E-Letter To The Washington Post Re: "At The Mercy Of The Dollar"

Your recent editorial "At The Mercy Of The Dollar", which blames Argentina's currency board for the country's economic woes, is one of the more disingenuous editorials that we have seen in some time. Your editorial actually seeks to revise history by depicting the IMF - which has done more harm to the international economy than any other multilateral institution - as Argentina's economic saviour, while depicting the currency board -a monetary regime that has been a source of economic good and stability for numerous countries - as Argentina's economic villain.

The first important consideration that your editorial omits is that Argentina's monetary regime, though it is set up like a currency board, does in fact deviate from a pure currency board in many ways.

It does not have a true one-to-one link between foreign reserves and domestic currency and the central bank is permitted among other things to engage in limited lender of-last-resort activities and to regulate the reserve requirements of commercial banks.

These aspects of Argentina's monetary regime violate currency board orthodoxy and result in a less than firm link between the domestic currency - the peso, and the anchor currency - the dollar. Unambiguous fixity between the domestic currency and anchor currency is the linchpin of a currency board.

This imperfect unification of the dollar and peso has opened the door to speculation that the peso would eventually be devalued and this expectation is partly responsible for the fact that interest rates on pesos are higher than interest rates on dollars within Argentina.

But it is the IMF who is responsible for the most recent damage done to Argentina. IMF advice, which Argentina has already accepted, required the country to raise taxes. The IMF told Argentina and Argentina told the world that the decision to raise taxes would inspire confidence among the investing community, lower interest rates and lead to economic growth.

But the question which begged to be asked and which you decided to ignore in your editorial is: How could Argentina and the IMF style its poorly designed fiscal program as one that would lead to interest rate reduction inside of the country when interest rates were rising all over the world?

You blame the currency board arrangement for the increase in interest rates while you are silent about the deleterious impact the IMF had on Argentina's interest rates.

The IMF created an unjustified expectation in how it sold its package. Interest rates actually went higher when confidence in the program and Argentina's economy dropped.

You specifically blame Argentina's currency board-like arrangement for making it vulnerable to last year's interest rate hikes by the Federal Reserve.

This is partly true but hardly proves your case against the currency board. A currency board certainly does allow one country to import the monetary policy of another and this can produce a negative effect at times and a positive effect at other times.

It is interesting that the Washington Post catches the minutiae of how Federal Reserve interest rate decisions affect emerging economies that are tied to the dollar but somehow misses the more obvious and disastrous impact that Federal Reserve mismanagement of dollar liquidity has on theses same countries.

Ironically your editorial overlooks the worldwide monetary deflation caused by the Federal Reserve and revealed in the massive drop in gold prices from $416 in January of 1996 to $256 in September of 1999. This type of deflation is devastating to emerging market economies like Argentina.

If Argentina deserves any blame for its currency board arrangement, it is for not following a gold-price rule that would have allowed it to temporarily leave its currency board arrangement or to reestablish it with a new fixed exchange rate with the US dollar in light of the dramatic deflation that was gripping the world and which the Federal Reserve, whom you praise, was responsible for creating.

In addition, Argentina should have countered the deflation with growth-oriented tax cuts.

Instead, four years after the worldwide deflation began, and under IMF-advice, Argentina is actually raising taxes.

While your intense focus on Argentina's negative experience last year with the interest rates may serve your interests in promoting the IMF and the Federal Reserve as saviors of the world economy, it absolutely does not prove the failure of a currency board.

Besides the fact that you ignore the role that the IMF-engineered economic program for Argentina played in creating the higher interest rates the country experienced, your editorial completely ignores the fact that since Argentina instituted its currency board like arrangement in 1991, interest rates have been dramatically reduced.

When Argentina moved to establish its currency board set-up in 1991 its money-market interest rates were as high as 71.00%, in 1995 those rates were down to 9.46% and by 1999 that rate was down to 6.99%. In 1991 the rate of inflation was 84.00%, by 1995 the rate of inflation had fallen to 1.6% and in 1999 the rate of inflation was - 1.8.

How can the Washington Post, with any credibility judge, the currency board to be a failure based upon 1-year of increased interest rates when the monetary regime that you are evaluating has a 10-year history?

Could it be that in 10-years, under a currency-board arrangement, Argentina has been able to produce an overall improvement in key economic indicators that the IMF has never been able to produce, in its 50-plus years of existence?

The data seems to support that possibility but we gather that such evidence was seen as an obstacle to the efforts of the Washington Post to place a joint halo over both the IMF and the Federal Reserve.

All appearances indicate that the IMF ended its war against currency boards in 1998 after it received criticism for its vehement opposition to the implementation of the monetary regime in Indonesia in 1998, over the objections of the President of that country and economists from around the world.

However it looks like the Washington Post has decided to pick up where they IMF left off.

That is a shame, because if there is any institution whose record of failure in solving economic crises is before the world and in the public record, it is the IMF, who unfortunately, since 1996 has had the help of the Federal Reserve.

A Washington Post editorial that offers an opinion on the impact of the Federal Reserve-produced monetary deflation and which examines the IMF's abysmal record in Argentina and throughout the world is much more appropriate than this unfounded attempt to discredit currency boards.

Sincerely,

Cedric Muhammad

Wednesday, January 17, 2001