FRB Lessons on Argentina's Crisis

[Book]

Here is the Linky (http://www.frbsf.org/publications/economics/letter/2002/el2002-31.html)

[Ragnarok]

Quotes I found interesting, among others and an ominous chart at the link.

"This Economic Letter observes that the recent events in Argentina were not entirely unpredictable, as they were associated with rapid increases in public and external debt that cast doubt on the sustainability of borrowing. Conditions that accentuated vulnerability to crises are also highlighted."

"Many observers have explained the crisis in terms of the deficiencies of Argentina's peg to the U.S. dollar under a type of currency board arrangement. While the currency board did play a role, it also can be argued that the main cause of the crisis was Argentina's persistent inability to reduce its high public and external debts. These made the economy vulnerable to adverse economic shocks and shifts in market sentiment."

"In the view of some observers, Argentina's debt position would have been sustainable if only market uncertainty had not triggered a crisis. While there is some truth to this view, it does not take into account the fact that Argentina could have reduced its vulnerability to potentially destabilizing shifts in market sentiment by aggressively reducing its public and external debts. This is illustrated by the contrasting experiences of Argentina and Asian economies like South Korea. With much lower debt levels, the latter is less likely to experience adverse shifts in market sentiment and is less vulnerable to them should they occur."

"Cutting Argentina's public debt requires reductions in government spending, tax reforms designed to increase government revenues, and policies to stimulate export growth over the medium to long run. The successful adoption of such policies is the key challenge facing Argentina and a number of other emerging economies, and it is an important prerequisite for achieving stability in a globalized economy."

Sounds like a warning shot across the bow of the US, dontcha think? This article might turn out to be a crystal ball view of the future.

I disagree with the raising taxes part in the last quote; that just dilutes the spending reductions and transfers of government jobs to the private sector which would stimulate the economy and automatically increase revenues without raising taxes.

Ragnarok