The Breakdown - Where Bitcoin Fits as Argentina Faces a Dollar Shortage and 100%+ Inflation

Episode Date: April 24, 2023

Argentina has one of the highest inflation rates in the world, which some economists are estimating at 133% or more. The Argentine Peso also has one of the highest interest rates in the world. On this episode, NLW discusses recent turmoil at the central bank and where some Argentinian bitcoiners think Bitcoin fits into the solution.    Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and hosted by Nathaniel Whittemore aka NLW. Research is by Scott Hill. Editing is by Rob Mitchell and Kyle Barbour-Hoffman. Our theme music is “Countdown” by Neon Beach.   

based on the infrastructure in place and based on the politics as they are in Argentina. Some mass shift to a Bitcoin system just isn't in the cards. But at the same time, he points out that he saves in Bitcoin. And when we think about the innovation of Bitcoin and the power of Bitcoin, the idea that there are people like Mara and probably people who are close to him, who know him, who run in his same circles, for those folks to be able to opt out or at least hedge against an insecure monetary regime that they have to participate in only by accident of

is tremendously different than what it was like before Bitcoin existed. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Monday, April 24th, and today we are discussing Argentina and the emerging economic crisis, or really the continuing economic crisis, that is unfolding there right now. Now, before we dive in, a quick note. First, if you are liking the breakdown, I would so appreciate it if you would leave it a five-star rating or a review.

It makes a huge difference and really helps new people discover the show. Second, if you want more Big Picture Power Shift content, go check out the Breakdown Network's other new shows. We've got Bitcoin Builders and the AI Breakdown, both of which you can find by going to Breakdown. Third, if you want to get deeper into the conversation, come join us on the Breakers Discord. It is an awesome and growing community, and we would love to have you. Bit.L-Y slash breakdown pod to find it. Lastly, I've just announced that we've rebooted the breakdown newsletter. Each weekday morning, it will be the five most interesting or important stories in Bitcoin,

crypto, and macro, and you can find that at breakdown. That's b-h-I-I-V.com. And I'll update the links in the show notes as well. All right, guys, welcome to the first breakdown of the fully independent era. I am so excited to be here with you. And even for those of you who don't particularly care at all about the ins and outs of the business or how it's run, I'm fairly sure that you're all excited not to hear a consensus ad at the beginning of this show. All joking aside, best wishes to CoinDesk and to Consensus and for anyone going there this week. But as for us, last week was a

very crypto-regulatory heavy week. And really it was a tale of two different approaches. There was, of course, Europe with its sensible seeming rules, embodied in the New Markets and Crypto Assets Act, or MECA. This was sort of a fascinating case of just start doing it because it's going to take a long time. If you look at these Mika rules, the context in which it was started, which was both the ICO boom as well as Facebook's Libra, still have their fingerprints all over it, and some of the provisions because of that, frankly, seem a little bit anachronistic. And yet, even with that, even still being a years behind in many ways in terms of what needs to be regulated, they are still now out ahead of everyone else in terms of having comprehensive legislation. It's a pretty good reminder to not

let the perfect be the enemy of the good, and to leave yourself the ability to just figure things out later if you need to, which is kind of what Europe seems to be doing with both NFTs and Defi. On the other hand, we have the U.S. We had two hearings last week having to do with crypto and the House Financial Services Committee. The first was a grilling of Gary Gensler. The second was nominally about this new old stablecoin legislation which the Republicans introduced in the form that the Democrats had rejected last fall. And while we talked and gabbed about all the juicy sound bites and Gensler really having it stuck to him, almost nothing of use is going to come out of those hearings. In fact, subsequent to those hearings, the crypto-twitter

rumor mill is suggesting that more action from the SEC is coming. A. B. Avikas this morning wrote update. The regional banking liquidity crisis temporarily slowed the regulatory assault on crypto. That ends this week. Expect more SEC actions via Wells notices this week. Gary Gensler was emboldened by last week's congressional hearings and the quote-unquote visibility it provided. Now, I should note that Andrew at Apiacos doesn't tend to give sources and so it's always worth taking this with a grain of salt. At the same time, however, he's been fairly on the money for the last couple months, so I also don't think it's worth ignoring entirely. Now, the other thing that has been notable recently is how the narrative that crypto shouldn't be regulated because that would be legitimizing it is becoming

normalized. This was something that was spoken behind closed doors by opponents last year, but it has now come out into the open in a big way. A few weeks ago, we had Professor Hillary Allen, who has been called to testify before Congress numerous times about crypto, publishing in foreign affairs a full-throated argument for just banning crypto entirely. And now this weekend, we had TV comedian John Oliver doing a new segment about crypto in which he very similarly says, I don't think we should regulate it because that would just legitimate it. Let's listen to to an excerpt from that monologue. Truth is, in a financial system where the only real currency is confidence, scammers are going

to thrive. And I know that we usually like to point to a solution at the end of our stories, and that often means calling for more regulation. But I'm not sure that's a good idea here. The danger is regulation might give this sector more legitimacy. It'll make a risky investment look safe when it is clearly not. And that in turn might entice banks to start getting more involved in crypto, giving the sector even more legitimacy, and also exposing all of us to its volatility. It really says a lot that one of the leading advocates for the government to strongly regulate crypto

was Sam Bankman-Fried. And look, I'm absolutely not saying that we should get rid of crypto entirely. It could eventually be useful. Maybe the third time that we talk about it will all be using a digital coin to buy everything. I doubt it, but I can't predict the future. After all, I'm no Jim Kramer.

But we should recognize that right now, the main thing you can really do with crypto is gamble with more crypto. This is all still a casino. Now let's talk about this for a moment, because I think it's actually relevant. I suppose if you're looking for an upside of this, it's that this perspective is now out in the open, which is kind of better than being shanked under the table with it like we were last year in negotiations around bills like the stable coin bill. However, there are two things that are super notable to me about this perspective as well.

The first is a lurking authoritarianism contained in this rhetoric. This is a TV comedian, so on the one hand, one might think, eh, don't read too much into it. I'll perhaps remind you here that the president before this one got most famous because of reality TV. What John Oliver is saying, when you strip it back, is, it seems to me into people who think like me that this thing isn't valuable. Therefore, it should be delegitized by not being regulated. The slightly more aggressive version of this, of course, was Hillary Allen's, this is just bad, so it should be banned, and by banning it will probably kill it. The argument, in other words, is that we don't like this thing, so other people shouldn't be allowed to interact with the thing as well. That's kind of remarkable. This is also at the core of

pretty much all arguments against Bitcoin mining. We've talked a lot recently about that mining fud piece from the New York Times. Just like every other anti-Bitcoin mining piece, hold aside all the specific details, and what it really comes down to is an argument that the energy Bitcoin mining uses isn't useful. If you don't think Bitcoin mining is useful, because you don't think Bitcoin is useful, any amount of energy with any mix of renewables will seem wasteful. And that's all well and good, except when we take a step back, there's actually something sort of dramatic happening here. When did it become okay for one group of people to decide that another group's legal use of energy was illegitimate? We don't do this for basically any other use of energy. It's an overused

example, but no one's shaming me for the ridiculous amount of energy I use lighting up the three 30-foot pine trees in front of my yard for Christmas. The one possible exception is people being judgy about big gas-guzzling cars, but in general, you don't see people saying, oh, this industry sucks, so other people shouldn't be able to use energy from the free market to participate in it. While slippery slope arguments can be pretty specious, I do think they're worth considering here, especially given that we're already starting to see the same type of environmental narrative pop up as an argument against AI. According to some new articles, Chad GPT apparently uses a ton of water. Now, there are very good conversations to have about AI and safety and regulation,

but how much water chat GPT uses is fairly low on the list. So, a creeping authoritarianism glossed over by humor is one concern. But the other is the hubris of people not being able to see crypto from any perspective other than the Western U.S. perspective. Oliver literally says the only use for crypto is gambling on other crypto. Somewhere, someplace, Alex Gladstein, is smashing his head into a wall. And this, I think, feels like the perfect segue into our main topic, which is Argentina. If you're a long-time listener, you will probably know I have a particular fondness for Argentina. I was married right next door in Uruguay. I first taught my father-in-law about Bitcoin and Crypto by having him meet with a bunch of guys in Buenos Aires who were working on

die and other projects in 2019. I even wrote my resignation letter to FTX sitting in the lobby of the Alvier Palace last November. And that's why it's particularly brutal to watch people struggle as their economy descends deeper and deeper into chaos through no fault of their own. On April 22nd, Argentinian Bitcoin and macro analyst Bautai Amara writes, urgent, the Argentine central bank has just suspended operations for today and Monday. Foreign payments have been suspended. There are no more dollars, it seems. Looks like the central bank was effectively already dipping into customer USD deposits at local banks. This was last month and it only got worse since then. The central bank will now also force companies to inform them two days in advance of all purchases over 10,000 USD.

Turdemister quote tweeted that and said, apparently Argentina's central bank ran out of dollars and started stealing local banks' customer USD deposits to fill a hole. Now that's no longer working, so they're announcing a bank holiday. No wonder the peso to dollar rate is rocketing to 500. So let's try to figure out what's going on here. The ongoing train wreck, that is Argentinian monetary policy, entered a new phase late last week,

when the central bank raised rates by 300 basis points to 81%. one of the highest policy interest rates in the world. Now, we often conceptualize the Argentine inflation rate as quote-unquote high, but there's a little more to it than that. The biggest currency crisis in the nation's history occurred in 1990, when the peso hyperinflated, causing a new currency to be issued two years later. That currency was pegged to the U.S. dollar and backed by dollars held by the central bank. Since the fixed exchange rate mechanism for this new Argentine peso was abandoned in 2002, the official inflation measure was high but stable at around 10% for the following decade. Economic problems during that decade were often expressed via a depreciating currency

instead. In 2014, official measurements ceased to be published, and when they reappeared in 2017, inflation had roared higher, hitting 25% for the year. From their inflation accelerated steadily, but hit an inflection point of 72% in 2022. This year, the forecaster even more dire, with economists generally predicting an inflation rate above 100% for the year. Put in different and frankly starker terms, that means the purchasing power of the currency would be cut in half in a single year. Steve Hankey, a professor of applied economics at Johns Hopkins, who's an expert in emerging market currencies, has a different measure of inflation in Argentina, which he pegs at 133%. That means the situation appears to have gotten dramatically worse in just the last month or two.

Now, although Argentine authorities have been struggling to hold the peso together for over a decade, the rest of the economy has largely moved on to dollarization. U.S. dollars are widely used as an alternative currency, with widely available black market currency conversion services that are illegal but generally tolerated as a necessity. The conversions are done at an informal conversion rate detached from the official central bank rate, with this unofficial dollar monetary system being collectively known as the blue dollar or the blue rate. Now, one of the big issues with operating a country that is, in effect, dollarized, but without the official recognition of the government, is that the banking system continues to operate in Argentine pesos, with the availability

of dollar accounts severely limited. Alongside hiking the official peso interest rate to 81% on Thursday, the central bank also tightened restrictions on dollars. Firms are now required to request permission to pay intra-company debts with dollars, and service sector businesses applying for dollar conversion now face two-month wait times. The blue dollar rate responded violently to this policy shift, dropping by 4% to an all-time low of around 440 pesos per dollar, which is about half of the official rate. That's more than a 45% devaluation over the last year. Fascinatingly, the Argentine economy is hardly a basket case outside of these currency issues. The nation is the world's top exporter of soy and a major global supplier of corn. But everything gets related, right? This year's harvest

has seen exports cut in half over the first few months amid monetary uncertainty, which limits the inflow of hard currency via trade. In an effort to encourage the critical agricultural industry to continue exporting during this bout of catastrophic inflation, the government introduced a preferential conversion rate earlier this month, known as the soybean dollar. That rate was proposed at 300 pesos per dollar, which is better than the official rate, but still more than 20% lower than the blue dollar rate at the time. Unsurprisingly, this program had very little uptake due to a lack of regulatory clarity and due to a lack of confidence in officials. Essentially, agricultural exporters are being asked to sell their crops to the global market in dollars, which are then forced to be

converted into pesos, which may be deeply devalued by the time the next planting season begins, and are already worth less than they're actually worth in Argentina because they're on the official government rate. Farmers then are turning up their nose at this raw deal and electing to keep their crops siloed for the year, awaiting a conclusion to the brewing currency crisis. Now, on top of all of this, to make matters worse, the region is also suffering a severe drought, which is wiped out around $20 billion in produce, which is equivalent to around 4% of GDP. Argentina posted a trade deficit of $1.1.1 billion in March, which is the widest gap in almost five years, and agricultural exports are down 34% compared to figures from a year ago.

Local consultancy firm, portfolio, personnel, and versiones said in a note, the scant income of agriculture has forced the central bank to intervene, as it had been doing prior to the launch of the soybean dollar. The stock dollar reserves at the central bank is so small that it cannot withstand negative flows of this magnitude for many more days. According to our estimates, net reserves closed yesterday at $679 million, the lowest since March 2022. End quote. As is often the case, this currency crisis has flowed over into a political crisis.

On Wednesday, President Alberto Fernandez's chief advisor resigned without providing a reason, and over the weekend, the president announced that he would not be standing for re-election in October. The concern now is that the government will be forced to dramatically devalue the peso ahead of the next election. Adriana Dupita, Bloomberg economist for Brazil and Argentina, said, the government is trying to buy time with price and import controls, a positive but low real interest rate, multiple exchange rates to circumvent the effects of an overvalued official currency,

and debt renegotiations that push maturities into the new presidential term. Those measures may prevent a near-term collapse, but plant the seeds for a difficult post-election outlook. On those debt renegotiations, the IMF distributed a $5.4 billion loan late last month as an advance on a $44 billion deal which has been accepted by the Argentine government, but is still going through board approval at the supernational organization. We'll come back to that deal in just a moment. Analysts that have been following the Argentine currency crisis suspect that the central bank's position could be worse than mainstream reporting is letting on, with dollar reserves already

dropping into the negatives. This gets us back to Botide Mara's tweet, which implies that the central bank has essentially been dipping into dollarized accounts held in the banking system, which are, of course, supposed to be backed by dollars held with the central bank. As much as Argentinians are no stranger to devaluations in currency crises, this situation still presents extreme challenges. While citizens have typically flocked to dollarized assets in past crises, the strict capital controls in place and the growing realization that dollar accounts held with banks may have been rated by the government mean that people feel that there's very few

places to turn to safely store wealth. Now, Bitcoiners have, of course, been following this closely for a few reasons. First of all, as I mentioned, there are lots of Argentinians in the Bitcoin and Crypto community who are posting updates from the ground. Second, that most recent IMF bailout deal that we were just mentioning that Argentina signed last year explicitly included a clause that would force the Argentine Central Bank to try to, quote, discourage the use of cryptocurrencies with a view to preventing money laundering, informality, and disintermediation in order to, quote, further safeguard financial stability, which was obviously seen as a direct shot across the bow of Bitcoin from the IMF. On top of that, any time Bitcoiners see an example of inflation like this, our natural tendency is to

see Bitcoin as fixing it. Sure enough, on Saturday, April 22nd, Michael Saylor tweeted, if you live in Argentina right now, you need Bitcoin. Still, in Argentina, it's long been clear that the preferred safety currency is the U.S. dollar. In 2019, Alex Kruger wrote, before Bitcoiners start using Argentina, my country, as an excuse to yell buy Bitcoin and generate clicks and sell newsletters, Argentines want to protect themselves against the peso losing value versus the dollar, and for that, they buy dollars. I do believe everyone should have Bitcoin, Argentines in particular. I am openly bullish Bitcoin for multiple reasons. However, I don't think it is right. to use a national tragedy to fabricate uninformed narratives. For an even more up-to-date take,

Botein Mara also wrote about this in his substack post today called The Tale of Two Currencies. He writes, And what about Plan B. So many people responded to this viral post about the BCRA scrambling for dollars that it's time for Argentina to adopt a Bitcoin standard. Since I save in Bitcoin myself, this is, of course, a compelling argument. However, knowing the local economy very well, this is not something that would be adopted or could be implemented at this time. The infrastructure is not there yet, since Argentina is 50% plus cash payments, and many businesses only accept cash. With the current poverty levels and many poorer areas of the country, people are more worried about getting food on the table versus getting a phone that they can use for Bitcoin payments.

Besides, not even libertarian presidential candidate Javier Melli is talking about anything Bitcoin-related, so there is no political platform for this in Argentina, like there is in El Salvador, for example. I think that's a pretty fair assessment of where things are. And I would say that when we talk about the idea of Bitcoin fixing this, it's important for us to be able to speak in both individual and societal terms. What Mara is articulating is the fact that right now, in this immediate crisis, based on the infrastructure in place and based on the politics as they are in Argentina, some mass shift to a Bitcoin system just isn't in the cards. But at the same time, he points out that he saves in Bitcoin. And when we think about the innovation of Bitcoin and the power of Bitcoin,

The idea that there are people like Mara and probably people who are close to him, who know him, who run in his same circles, and others that they don't know but just are empowered in the same way that he is. For those folks to be able to opt out or at least hedge against, an insecure monetary regime that they have to participate in only by accident of birth is tremendously different than what it was like before Bitcoin existed. We shouldn't diminish how powerful that is, even as we look to expand the community for whom Bitcoin can have that sort of impact. But regardless, on Monday, it seems things are getting more turbulent. Reports from the ground suggest that the Blue Dollar has risen even more since the beginning of trading hours. It's currently over 450 pesos per USD in downtown BA, and likely closer to 465 or 70 in the rest of the country. That's the story from here. Obviously, I am watching closely,

and most of all listening to people who are actually experiencing it. I'll keep you posted as it evolves, but for now, I appreciate you guys listening, and until tomorrow, be safe and take care of each other. Peace.