Depreciation and Inflation in Growing Economies

For me, it all became clear through a bottle of water. I spent last June in an immersion program in Argentina. When I arrived in Buenos Aires, I bought a bottle of water in the airport. I paid with two U.S. dollars (and got some change). Four weeks later, on leaving Buenos Aires, I bought another bottle of water. I paid with U.S. money again, but this time, just 30 days later, I needed only a single dollar to buy the same bottle of water from the same shop. My U.S. money had become more valuable because the Argentine peso had become less valuable. Money that becomes less valuable that fast is a big problem for people trying to live any kind of decent life. Bad monetary policies and inept government decision-making are pushing Argentinians, and people all over the world, into economic crisis. The people who can least afford these crazy fluctuations are suffering the most. These most-impacted people must be protected while their governments take the right steps to right their economies.

Bad monetary policy and rising inflation are not just macroeconomic management issues, they are social justice issues. The working poor (and there are more of them all the time) are being hit the hardest. They cannot afford proper food, clothing or housing. Good healthcare and education are now mostly beyond their means. Their governments are making short term decisions intended to temporarily please their populations (for election appeal) but are destabilizing the lives of the poor. Increasingly, the working poor are becoming the homeless poor; the basic things they need are just too expensive and inflation is eating up their wages. Their leaders do things like starting public works programs to employ their citizens. While this seems like a solution, it is only a band-aid; public works programs are expensive and often only sink the country further into debt.

Argentina is a good example. Because the U.S. Federal Reserve is raising interests rates, many Argentinians are converting their pesos to dollars, a more stable currency. Additionally, Argentina runs a fiscal deficit which it must finance in expensive dollars. As the peso depreciates and the exchange rate soars, the risk of default grows. Earlier this year, Argentina President Mauricio Macri raised interests rates to over 40 percent to try and save the falling peso. When that didn’t work, he turned to the International Monetary Fund (IMF). In May, the IMF granted Argentina a credit line for $50 billion; Argentina can use the money to pay down its expensive debt and support the peso, but it must reduce its budget deficit through spending cuts (including human welfare services) and taxes on exports (making Argentine products less desirable).

With Argentina’s insanely high interest rates, businesses and consumers cannot borrow the money they need to grow. Families cannot get money to buy new houses or cars, so the local economy is suffering as well. International investors are fleeing the Argentina market, drying up growth and opportunity. Inflation (the biggest driver of poverty) has soared.

To get out of this mess, Argentina will have to ask richer countries for help. When the IMF lends money, it requires the country’s leaders to “straighten up and fly right,” but they rarely do. I think that the terms of these loans must be very specific, very enforceable, and must include a social justice element. To ensure that the governments do not “solve” their imminent economic problems by impoverishing more of their people, the loans should contain a living standard condition. That condition would establish a minimum standard of living for a percentage of the population—ideally, the working poor—and provide that that standard of living must be maintained and should improve by an achievable percentage each year when compared to similar populations in other countries. In order for countries to truly move forward, they must change their economic policies and “leave no one behind.”