A Case of Highway Robbery

What if the savings in your bank account lost 55 percent of its value over the last 12 months?  Would you be somewhat peeved?  Would you transfer some of your savings to another currency?


USD-ARS, weekly. For several years the Argentine Peso has followed a certain pattern: it declines mildly, but steadily, with little volatility for long time periods, and then spikes in crash waves whenever a crisis situation comes to a head. In early 2011, it took roughly four pesos to buy one US dollar – which was already an enormous loss of value relative to the 1:1 exchange rate that prevailed under Argentina’s currency board prior to the government default and banking system collapse of 2001. When Mr. Macri was elected president, it was widely held that his market reforms would finally repair Argentina’s economy, which had been ruined by almost two decades of economic mismanagement and inflation under the previous Peronist administration. Alas, Macri made a mistake no Argentine government that gains the trust of foreign investors seems able to resist: he embarked on a big borrowing spree, much of it denominated in USD, until it became clear that the government would no longer be able to defend the peso or service its debt. Then he exacerbated his mistake by borrowing even more money from the IMF – which should be filed under “a movie we have seen before”. And just as had happened in that earlier escapade, his government is now likely to default on its IMF loan as well. Not surprisingly, the peso has collapsed – and in well-worn fashion Macri is now trying to save the village by destroying it and has introduced capital controls. [PT]


That was the favored approach in Argentina – where the official inflation rate is 55 percent.  But no more.  On September 2, President Mauricio Macri resorted to capital controls to preserve the central bank’s foreign exchange reserves and prop up the peso. What gives?

Just fifteen months ago Macri secured the biggest bailout in the International Monetary Fund’s history.  Now Argentina is delaying payment to its creditors and is rapidly approaching what will be its third sovereign default this century. On top of that, Macri’s Peronist rival Alberto Fernández will likely take his job come election day in October.

Alas, for Macri and his countrymen, a painful lesson is being exacted.  You cannot solve a debt problem with more debt.  Eventually the currency buckles and you are left with two poisons to pick from: inflation or default. With Macri’s latest capital control scheme he is choosing to take swigs of both.


Argentina: official CPI, year-on-year. CPI data published under the Kirchner government are highly suspect – private economists regularly estimated the figures to me much higher than the official data suggested. Upon this the government resorted to threatening economists with jail terms if they continued to contradict official inflation data. [PT]


Make of Argentina’s woes what you will.  Central bankers in the United States are also guilty of programs of mass money debasement.  They may have a bigger economy to better mask their malice.  But despite what the delusional MMT proponents say the day of reckoning always arrives – and always at the worst possible time.

Indeed, the U.S. dollar has not lost 55 percent of its value over the last 12 months.  However, according to the Bureau of Labor Statistics’ own inflation calculator the dollar has lost 55 percent of its value since 1988.  In other words, it takes $1 to purchase what $0.45 could buy during President Reagan’s last year in office.

No doubt, a 55 percent loss spread out over 30 years is much better than a rapid devaluation over 12 months.  But that doesn’t mean it isn’t highway robbery.  And we all know the unofficial price inflation rate is much, much higher.  What to make of it?

To answer this question – and many others – we will take a gander back nearly 300 years… to a nearly forgotten episode of mischief and mayhem…


Bad Money

William Wood was an English retailer of iron goods. Some years were better for business than others.  But somewhere in his dealings he, like Lockheed Martin and many others, stumbled upon a very important secret.  Namely, that having friends in high places makes all the difference. Thus in 1722, the English Parliament granted him a patent to coin copper money for use in Ireland.

The Irish, without question, found Wood’s patent to be unadulterated malarkey.  For one, the Irish Parliament didn’t approve it.  Second, it opened the Irish currency up to debasement.  Third, this was yet another instance of political and economic exploitation by the English.


A copper farthing struck by William Wood. Wood also made copper coins for Britain’s American colonies, which were actually of inferior quality compared to his Irish coins. Presumably the colonists were not particularly happy about this either. [PT]


Jonathan Swift, the noted political satirist, wrote a series of pamphlets to unite his fellow Irishmen and defend the constitutional and financial independence of the Irish kingdom.  Swift wrote under the pseudonym M.B. Drapier – hence the seven pamphlets are collectively called The Drapier’s Letters.


Jonathan Swift’s Drapier’s letters denouncing Wood’s coins. Wood was inter alia widely suspected of debasing or even counterfeiting his own coins, as minting the coins in accordance with official specifications appeared not to be profitable. [PT]


Swift’s grievance with Wood was not that there would not be enough money; but rather, there would be too much of it – and that it would be of inferior quality.  Swift recognized that a flood of new lower grade copper coins into the Irish economy would drive the more valuable silver coins out of circulation. Plus, since the coins wouldn’t be minted under Irish authority, there would be no way for the Irish to control their quantity, and rampant price inflation would follow.

This is known as Gresham’s Law, which commonly stated is: “Bad money drives out good.”  More specifically, if a circulating currency consists of both “good” and “bad” money, with both forms required to be accepted at equal value under legal tender laws, the currency quickly becomes dominated by the “bad” money.

This was seen in the United States in 1965 when the quarter was first minted from a copper-nickel composition instead of silver.  Leading up to this, the Federal Reserve had inflated the U.S. currency so that the silver content of a quarter was more valuable than a quarter dollar. True to Gresham’s law, pre-1965 silver based quarters rapidly disappeared from circulation.


1955 silver quarter


Today, if you want a pre-1965 quarter, you can buy one from a coin shop for about $3.50.  Consequently, while still of the same face value, the quarter has lost over 92 percent of its actual value since 1965.


Suffering the Profanity of Plentiful Cheap Money

Swift shrewdly determined there was no legal requirement for the people of Ireland to accept payment with Wood’s copper coins. He details this in the The Drapier’s First Letter, which was titled, To the Shopkeepers, Tradesmen, Farmers, and Common People of Ireland. What follows is a brief excerpt…


“I will now, my dear friends, to save you the trouble, set before you, in short, what the law obliges you to do; and what it does not oblige you to.

“First, you are obliged to take all money in payments which is coined by the king, and is of English standard or weight, provided it be of gold or silver.

“Secondly, you are not obliged to take any money which is not of gold or silver; not only the halfpence or farthings of England, but of any other country.

“Thirdly, much less are we obliged to take those vile halfpence of that same Wood, by which you lose almost eleven pence in every shilling.

“Therefore, my friends, stand to it one and all: refuse this filthy trash.  It is no treason to rebel against Mr. Wood. His Majesty in his patent obliges nobody to take these halfpence: our gracious prince hath no such ill advisers about him; or if he had, yet you see the laws have not left it in the king’s power to force us to take any coin but what is lawful, of right standard, gold and silver.”


With the help of the Drapier’s letters, Wood’s patent was revoked in 1725 and Ireland was spared the profanity of plentiful cheap money.


US broad true money supply TMS-2 – there is nine times as much money in the US economy today than 1986. [PT]


Such are the profanities that the citizens of Argentina are now suffering.  Such are the profanities our fellow countrymen here in the USA will suffer when the great dollar bubble eventually pops.


Charts by investing.com, tradingeconomics, acting-man.com


Chart annotations, editing and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




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