneficial effects for the economy, and even more when the economy is in possession of dollars. But it also increases the operating costs of businesses, discourages activities like foreign tourism and halts investment.

Dollars are entering into Argentina, and these permit the country to cover many offsets. But it is important to take note that in any moment the costs will have to be paid.