South American Woes

Both Venezuela (socialist worker’s paradise) and Argentina (nationalist socialist paradise) have a problem with their foreign exchange reserves. In both cases it stems from trying to keep up the pretense that their currencies are worth more than they really are. The central banks of both countries are (and have been for some time) printing money like crazy, and inflation is galloping with gay abandon. Their governments publish misleading economic statistics, that inter alia attempt to hide the true extent of the monetary debasement – in short, their inflation statistics are even more bogus than those of other governments (we are leaving aside here  that the mythical ‘general price level’ cannot really be measured anyway).

Since they have maintained artificial exchange rates – coupled with capital controls, price controls and other coercive and self-defeating economic policies – people have of course felt it necessary to get their money out any way they can. This includes making use of every loophole that presents itself, so that e.g. in Venezuela, so-called ‘dollar tourism’ has developed, whereby citizens travel abroad for the express purpose of using their credit cards to withdraw the allowed limit in dollars at the official exchange rate (and buy some toilet paper while they have a chance to grab a few rolls).

Now the governments of both Venezuela and Argentina have reacted – the former by introducing a ‘second bolivar exchange rate’ for certain types of exchanges, the latter by stopping to defend the peso’s value in the markets by means of central bank interventions.

….much more HERE

One of the reasons the rich countries’ excessive money creation hasn’t ignited a generalized inflation is that today’s global economy is, well, global. When the Fed dumps trillions of dollars into the US banking system, that liquidity is free to flow wherever it wants. And in the past few years it has chosen to visit to Brazil, China, Thailand, and the rest of the developing world.

This tidal wave of hot money bid up asset prices and led emerging market governments and businesses to borrow a lot more than they would have otherwise. Like the recipients of subprime mortgages in 2006, they were seduced by easy money and fooled into placing bets that could only work out if the credit kept flowing forever.

Then the Fed, spooked by nascent bubbles in equities and real estate, began to talk about scaling back money printing*. The hot money started flowing back into the US and out of the developing world. And again just like subprime mortgages, the most leveraged and/or badly managed emerging markets have begun to implode, threatening to pull down everyone else. A sampling of recent headlines:

Contagion Spreads in Emerging Markets as Crises Grow

Investors Flee Developing World

Erosion of Argentine Peso Sends a Shudder Through Latin America

The Entire World is Unraveling Before Our Eyes

Chinese Debt Debacle Supports Soros’ ‘Eerie’ Portrayal

Venezuela Enacts “Law of Fair Prices”

Argentina Returns to Villa Miseria

Indian Rupee Falls to 2-Month Low; Joins Emerging Market Sell-Off

Turkey’s ‘Embarrassing’ Intervention Fails to Curb Lira Sell-Off

Prudent Bear’s Doug Noland as usual gets it exactly right in his most recent Credit Bubble Bulletin. Here are a few excerpts from a much longer article that should be read by everyone who wants to understand the causes and implications of the emerging-market implosion:

….continue reading HERE