First Vietnam, and now Argentina. Who will be next?

The other day I wrote about the currency crisis in Vietnam, and now today I read an article by the Telegraph which reports how this is starting to spread not only in Argentina, but all around the globe.

If you remember, in 2001, unable to pay its debt, Argentina defaulted on it's bonds sending inflation around 30% and interest rates over 40%. This was and still is the biggest default in history. Banks froze withdraws and currency could not leave the country. When banks reopened a few weeks after the default, the currency was almost half of its original value. From the article:

"Argentina is defaulting on its sovereign debt yet again, this time by stealth. Wealthier Portensos with a nose for trouble are pulling their savings out of Buenos Aires banks. Most are buying dollars, or slipping across the Rio de la Plata to deposit their stash in Uruguay."

"Argentina's trick this time, under the presidential double act of Nestor and Cristina Kirchner, has been to purge the National Statistics Office and appoint a friend to manage inflation data.

The official Consumer Price Index (CPI) is 8.9pc. This is the benchmark used to set payments on inflation-linked bonds, now 40pc of the country's debt.

"The true inflation rate is more than 25pc, according to union staff of the statistics office. They allege manipulation. St Luis province is issuing its own data, three times higher.

"Argentina is engineering a partial default on its domestic debt," said Professor Carmen Reinhart, from Maryland University."

Sound similar? Does anyone believe that the true inflation rate here in the U.S. is between 4% and 5%? If we were to ever use the same weight in the CPI as the Carter administration, we would more than likely see 10-12% inflation. But then no one, especially foreigners would buy our bonds to finance our life style.

But we shouldn't be surprised with the economic mischief in Argentina and other parts of the world. Most of their economists were educated in American universities. We taught them the tricks of inflation and fiat.

But this doesn't stop with Argentina. It gets worse. The article goes on:

"Some $300bn of inflation-linked bonds from Turkey, Hungary, Poland, Mexico, Brazil, South Africa, and other emerging markets (EM) have been sold, mostly to pension funds.

Bankers in London and New York have hawked the debt with the same insouciance that they hawked US sub-prime mortgages. These "Linkers" were also deemed to be as safe as houses. Well, not quite.

Vladimir Werning, from JP Morgan Chase, said the yield spread on inflation-linked peso debt has ballooned to 1230 basis points. They are priced for the dustbin."

This is starting to make the mortgage fiasco look like a walk in the park. Who the hell is going to bail out the governments themselves?

And finally:

"The International Monetary Fund says 70pc of the EM inflation shock came from soaring food costs last year (typically 40pc of the basket, versus 12pc for richer states). But the home-grown part is fast gaining a life of its own.

"Easy money is the culprit," says Joachim Fels, chief economist at Morgan Stanley.

"Weighted global interest rates are 4.3pc, while global inflation is above 5pc. The real policy rate in the world is negative. Central banks are both fuelling and accommodating the rise in food and energy prices," he said.

Fixed exchange rates are playing havoc. Most Gulf states are pegged to the dollar, while China runs a crawling peg. These countries are importing the emergency stimulus of the US Federal Reserve when they least need it.

Across the EM universe, states are now hitting the inflationary buffers. Either they hit the brakes, or risk repeating the errors of the 1970s - if they have not already done so.""

My money quotes in bold. It is hard to believe that we are starting to hear some small voices of reason. Though we have to strain, they are beginning to be heard. But alas, it is too late. We don't risk repeating the errors of the 1970's. We past that several years ago. It is already here. The only way out of this mess is to let it run its course and let interest rates float freely. If this doesn't happen (which it won't)this new global economy of ours is going to look like Zimbabwe.

Better start loading up the truck with precious metals. I don't see central banks tightening much anytime soon.