Argentina's Problem Was an Over-Valued Dollar, Not Inflation

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Thursday, 06 October 2011 19:59

In an otherwise thoughtful column comparing the current situation with Greece and its options for leaving the euro with the situation of Argentina in its 1998-2002 crisis, Floyd Norris gets a fundamental fact wrong. Norris told readers:

"In 2002, Argentina’s currency, the peso, was officially tied to the dollar at a one-to-one parity. There was a “currency board” that was supposed to assure the tie could never be broken, and it had worked for a decade. But Argentine inflation had outpaced that of the United States, and the peso was seriously overvalued."

Actually, Argentina had no inflation at all in the years from 1997 to 2001. The reason that its economy became less competitive was that the dollar had soared in value against other currencies. When the dollar rose, the Argentine peso rose with it. This made Argentina's economy uncompetitive.

The problem was not excessive domestic inflation, but simply that its currency was linked to the dollar at a time when its value was rising. While the United States could support the large trade deficit that resulted from an over-valued currency, Argentina could not.