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Politicians at WorkThe newspaper El Pais (from Spain) reported in its article "Mercosur begins a historical soybean crop" that a windfall soya harvest is to be expected for this year in the Mercosur (the South American free trade region). Four countries in this region (Brasil, Argentina, Paraguay and Uruguay) produce more than half of the entire world-wide soya crop. The harvest is expected to be of historical proportions, partly because of the high prices that soya commands in the market. And so what?

That is correct. So what?

For that we need to dig deeper. For that, we need to check out the usual suspect: Argentina.

If you look at the export processes in Brazil, Paraguay and Uruguay, you will notice nothing unusual. Companies harvest. Companies ship. Companies get paid. Not so in Argentina.

Over there, companies harvest, companies ship, the government cashes in and companies get paid with the leftovers. Noticed the difference?

We mentioned several times in the past that Argentina is a basket case and the future of the economic debacle. This post will show you just how advanced they are. Let's begin with a snapshot.

Argentine Economic Indicators

In this graph you can see how Argentine governments have been consistently spending more than the revenue they obtain. This is in agreement with one of the basic government rules that state that revenues always rise to match expenditures. As you can see, the red line (expenditures) is always above the blue line (revenue). The difference is met by taking on debt, which can be seen as the green line. The other source of "revenue", this is, inflation can be seen in the purple line. And there you have it in all its glory; the unholy trinity: Tax, Borrow and Print.

Note: incidentally, it is possible to see the peak debt just before the default of 2002. This is a typical default curve. Just before the default, a country takes an enormous amount of extra debt in order to kick forward the inevitable. They do so until they can't do so anymore and the country defaults.

As you can see, Argentine debt is almost identical in size as revenue or expenditures. Which means that after expenditures there is nothing left to pay debt interests. The problem is that these interests are typically denominated in USD and as such, the Argentine Central Bank cannot print the country out of debt.

To emphasize this point, let's assume that the Central Bank tries to pay the debts by printing. They would print, go to the Forex Market and buy USD with freshly printed ARS (Argentine Pesos). Then, they would use these USD to pay up the debt. But, the people who sold USD for ARS would deposit these pesos in a bank, which would then go the Argentine Central Bank and demand USD for ARS, hence nullifying the whole transaction. The Argentine Central Bank cannot afford not to exchange ARS for USD because doing so would instantaneously create a depression since all import / export activities would stop.

And so, the Argentine government finds itself yet again between a rock and a hard place. On one hand they can't diminish expenditure (all the votes depend on this) and on the other they don't have USDs to pay for debt interest. What to do? What to do?

Well… they do what all governments do when they get desperate. They tax the hell out of everything that moves… in and out of the country.

Which brings us back to the soy crop. As we mentioned before, Argentine is "unique" among the four countries because it taxes exports of soybeans. That's right. The Argentine government will tax you if you happen to export grain. Let's say this again, they tax exports in addition to taxing imports.

Of course, taxing exports is even contrary to the crack-pot theories the monetarists (i.e. the Argentine government's drone economists) recommend! Think about it. In any reasonable or semi-reasonable country in the world, the last thing that governments want to do is to curtail exports. Yet, this is exactly what's going on in Argentina. We don't need no stinking exports!

As such, soybeans exports enjoy a tax of "only" 35%. That's right, 35% of all profits are taken by the state. But hold on, because we are not done yet. Farmers also enjoy a tidal wave of other taxes, which, according to some calculations, reach the "reasonable" level of 75%. But, there is more to come. It would seem that giving the fantastic windfall of profits that this year's soy crop will produce; the government is contemplating to raise the export tax to 40%, elevating the total taxation level to a "comfortable" 80%!

What the government plans to achieve with this "just re-distribution of wealth" is to balance the budget. That's right! The entire Argentine budget hinges on whether or not this year's soy crop will be a windfall.

Think about this. An entire country with 30+ million people is dependent on one single crop. And you thought that monoculture was a bad idea…

But the story does not end here. There is more.

Faced with ludicrous taxes, impossible inflation and mounting "public" debt, what do farmers do? When money is worthless and the government is nothing but a collection of thieves, what do people with common sense do? They switch to "alternative currencies". This is why Argentina is probably one of the countries where "dollarizations" happens as cyclically as weather seasons. There are several websites dedicated exclusively to black market exchange rates, primarily for dollars. The snapshot below corresponds to the website Dolarblue

Argentine Black Market USD Exchange

But what happens when the governments mandates that all financial transactions (and we mean all) are routed through the Ministry of Economy? What happens when the government know about every electronic transaction that you do? Irrespective of the size of the transaction? Then, more creative ways around the problem must be found.

For soybeans it so happens that they keep very well in plastic bags. So, farmers do what every person with common sense does. They store the grains. They do not sell them; they bag them and store them.

And what do they do with them? They trade them directly for goods and services, hence bypassing the government altogether. Pure black market. It works.

The takeout lesson from this article is the world-wide scenario that awaits the rest of the world population. As countries become progressively more indebted, they will also become progressively greedier. Everything and anything will be a target. When they are not satisfied with this, they will become paranoid and will permeate all public and private information. The moto becomes: we know you have it, give it or else!

And what do people do in these circumstances? They switch to "alternative currencies" first and when this avenue is closed, they switch to physical goods and services. Anything and everything that will retain wealth for the long term is immediately purchased. This, of course, creates all kinds of problems such as shortages and bubbles, which further increases everybody's misery.

This is not economic science fiction. This is happening today in Argentina and it is the economic future of the world. This will eventually happen to all countries, with very few exceptions.

Of course and on schedule, you will start hearing all kinds of strange and unusual economic explanations. Everything from "overheated markets" to "lack of liquidity" to "debt requirements" to "sock treatments" and anything in between. When it is time to keep their jobs, politicians take no prisoners. Any explanation is good regardless of how ridiculous it may be, with one exception. The truth. The only explanation they cannot afford under any circumstance is the truth. This is so because it would point directly at them.

You may choose to believe this or not; but when the time comes, don't look surprised. We told you so well in advance.

Note: please see the Glossary if you are unfamiliar with certain words.

 

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