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Guest Post: Another Episode In The History Of Failed Manipulations
Submitted by Martin Sibileau of A View from the Trenches blog,
“…The Argentine government jawboned the foreign exchange market more efficiently than Draghi did with the gold market upon the insinuation that Cyprus would sell its gold…”
I am back from a brief trip to Argentina’s Patagonia, where I could confirm first-hand the irreversible damage caused by interventionist policies: Widespread poverty, abandoned infrastructure, scarcity of consumer goods, unseen unemployment and criminality, etc. I could also see for myself the madness of hedging against inflation with the purchase of new cars. The streets of any forgotten small town in Patagonia are filled with brand new 4×4 vehicles that would be the envy of many in North America.
While visiting too, the Argentine government made a new move to suppress the price of the physical US dollar. In previous articles (here and here), I made the case that the broken US dollar market in Argentina would provide insights into what we may eventually expect from the gold market, if it broke in the same fashion. However, I had underestimated the magnitude of the USD physical market. Zerohedge brought attention to this point a few days ago (here).
Overview
In August of 2011, Argentina’s government slowly began to implement a series of actions destined to curtail the right of citizens to access US dollars (foreign exchange in general). The goal was and is to force savings into pesos, as pesos are after the taxable asset in a country that cannot access capital markets and fully monetizes its deficits.
From that moment onward physical US dollars started to trade at a premium. Last week, with the paper US dollar value at 5.11 pesos, that premium was over 100%. Physical US dollars, i.e. dollars outside the system, reached a bid/ask of 10.30/10.45 pesos. The chart below should help visualize this dynamic (source: Reuters/La Nación)
The latest move: Tax moratorium to repatriate capital
With a 100% premium over the “official” price of the US dollar, on May 7th, the federal government announced a moratorium for off-shore capital (see here, in Spanish). A simple reading of this measure would reveal a government encouraging capital inflows to an investments-starving nation. The moratorium, after all, is for capital directed to the real estate and energy sectors. The real intention behind it is, however, to narrow the gap between the official and black market price of the US dollar, via manipulation of the “official” price, as I will show further below. At the official price, of course, one finds no sellers.
The moratorium is a tax pardon, no questions asked, for all Argentines who decide to bring onshore their undeclared US dollars deposited offshore. Although it is not clear yet whether the declared funds can be freely disposed of, the government seeks that they be applied to the purchase 2016 4% bonds issued by the federal government or USD certificates, issued by the central bank. These USD denominated certificates (see image below, source: La Nacion) are to be used to clear transactions in the real estate sector, are fully endorsable and have no maturity. In other words, the government wants to further segment the US dollar market.
I can’t help speculating that years into the future, one would see a developed country implementing a similar measure to repatriate undeclared gold.
How it works
The tax moratorium is a simple transaction. Let’s forget about the USD certificates issued by the central bank that pay no interest and assume that the public will accept them like US dollars. We are talking about a public that already holds 1 every 15 US dollar bills in the world. My view is that these will not prosper, because I doubt that anyone selling real estate would be willing to take them at face value.
We are left with the 4% coupon bonds issued by the federal government, maturing in 2016, which are bought by offshore depositors. The figure below shows the accounting:
Final Observations
By now it should be clear that if the Argentine government had only wanted to attract offshore capital to fund investments, there would have been no need to have the Government Issue interest paying certificates.
It is also obvious that for this policy to be successful, offshore depositors must believe that declared, taxable, interest paying USD certificates are better than holding US dollars off-shore. But if these certificates are to be liquid, the discount in the secondary market should be lower than 12% approximately, in the absence of counterparty risk (4% x 3 years). And with the Federal Government of Argentina as the issuer, there is no doubt that counterparty risk is real and present. Preliminarily the government expects $4 billion to be declared.
One would find this measure laughable, as it is absolutely evident that one is better off holding undeclared funds offshore than facing scrutiny to earn a 4% interest on a certificate issued by the government of a country that defaulted on its debt and has no access to the capital markets. Yet, in this new normal world we live in, with the announcement, the price of the US dollar fell to 8.87 pesos, which represents a considerable 13.9% drop. To put the reaction in perspective, the Argentine government jawboned the foreign exchange market more efficiently than Draghi did with the gold market upon the insinuation that Cyprus would sell its gold.
It is also a known fact that financial repression in Argentina is a publicly disclosed policy, and some may attribute the drop to the same. But I cannot deny that the reaction surprised me. If the measure is successful, would the success indicate that monies currently offshore are perceived to be in far greater danger than in a country where they can be laundered into the energy sector? To finance a company that was confiscated in 2012 to the Spanish crown?
Regardless of the initial drop (the closing price on Friday May 17th was 8.95 pesos, while the official price was 5.25 pesos), one wonders if the Argentine government can sustainably manipulate the price of the US dollar, assuming the certificates are accepted in the market, and if there are lessons to be learned here.
Without changing the terms of the tax moratorium, Argentina’s government could replicate the tactics of the gold cartel to suppress the price of the US dollar. The way to achieve this is by expanding the credit multiplier, as shown below:
The figure above shows that with the US Dollars repatriated and in the balance sheet of the Federal Government (assets), it could be possible, assuming that the certificates are accepted, to generate a credit pyramid in the system. If the certificates are accepted in deposit by banks (step 2 above), these can use them to expand their USD loan base (just like bullion banks use the gold ETFs to expand their gold loans).
This scheme would suppress the price of the US dollar (just like gold loans suppress the price of gold), in a country where depositors have not lost their deposits to their banks (i.e. in a country where people trust their banks). But we all know this is not the case with Argentina. However, I can imagine that the 4% coupon of the certificates will not carved in stone. Would a 20% interest on USD certificates encourage certificate holders to leave them in deposit? It did in 2001, and with Argentina’s holdouts still alive and fighting, this alternative scheme would allow the government to source US dollars and keep kicking the can until the next election.
Nevertheless, with an ever increasing fiscal deficit, it would take an equally growing amount of leverage (on the bonds) to keep the party going. But remember: This whole intellectual exercise is based on the assumption that the bonds trade in the secondary market and that one can only produce a tax moratorium every few years….
If the “bancos” had to offer a high interest rate to use the bonds as collateral (say, above 20% or most likely above the actual inflation rate), the Banco Central (i.e. not the Federal Government that issues the 4% bonds) would feel tempted to directly subsidize the banks, while earning a laughable amount, from its US dollar bills. This subsidy would be required to maintain a positive net interest margin, because I doubt that the bancos would be able to make any significant USD loans at such rates. There is a precedent to this in the Cuenta de Regulación Monetaria, established in 1977.
We can now see that the sustainability of the manipulation in a segmented/broken foreign exchange market causes a negative carry, which would create a quasi-fiscal deficit in Argentina (i.e. the deficit of the Banco Central), fully opening the gates to hyperinflation. I have made the point in earlier letters (here) that the same could be conceived to happen with the manipulation in the price of gold. This latest example from Argentina serves therefore as another experiment in the history of failed manipulations.
One last comment: Because the scheme is so visibly unsustainable, the temporary drop in the price of US dollar bills (i.e. physical US dollars) will attract a higher demand of said US dollar bills, forcing the leverage provided by the certificates to grow exponentially. In the week of the announcement, USD deposits fell another 96 million. This is the same behaviour seen in physical gold.
What makes the gold market of 2013 different?
As gold is a commodity, there is no counterparty risk: Either the gold is or isn’t where it is supposed to be. This makes the gold market less flexible than, say the foreign exchange market just described above. Why? There cannot be an interest rate in gold paper that will keep investors in the Ponzi scheme, just like there is one for US dollar bonds in Argentina.
For instance, if a gold ETF (or any commodity ETF for this purpose) offered a coupon, it would raise all kinds of suspicions, unless we are in a system where gold is allowed to compete with legal tender, in which case too, there would not be a need for gold ETFs. This means that in order to keep its price suppressed, the gold market requires outright fraud. It also means that the only way that such fraud can be resolved is with plain and swift confiscation, because once revealed, no interest rate will clear the market.
If it is correct, as reported, that 1 out of every 15 US dollar bills is held by an Argentine, it is easy to see why the retail US dollar investor in Argentina managed to break the market and keep the official manipulation at bay. This is not the case with the global gold market today, but it was certainly not the case in Argentina of the ‘70s either, when the decline of its economy began to show itself as evident.
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"Economic hit men (EHMs) are highly paid professionals who cheat countries around the globe out of trillions of dollars. They funnel money from the World Bank, U.S. Agency for International Development, and other foreign “aid” organizations into the coffers of huge corporations and the pockets of a few wealthy families who control the planet's natural resources. Their tools include fraudulent financial reports, rigged elections, payoffs, extortion, sex, and murder. They play a game as old as empire, but one that has taken on new and terrifying dimensions during this time of globalization.
I should know; I was an EHM."
-John Perkins
That's from a decade or so ago. The banks are what destroyed Argentina. What the government is doing there now is a reaction to a crisis caused by unabashed greed of non-governmental actors. The government was bribed and corrupted and is doing stupid things now, no doubt. But the collapse was planned and a few people made a shitload of money in the process.
How does one become an EHM?
First step, sell your soul.
Tattoo a Star of David on your forehead.
Haha so true. Star of Molech
Read the book. They found and recruited him
get a job in a big bank.
Socialists always take the easy out. It's never the govt's fault w/ you guys-EVER. There's always some boogey man to blame for the economic problems- just ask Chavez( not that you can with him) or Castro.
Get the order of blame strait:
1. Animal spirits. People are dumb animals, they didn't know the
Fed was going to pull the punch bowl away from the party.
2. Bad regulations. Politicians are always looking for more regulations so blame the previous regulations for the failure.
3. Speculators. Always a favorite of Bill O'Reilly and the neocons.
4. Weather.
5. Bad luck.
6. Whatever the public is gullible enough to believe.
How goes the taxpayer funded teacher gig economics9698? Sink or swim is always for the other guy, heh?
7. waddel and reed
"Socialists always take the easy out. It's never the govt's fault w/ you guys-EVER."
If you bothered to read my post (or Economic Hitman) rather than just have a knee-jerk black and white reaction, you would see that I stated that government shares plenty of blame. But ignoring the bribers and focusing only on the bribed is sophomoric ideologue thinking. It's like saying the hitman should go to jail but not the guy who hired him.
So now the Fed, ECB, BOJ, World Bank, IMF, multi-nationals, etc. are all just "boogey men." LMAO... of the conspiracy tin-foil type. Whodanode?
From Iceland to Ireland to Greece to Cyprus to Japan to China the US the EU the fucking PLANET... blame the socialists. And use "Castro" and "Chavez" for effect.
I think I just nailed your post-19th century worldview. Any brilliant "easy outs" that may pre-date this??? ..Since no boogeyman could ever shake down a former empire for loose change like a good socialist can.... don't hurt yourself.
Funny watched Boardwalk Empire last night and the Mafioso's where in Chicago deciding who was to be president, the only difference between now and then was they run Wall St now not the liquor/bookie/unions (should that read 'as well as'), that and straw hats.
into the coffers of huge corporations and the pockets of a few wealthy families who control the planet's natural resources
So who are they exactly... Maybe its time to get a list together.
Little problem with this story though. 'EHMs' are like dragons and unicorns. The EHM meme is a limited hang out story for the real bad guys (politicians plain and simple). So many love to blame wall street, or bankers, or jews, or 'capitalism' ( seriously funny since 'capitalism' is a myth akin to dragons and unicorns).
Bullshit on your good government fighting the 'evil force' crap dude.
Government is the sickness, all the symptoms are merely effects.
http://www.thedailybell.com/1791/Anthony-Wile-with-John-Perkins-on-His-B...
So this guy just spills the beans huh?
Don't be an idiot.
He would have been dead long before becoming so 'heralded'.
It takes two to tango.
The government was the keeper of the public trust; unfortunately it was corrupt before it accepted any bribes, else it wouldn't have accepted the bribes in the first place.
I saved all the time it would take to read your article by simply deciding to never go to Argentina.
It's really a beautiful country that is rich with natural resources but socialism is too deeply entrenched in their psyche. Brazil is now veering back to socialism after their brief experiment w/ capitalism- unfortunately these people from Central and South America bring that same "socialist spirit" with them when they come to the US to live. I'm sure LTER will chip in w/ his usual pablum.
The real problem with actual Capitalism is that it eliminates the need for and in fact is incompatible with bureaucratic servitude.
The gang running this farcist criminal game is scared shitless by Capitalism.....We don't need them anymore.
Poor babies would need to get an honest life.
Iseeit: "The real problem with actual Capitalism is that it eliminates the need for and in fact is incompatible with bureaucratic servitude."
The capitalists at the top simply bought the government. How did they get so rich? Because perfect competition only exists in small pockets here and there, never everywhere. A bully will always arise.
+1. For an example of that socialist brainwashing just mention healthcare in the States vs. Argentina.
I've been to BsAs several times and have probably spent a couple of years there. The people are just as stupid here as there. Our problems are probably far greater here than there. Why? Sheer size and the complexity of our situation; and those people will get up and fight.
We are a sorry lot all in all.
Christna and O'Blah blah are a match for the Gods. Stumble n bumble and step an fetchit. Milestones
What about $100 bills and Gold and Silver under mattresses?
The black (or gray) market value is determined by non-deposited dollars I would think.
FDR only got about 15% of privately held gold in his Tyrannical grab attempt - which means 85% of American's gave him the finger (as they should have).
Cristina was pretty hot about 25 years ago. She is my age, so I'm guessing a night with her has not been hit by hyperinflation.
Don't even consider it. How do you think she killed off Nestor?
I wonder what happens to all those U.S dollars if the U.S has a currency crisis of it's own.
They circulate and self destruct after 50 days.
Try buying Gold or a Toyota land cruiser with a post crisis dollar and sadly you will find out...
Ministry – Breathe! breathe, you fucker!
The instant auspicious moment occurs once this administration calls for a completely new stimulus bill, then all bets are off. The light bulbs will rapidly click on. The days of demonizing Capitalism along with the current administration’s necessity to borrow more money to advertise crony capitalism will come to an end.
Sit back and watch it unfold.
adminstered by presidente kk, (caca)
THE REPATRIATION HAS NOTHING TO DO WITH PRICE CONTROLS, THEY KNOW NOBODY IN THEIR RIGHT MIND WILL DECLARE AND BRING THEIR WEALTH BACK.
IT'S ONLY A MEASURE CUSTOM MADE FOR CORRUPTION DOLLARS TO COME BACK TO THE COUNTRY ON AN OFFICIAL LAUNDRY.
SO LONG AS SOYBEAN PRICES REMAIN RELATIVELY HIGH, THEY WILL NOT CARE ABOUT THE PARALLEL MARKET. SAME AS VENEZUELA HAS MANAGED TO SURVIVE FOR OVER A DECADE.
SOON THE WILLL ISSUE CONVERTIBLE BONDS TO PAY CORRUPT POLITICIANS, BANKS AND MILITARY.
HISTORY REPEATS........