Global Capital, Empire and Argentina

Bradford DeLong jbdelong at uclink.berkeley.edu
Sat Dec 22 09:10:08 PST 2001



>Cavallo's currency arrangement was proposed as a solution to
>hyperinflation, and orthodox thinkers and investors loved it at
>first. But why does hyperinflation happen? Sometimes because of war
>or natural disaster, but also because of extreme demands being made
>on a national treasury - to maintain a quarter-decent level of
>social spending at the same time debts must be serviced.

Rather, to maintain a quarter-decent level of social spending *and* to keep taxes on the rich relatively low. It's the desire to have the free lunch and eat it too...


>Cavallo imposed his currency board as a magic bullet, and there's a
>boom for a while as capital flows in and the investing class feels
>happy - but there's no way Argentina can survive in export markets
>with a currency fixed to the dollar, given that its productivity
>growth can't match that of the U.S. So the country goes into a
>four-year depression. But the currency can't be devalued, and the
>system can't be renounced, because the investing classes wouldn't
>like that, and capital would flee. There's no way out of this box,
>is there?

Devalue, default, and dollarize is my favorite option. Dollarization helps you avoid the hyperinflation that is the likely consequence of a large devaluation. If you structure default in a way to preserve the principal while cutting back interest to U.S. Treasury levels, the New York banks won't be *that* unhappy. And devaluation is needed if you are to have any hope of generating an export boom.

Of course, time is wasting...


>
>The only countries that have closed some of the income gap with the
>First World were those in Asia...

?? Southern Europe as well. Plus China and India...



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