🤯 How Argentina Adapted to Inflation

While inflation seems like a relatively new demon to us, Argentina has been battling with this forever. Here are a few lessons we can learn from its battle.

Nobody in Argentina knows the price of things.

Sounds strange? But well that's what inflation levels of 70% do to the economy.

Yes, you read that right: Argentina has an inflation rate of 70%, with consumer prices having risen 71% from a year ago! And it is set to reach 90% by the end of the year.

But for Argentina, this is not a strange phenomenon. People have been dealing with inflation since the 1960s and have adapted to it. Wondering what inflation adaptation looks like? ReadOn.

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🇦🇷 Argentina: The Land of Inflation

No, it's not just us who are saying that Argentina is the land of inflation. Check out these articles from the 1975 and 1983 that highlight the country's recurring issues with inflation:

The highest that Argentina's inflation has reached is 3,000%!

But what is causing this inflation?

Well, right now, the fault partly lies with the global circumstances that have increased all our bills.

You know, Covid, the Russia-Ukraine war, the same old crises that we have been dealing with.

However, that's not the only reason behind Argentina's insane inflation.

The fault also lies with the way the country manages its economic policy. 

The country has a history of spending more than its means. 

Though this is usually done with good intent: a lot of government money goes into subsidising healthcare, education and other public welfare schemes, but it leaves them with a huge fiscal deficit (gap between its earnings and expenditure). 

To bridge this gap, it resorts to printing more money.

And that's where the trouble lies. 

You see, any time a country prints more money, the supply of the currency in the market increases. However, this extra currency is chasing the same amount of goods. So, the price of the goods rises (inflation) and the price of the currency depreciates in comparison to other currencies.

Right now, this is exactly what is happening in Argentina. The fast rising inflation is increasing prices of goods daily. So much so, that shops have stopped using price tags altogether. 

And the peso has been depreciating.

A 1,000 peso bill was equivalent to $58 in 2017 but now it is worth only $3.45. 

Which is why Argentinians are avoiding the peso as much as they can. Huh?

Yes, that's how they have adapted to the country's insane inflation: by avoiding its currency. 

But ReadOn, how can you avoid your country's currency?

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🤔 How Argentina Has Adapted to Inflation

In 2001, when Argentina first defaulted on an IMF loan, the citizens understood that the country's internal evaluation of the peso’s value was much higher than the rest of the market's.

This led them to lose faith in the currency, so they began buying and hoarding US dollars.

Some believe Argentina probably has more US currency in use than anywhere else in the world (barring the US of course). 

So much so, that hundreds of thousands of dollars were recently found in a trash dump.

Nowadays, you can't buy a property or make any meaningful transactions in Argentina without cold hard dollars.

This has led to the peso falling more as the demand for the dollar keeps pushing dollar's price high.

Which is why the country has put a limit on buying dollars: Only $200 a month can be bought by a citizen.

But such is the demand that no one adheres to this.

While other countries have black markets for drugs or organs, Argentina has a black market dedicated entirely to dollar trading.

And that's how the rich in the country are surviving: by buying more and more dollars.

They are also adequately compensated, with major companies giving regular hikes of over 50% each year.

But as usual, the poor, who don't get any such hikes are suffering. Poverty in the country has increased to 37%, up from 30% in 2016. 

The poor usually don't have enough money to buy the continually rising dollar.

However, they have also managed to bypass the peso altogether. How?

By going back to our ancient roots and adopting the barter system.

Women sell extra milk powder that they get from the government to feed their babies in exchange for diapers.

Such barter is worse for economic growth but everyone is looking out for themselves in the country.

And how has this impacted the broader economy?

Most Argentinians refuse to keep any money in the bank, fearing it will reduce in value. This impacts the entire credit system of the company.

And the continually declining peso also discourages foreign investment in the country.

Moreover, people refuse to buy insurance as the peso's decline means their payout could be less than the premiums they have paid.

So, the Argentinian economy is in trouble and could default once again on a $44 billion loan to the IMF.

The only reason that the economy has not completely collapsed is because people believe in spending money as soon as they get it, worried that storing it could decrease its value.

This constant spending helps the economy sustain itself somewhat.

But now the country is also taking active steps towards reducing inflation, the number one being that it will stop printing more money.

This move could help the country a lot. 

However, with people now so used to the dollar, will Argentina ever be able to recover?

Only time will tell.

Meanwhile, the lessons that we learn from Argentina are important, especially for Indian states that are now spending lakhs of crores on welfare schemes and freebies. While such schemes are necessary, it is important to draw a line and provide only the essentials for free or at a subsidized rate. 

The Argentinian economy also makes an interesting case for having cash in hand. As we move more and more towards digitalisation, situations like this could make things complicated for us when the economy is in a bind. 

What other lessons do you think we can learn from the country?

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⚡In a line: Argentina has been dealing with inflation probably since before you were born but the citizens have now adapted to it.

💡Quick question: Do you think Indian states will go Argentina's way or are we far from that situation?

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