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Stewart Cowley: Last tango in Buenos Aires

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Stewart Cowley: Last tango in Buenos Aires

Amongst the signs that there is something seriously and fundamentally flawed about a society is the simultaneous existence of two national currencies; the official and the unofficial rate. 

Maybe it’s something that Alex Salmond and the Scottish Nationalist Party should watch for in the future but the starkest current example is Argentina. The official rate has shot up to 8 Argentine pesos to the US dollar, unofficial rates of exchange have it closer to 13 pesos.  

The devaluation that occurred two weeks ago, suddenly and without warning, has in reality been coming for some time.

Since 2008 when the peso traded at 3 to the US dollar there has been a managed steady decline. In the process Argentina’s foreign exchange reserves fell from a pitiful $45 billion to a negligible $25bn. Finally the elastic band snapped – they had run out of money to manage the decline and the markets took over.  

The other sign of a flawed society is the existence of a self-consciously self-pitying administration that sees all of its victories as theirs and all its defeats as part of an organised conspiracy.

It’s even better if those you seek to blame are simultaneously invisible and paradoxically easily identifiable. So to hear cabinet chief Jorge Capitanich blaming unseen hands behind the peso collapse merely serves to confirm a dystopian society in all its glory. 

When it happens again – and make no mistake there will be another devaluation – we should expect more rhetoric from wounded politicians seeking a scapegoat for their own mismanagement and moral corruption.

The human tragedy

But the real tragedy is a human one. Prices, once more, are spiraling and goods are disappearing from the shelves (for fear that retailers don’t know what the right price is any more).

The days when the price of a carton of milk rises between the time when you entered the shop and when you approached the till are back. 

Argentina, resource rich and geographically beauteous has squandered the opportunity to put its house in order – unlike many of its near neighbours - for the sake of the egos of a few politicians.

European deflation trap

It may seem an incongruous leap to start talking about Europe after that but on the face of it they are staring at the opposite – deflation.

What both societies share in common is a lack of acknowledgement that a problem exists. The European-style classical deflationary spiral is born out of a need for a lack of money and the need for a currency devaluation.

To illustrate this you don’t have to look much further than a strong monetarist interpretation of the world and see the relationship between broad money supply growth and gross domestic product.

If you weren’t convinced before, you should by now know that for a capitalist society to exist it must have a credit cycle and for that to function you have to have a functioning and, preferably, expanding banking system. Neither of these things are evident in Europe nor are they going to turn around in the near future. Europe is in a deflationary trap built out of its own ossified system.

Europe needs QE

Both Christine Lagarde and President of the European Commission José Manuel Barroso have done their darndest in the past two weeks to pull off a Draghi-esque confidence trick, by trying to tell us all that everything in Europe is fine and as long as we carry on as though nothing has happened there is light at the end of the tunnel – things have at least stopped going down.

But, as should be obvious, if a man jumps out of a building he will eventually stop falling but it doesn’t tell you anything about the condition he is in after he has stopped. 

Somehow, and it may be quite soon, the Europeans will have to find a form of words that allows them, via the European Central Bank, to engage in an American-style version of quantitative easing.

This will have many effects not least of which will be the desired decline in the euro against all its major export competitors but also in the process suppressing European government and corporate bond yields during 2014 and beyond.

Citywire + rated Stewart Cowley runs the Old Mutual Global Strategic Bond fund, a Citywire Selection fund. According to Lipper the fund has returned 6.5% in the three years to 10 February versus a 5.1% rise in the benchmark.  

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