Wednesday, October 15th, 2008
A while back I posted a question about the South American economies and their rate against the dollar. Here is what I think, is the best response:
Think of it this way: if there’s a world wide credit crunch (as it appears there is) and banks and things are cutting credit off to US companies, which have traditionally benefited from extremely generous lending policies and many of which are considered very good credit risks . . . then what do you think happens to under-developed countries, many of which have been recently in default (the equivalent of bankruptcy) and are considered very BAD credit risks – do you think an investor or bank with only limited funds will still keep investing in Latin America or will decide that it’s better to go with the safest of all possible investments (ie. AT HOME and the absolute SAFEST bets at home). Latin America is, essentially, one big sup-prime borrower. And sub-prime bets are all off.
When the developed world falls, the under-developed world tends to fall harder. EVERYONE is freaking out and withdrawing investments – they keep their money in only the safest bets, and sometimes that’s under the mattress. And the safest bets are NEVER in Latin America, even in the best of times. (Latin America is where you go if you want to make lots of money in a short time, but confronting big risks that you might lose it all.) Hence, when the going gets tough US and European currencies will go up – while Latin American currencies will go down.
Also, in Argentina it’s South American economic factors which are driving the lending policies (and the limited interventions from the Argentine central bank, which has lots of US dollars to spend to make sure that the exchange rate is more or less what they want): Brazil just devalued their currency rather significantly, which makes Brazilian goods cheaper in Argentine markets. The way Argentine industry can compete is if the Argentine pesos is also cheap, which means that it needs to be devalued a little – hence the Central Bank of Argentina lets the peso inch upwards against the dollar. (Many economists have argued for a long time that the peso, absent Central Bank interventions, should be valued at 4.00 to the dollar, or even 4.20. )
The US economy right now has people asking a lot of questions. What will happen to the state of the economy in the long and short run? How will this affect me? What will the situation ... 
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compasskim