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Elliott Wave Trading

How An Economy Collapses

Economics / Great Depression II Jun 20, 2011 - 02:41 AM GMT

By: Dr_Martenson


Diamond Rated - Best Financial Markets Analysis ArticleChris Martenson: Welcome to another podcast. I am Chris Martenson your host today as usual. Today we’re speaking with Fernando “FerFAL” Aguirre author of Surviving the Economic Collapse. FerFAL experienced the hyperinflationary destruction of Argentina’s economy in 2001 and has since dedicated his professional career, like I have, to educating the public about his experiences and observations of its lingering aftermath. Given the rising concerns that we all have today about the future of fiat currencies, our listeners are increasingly asking to hear from voices that have firsthand experience with extreme currency devaluation, what it means, how it actually feels, how it plays out. So we’re very fortunate FerFAL is able to join us today from his home in Argentina. We’re going to be discussing the signs that preceded the collapse in his country and what has defined the society since, including smart moves to take if worried about a similar fate happened in one’s own country and how would you know where you are in the story as it unfolds. So FerFAL, we’re so glad to have you with us today.

FerFAL: Hi Chris. Thanks for having me here.

Chris Martenson: So take us back to that period leading up to the currency collapse that you witnessed living in Argentina in 2001. You know: what were the signs, what were people’s perceptions at the time about how dire the situation could get, and what was the government saying and doing?

FerFAL: Well, the government as always says that nothing is going on and that everything is fine. As you can come to expect by now, just a few hours later you see the entire country go down and you will be seeing high amounts of an unemployment and there’s going to be a good amount of social unrest. Unfortunately, many of these things are already happening in the United States. So you are seeing many of these signs right now.

Chris Martenson: What sort of signs?

FerFAL: Having the people living on the streets where it didn’t happen before. Inflation slowly going up. There’s small details. I was talking with a friend yesterday of mine from the U.S.A. He was telling me that something I had mentioned a few years ago about sizes of items and products shrinking and changing the design. It’s all very well-campaigned with good marketing and such. It’s like we’re offering this new improved product but that new improved product happens to be just a bit smaller than it used to be at a slightly higher price. So all those little things, the way in which they hide the inflation, they slowly creep it into your life.

Chris Martenson: So did the Argentinean government – how were they hiding inflation? – through the official statistics claiming it was lower than what people were experiencing or how did that play out?

FerFAL: Yes, at first hiding inflation as products get smaller but soon enough that’s just not enough either. So it starts going up as well, noticeably so, and people see that their shopping cart just isn’t filling as much as it used to. You’re just buying half of what you used to with the same amount of money; but in the official statistics they’re saying that everything is fine because they changed the way they measure inflation so as to fit what they want to show you. So, if for example, take meat – it has gone up 20 percent, they will just take into account specific type of meat that is only found in one particular location so it’s not very real, that statistic, but that’s what they stick to.

Chris Martenson: Right, so a beef tongue in the outer reaches seems to be cheaper today so we’ll go with that – something like that. So it sounds like a pretty common story here which is the government’s obviously don’t want to admit that inflation is high because that’s either a fiscal or a monetary failing or most likely both. So they don’t like to admit that plus there’s a lot of reasons why you want to keep inflation low in terms of being able to say your economic growth is higher and keeping your pension payments lower. There are a lot of reasons for that. So you’re saying that in the United States if we look around, we can already see early signs that parallel what you saw in Argentina? We have rising prices, shrinking packaging for certain things, maybe more people on food stamps, historical records, maybe more people homeless…

FerFAL: More people on social welfare – all those things we saw as well and it’s happening in U.S.A. as well unfortunately. It’s an already written story. We know what ends up happening. It may have different variations and it may end up in an economic collapse or not. That’s something that I personally prefer not to be the one spreading that kind of – you know what happens? Its fear. It’s not productive for people in general when preparing, so I’m not going to be saying that the economy in the U.S. is going to be collapsed. All I’m going to be saying is that it’s going to be much worse than it already is right now and people need to adjust to that different lifestyle.

Chris Martenson: Absolutely and I want to get to that really important point about how fear can be demotivating. Let’s get to that later. Let’s track this now. So how quickly did the collapse happen? You know, what is a boiling frog situation and people woke up one day and said “whoa, how did we get here?” or did it feel somehow like the world changed overnight?

FerFAL: It’s a bit of both. These things don’t happen overnight. You see them coming for years. As you see it in U.S.A. as well, we saw it here as well and that’s the reason why some of the richest, most powerful elite manage to leave the country with more than enough time. Some happen to do it more in a rush but most of these guys that have the inside information manage to avoid having their bank accounts frozen as we saw. So there are signs and it is a bit of a boiling frog situation. The thing is eventually when it cracks down its does so all of a sudden. All of a sudden, you know, when the banks close that’s when people go absolutely ballistic because that’s when they realize that their money has been stolen from them – or when inflation turns to hyperinflation one day to the next. That’s when people see that even though you didn’t steal their money directly as it happened here with the banks, you’re stealing it through inflation as well. So they just bought half of what they used to with the same amount of money. It’s in a way of stealing their labor, their savings.

Chris Martenson: Absolutely it is but it seems that few people can really diagnose what it is and so somehow it feels like the easiest course of action. So that’s why we see it again and again historically speaking. In my mind, I have no idea what’s going to happen next or what the future is going to hold but I do know how to spot risks when they pile up and know that the more risks you pile up the greater the chance of something happening. So from my perspective as I look at the U.S., I see a lot of parallels with Argentina, some significant differences too but some of the parallels for me are: we’ve got basically a fiscal situation at the federal level that’s pretty much out of control. There’s a lot of spending. Nobody wants to dial spending back. It’s never a good time. It’s always an election year or about to be one or just was one. For some reason it’s very difficult to do. So we have that going on. We’ve got monetary policy which by every measure is just in insane territory at this point in time. And, a lot of structural sort of deficits like we have a trade imbalance, a really big one. Its 30, 40, 50 billion dollars a month that’s constantly eroding – these are all things that I sort of see in parallel to Argentina. How do you see them and are people who are ignoring those really potentially ignoring a really big risk?

FerFAL: I think – like you mentioned – there are many of them. I’d say there are even more than some feel comfortable accepting. Because some people like to think they are different especially in the U.S.A.. Americans want to feel that they are different as well, that they are slightly better than some of the rest of the people. Why is this going to be happening in my country when this only happened in South America or in this poor country? Those are Europeans – it happens to them but that’s not going to be allowed in U.S.A.--we’re not going to be allowing that. Many people told me that before they got hit with this $300 billion tax on the hard working American people they said it would never happen but it did end up happening. My point here is that we’re all more similar than we want to admit. These things that you mentioned happened here exactly the same way – out of control spending especially through corruption, everything that was getting built or spent or done in Argentina was costing ten times as much than if you had gone and done it yourself on the private sector. So the out-of-control spending is a typical thing that happens during these times.

Chris Martenson: Yeah and let’s draw the parallel there because you know some people maybe in America will be listening saying, “oh well that doesn’t apply”, because we don’t have that kind of corruption going on up here in America but what’s the difference. So if a defense contractor comes and puts a few bucks in a lobbyists hands then gets a billed passed that results in some really, really overpriced military hardware being bought how is that different from what we might otherwise call corruption? I can’t – it’s a rhetorical difference at best. In practice it looks the same to me.

FerFAL: The textbook of what they’re doing is very similar, maybe you could say exactly the same result within its variations but, as you said, what’s the difference between spending too much money on a military contract that makes no sense than paying ten dollars a brick for a school you’re making in the south of Argentina?

Chris Martenson: Very little difference – I can’t find it. So it’s a rhetorical difference. So the same thing though there’s an entrenched system which ends up driving a lot of unproductive spending possibly by over spending in the case of buying ten dollar bricks or an unneeded military contract of some kind or by spending way too much on things that are actually malinvestments. You know the country doesn’t really need these things. They were decided behind closed doors between a small number of people and so we get them. Sometimes they’re good investments but often not really the case. So here we are. We’ve got a growing number of people who fear that the U.S. and other developed countries – so let’s expand this a little bit to other developed countries – are at risk of a currency collapse given the unsustainable debt levels or this profligate money printing that we talked about before. What are the similarities you see to pre-collapse Argentina that might lend credence to those arguments?

FerFAL: Well, since you brought in other countries as well just look at Spain right now. It’s just about to go down. The situation there it’s very bad. I have my parents and my brothers they live there and there are so many of similarities especially where the differences are cultural you know and just different such as the language you speak. That’s enough to place some people in a comfort level and think “Yeah we’re not like that. We’re going to be doing better I think.” Some people are more pessimistic and they think it’s going to be worse but it’s so much alike. You know I was watching on the news the other day what was going on in Spain and they were advertising on national television a job. There was a place where they were offering job paying a thousand Euros a month and it was such a big news that it was on TV. So that reminded me of the times when we had 25 percent unemployment here and something as weird and as strange as a job was newsworthy as well. So we have people that escaped from Argentina during and after the 2001 collapse about 200,000 left to Spain and they’re seeing that the exact same thing they saw in their own country. They’re seeing it happening there as well. In the U.S.A. I know it changes from state to state. Some do better than others but the unemployment situation is also just as bad as it was here in Buenos Aires as well than some places.

Chris Martenson: Okay, so let’s talk about then what it looks like when hyperinflation sets in. How did that manifest itself in the life of the average Argentinean, maybe with a timeline? Like how did this really play out and what were the impacts?

FerFAL: Well, the first thing you see when this happens is that no one wants to spend a single buck. No one wants to spend nothing at all because they don’t know what’s going to be happening tomorrow so everything just happens to freeze. With places such as supermarkets and such you see the workers, employees, running around keeping the price of products updated within the hour. I mentioned one time I was buying myself one of these Home Depot equivalents in Argentina and I was buying a few tools, and by the time I reached the cash register it had gone up in price and I had to have a small argument with the cash register lady and she ended up talking with the manager and the manager said, “well, he pays the price that he picked it up at”. So, you could actually go buy the product again and see that they had just placed the sticker on top of the older price. So there was this little pile of prices from that day and if you peeled them away you could see how it had gone up in price through the day.

Chris Martenson: Well, what about the availability of products as this is happening? Were products still available? Did they just happen to be moving in price very quickly or did certain things become unavailable?

FerFAL: It’s an extremely complex situation but some of the things that you might be interested in it happens to go up in price depending on other currencies. For us it was the dollar, so it would go up in dollars so that’s why they had to change the stickers with the different prices. Some companies decide not to send their products to the outlets, to the stores, to supermarkets. They stay waiting to see what happens with those prices because they don’t want to be selling at a price that’s going to be half as much as its going to be the next day. So they just prefer saying we don’t have any more left and we don’t have any more sugar left; we ran out of it. So they keep their stockpile and see if they can sell it for a few more bucks the following day. Also, you have to consider that while this happens the social situation is pretty bad. You have lots of protesting, lots of rioting, and looting all across the country. That lasted in Argentina for a couple of weeks. It extended itself for more time in different locations depending on what was going on in that particular region but the problem of the social unrest and looting is also a factor to be considered as well.

Chris Martenson: So in these events – let me guess – the poorest people are probably impacted the most and then this reached into the middle class and maybe even up a little further. The rich were probably reasonably well-insulated. Is that right?

FerFAL: Yeah. The breaking point – something that you might to keep in mind – the breaking point is when the middle class which is in general all over the world, the middle class is the one that makes things work because the more middle class you have the better in general terms the country is, right? The more middle class you have the better life standard for everyone, the more chances of growth, the more fair it is. When you have lots of poor people, little middle class and the very powerful and very rich elite, that’s the typical schematic of third world nations, right? In a prosperous first world country you have a strong middle class. When that middle class is being threatened or is being actually destroyed as we saw here through the economy situation, through lots of purchasing value, of their savings, of what they make every month – when that happens is when everything cracks down and that’s when the situation goes from ‘slow boiling frog’ to sudden instant collapse of society and everyone taking to the streets and protesting and trashing the banks and such.

Chris Martenson: So what’s the greatest risk here if you would say another country you’re looking at it and giving it an analysis and this country’s going to face a currency collapse like what Argentina faced? What’s the biggest risk for people living there? Is it just loss of investment wealth? Are you actually concerned about violent crime and how that might reemerge? Is it unemployment? What really drags people down there?

FerFAL: When you ask any Argentinean person what concerns them the most, the first thing they’re going to be telling you is the crime problem. And the second one is the financial problem. Those are by far the top concerns the average Argentinean person has and I think that eventually it will happen in the U.S.A., as well. I think that five years from now or so you’re going to be talking to people and the thing that’s going to be concerning them is that, you know, Joe down the street he suffered a home invasion and he got beaten up, maybe even got killed, all that kind of crime that wasn’t used to happen in the U.S.A in the good parts of town. It’s going to be one of the greatest concerns people will have eventually.

And, of course, the financial situation as well. If you look into what people are worried about right now they’re worried about losing their jobs not being able to put food on the table the next month. They see that if they lose their jobs it’s not as easy as it used to be to find another one as well. That’s terrible because it’s very cold when you look at it in numbers but it’s – I’m telling you – it’s so much different when it happens on a social level and you see that on the street . When you see the people picking up garbage on the streets to eat. This guy – he sent me an e-mail about visiting Argentina – and he saw how it was here after visiting during the 70s. He said he was surprised to see normal-looking people, relatively well-dressed people eating off the junk bags in the street. That’s something I saw myself and that’s one of the things that impacted me the most: seeing people that looked just like myself with their kids, an entire family, a couple and two or three kids, eating around a trash bag as if it were at my dinner table.

Chris Martenson: So this has reached up into the middle classes at this point in time. It’s been enormously destructive. So the process here was what? So hyperinflation begins to set in, banks get closed, the currency really gets devalued, and then unemployment follows. Why does the unemployment follow in this story?

FerFAL: Unemployment follows because it’s very hard for people to keep a business open as well. As you said before there’s the government is not helping. The government is insulating a different kind of society, right. They’re looking for a society where social welfare is going to be the solution. That brings up taxes and government expense. That means that the small business entrepreneur is getting punished for his boldness in getting involved in a new business. It’s getting more expensive for him to stay in business. At the same time with inflation going up supplies and materials and wages as well, because wages also go up. If you don’t do it yourself the government starts forcing you to do so. So we see that here as well. Here one of the greatest problems businessmen have is keeping up with inflation but also with the unions that force them to raise the wages so as to keep up with inflation. It’s basically a race to keep up with inflation that makes it very hard for the honest entrepreneur, the business owner to stay afloat. That causes more unemployment as well and its part of the problem.

Chris Martenson: And the more unemployment you get the probably the less money there is to spend and circulate, even as prices are rising. Just it squeezes everything.

FerFAL: The entire society ends up changing where people that used to be middle class now become poor. Just think for a second what you would be doing yourself if things went up 30 percent as of tomorrow. Maybe you’d be okay, right? Maybe you’d say okay I’m going to be cutting some expenses so as to get by. Now after a month it goes up 50 percent. What would you be doing then? What if after a year it went up 100 percent? So you have to cut your expenses to half. Eventually you reach a point where you cannot cut anything else where your income just isn’t enough to keep you in the middle class. You’re now poor and you’re now fighting to put food on the table, right? Where people that don’t manage to succeed at that they become poor or they fall below the poverty line where they don’t have anything at all and they have to basically scrounge around junk and eat out of the trash.

Chris Martenson: So the great reset here is that too many promises are made on a number of dimensions and levels at some point and then those promises have to be taken away and they get taken away through a process of either outright default or inflation or sometimes both but in some way or another the key warning sign here is to note: has my country made promises it can’t possibly keep? (in current dollar terms if that’s your currency, in current whatever currency terms). So the key thing would be to ask, hey, do we have promises here that we can’t possibly meet under current arrangements as we understand them? Yes, if that’s true – okay – no, we’re not going to meet those things. That means we just have to figure out how those promises are not going to be kept.

FerFAL: Unfortunately, it looks very political, it looks like – why are we talking about politics? People have to understand that the greatest key is understanding what the country’s going for. Is my country going for a welfare state where everyone is kind of poor and the government is the good daddy that gives you a few bucks so as to stay afloat and survive? Is that going to be happening in my country or is it looking to another direction? Is it looking for a different direction where the middle class would be stronger, would be more capable of fulfilling whatever they strive for? Is that my country or is my country a socialist welfare state? Understanding that will give you a great lead as to where you’re going to be in ten years from now.

Chris Martenson: And your assessment of the United States?

FerFAL: Unfortunately, it’s copying the exact same role model we follow. That it’s a big country, big government that handouts to an increasingly poor society – unfortunately, you know what happens when that occurs is that you need the poor people because if your entire politician stance is that you’ll be the one fighting for the poor, you need poor people. Because if not, no one elects you into office, right? Who’s going to be electing you if you are the savior of the poor people if there’s no poor people anymore. So it sounds very drastic but it is exactly what happens. They feed on its own. They need poor people to keep in power.

Chris Martenson: Right, so let’s be clear. This is understanding the politics of the situation. This is not partisanship, this is not casting a dispersion in any one direction left to right, however you want to look at that.

FerFAL: No, not at all because it all comes back to the same point no matter where it is you’re going left or right, unfortunately, so.

Chris Martenson: Yeah, so here we are. Your assessment is that the United States is clearly in a direction of big government. I’m a small business owner up here and I can tell you that the burdens on small businesses become only larger with every passing year. They never take any laws off the books. The taxes never go down. These are the sorts of things that, you know, ultimately the productive class has to support a larger and larger weight and at some point that starts to break in a hyper inflation or even a just highly inflationary environment, is a great place to break more than a few backs in the productive class. Is that how you see it?

FerFAL: Yep. That’s it.

Chris Martenson: Okay, so for the people who were there then are they really worried about crime. And they really worried about their investment wealth. And then unemployment was a big factor for the people who lost their jobs. And, at 25 percent unemployment, you know, that’s the levels we experienced at the Great Depression. The U.S., allegedly we may be close to that now if we count things differently in the U.S. or how we used to. It’s kind of murky but we’re – one of the key messages I work with here is we’re really actually pretty far along in the narrative of this story if we bother to step back and start to add up all the pieces that we see ranging from the debt levels, the fiscal situation, the political gridlock, the rising numbers of the dispossessed which are just staggering at this point you know from the poor and its reaching up into the middle classes now. So you would say of all these signposts, you’ve seen them before.

FerFAL: Yes. Most of what’s going on in the U.S.A. right now happened in Argentina and unfortunately it makes an extremely clear road map of what’s going to be happening soon. It’s going to be happening different because I honestly doubt that they’re going to be closing bank doors as they did here and bluntly stealing your money. “We close the doors, we keep your money, and we’re not giving it back to you.” That’s a bit too third worldly for the U.S.A. I doubt that’s the way they’re going to be stealing it from you but through inflation. By all means with inflation rising slowly, little by little, and one day you’ll look back and you see how different it was. You know, you find an old supermarket bag and you find an old ticket, an old receipt and see the prices and wonder what the heck happened here. This used to be the prices I was paying a year from now. Why are we like we are today? That’s the kind of thing people will be experiencing.

Chris Martenson: So we’re in the boiling the frog stage you would say and you would predict that at some point there’s some sort of a trigger, there’s an event, there’s a something that kind of kicks this into a different orbit. Is that how you see it?

FerFAL: Yes, eventually there’s an event where there’s going to considerable unrest, there’s going to be looting, rioting, and such. It may happen in one city or in a few. These things are viral in terms of they show it on the news that its happening in L.A. and then it starts happening in Washington D.C. and the guy in Texas says, “Okay, I’m fed as well so I’m going to be taking this as well and making my opinion heard because obviously no one cares about it. So I’m going to make it extremely clear what it is that’s upsetting me.” That appears to be extremely bad and it is to a point, but it’s more impressive to the eye than it actually is in social and economic terms. What has happened in social and economic terms has been happening already for years. It’s not just because there was suddenly looting over in L.A. or in Washington. It happens because it had been going on for a good amount of time now. But the scenes of the people protesting and looting and rioting are a bit staggering for most people. And Americans, in general, will feel like that’s the breaking point in spite of this having been provoked through a number of years. These things may last maybe a couple of weeks, something like that, but in the end when you look at the cold numbers that’s not the worst part. The worst part is not the looting and the rioting and whatever. The worst part is the loss of quality of life and the suddenly becoming poor for a lot of middle class people. That’s the real tragedy.

Chris Martenson: Okay, so at this point as you’re looking at things and you’ve been following it for awhile and you’re watching these events unfold is that avoidable for the United States?

FerFAL: I don’t think so.

Chris Martenson: Okay.

FerFAL: I don’t think so because the political stance as of today is unfortunately so similar to what we’ve been doing. There are people that offer solutions but they’re not getting elected, they’re not getting – the elected people are still seeing this as a republican and democratic thing. Its people that end up working for the same people, okay? It’s politicians working for the same elite that really manages things and models a country depending on what they want for themselves. So I don’t think it’s going to be changing. I hope I’m wrong. I really hope I’m extremely wrong.

And even if it keeps going this way there’s much worse places to be in, right? It’s going to be bad but America will eventually recover from this. It’s going to be taking decades for sure but it’s not going to be the end of America by any means. It’s just going to be a very hard time to live in but it will get by this.

Chris Martenson: Yeah, big change is coming and for those who can see it coming and they have an opportunity to prepare, mitigate some of the risks and maybe even come up with a better quality of life once they sort through what’s available in the pieces there.

FerFAL: There are always opportunities.

Chris Martenson: Right, there are always opportunities – something I harp on all the time. This is change. So what used to be is no longer and now something new is unfolding. Getting to that story early is important and I know you help people with your book, Surviving the Economic Collapse – how else can people follow you if they want to hear more and learn more, and I think they should, about the parallels in the Argentinean experience? How do they follow you?

FerFAL: Well, my book is in Amazon. It’s easy to find. It’s Surviving the Economic Collapse. It’s rather easy to find on Amazon. Also, my website is the I blog almost daily and there’s a forum where they can find me if they want to ask questions or see what we’re up to. It’s all there for people to use.

Chris Martenson: All right. Excellent. And the name of that website again – one more time…?

FerFAL: It’s the

Chris Martenson: Excellent. Well, thank you so much for talking to us today. This brings us to the end of the public portion of this podcast. It’s just been a real pleasure talking to you and I hope people get your book and visit your website because what you’re talking about could easily happen not just in the U.S. but for anybody listening in many other countries. This is a reality that can hit anybody, any country at any time. So thank you for the work you do.

FerFAL: Thank you Chris for having me on your show.

Chris Martenson: My pleasure.

Click here to access Part 2 of this interview (paid enrollment required).

By Dr Martenson

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20 Jun 11, 10:32
Old Obama Had A Farm

Old Obama had a farm, E I E I O,

And on his farm he had a pig, E I E I O.

With an oink oink RECOVERY here and an oink oink RECOVERY there,

Here an oink RECOVERY, there an oink RECOVERY, everywhere an oink oink RECOVERY.

Old Obama had a farm, E I E I O.


Just an afterthought: Bernanke loves to use big words. I wonder why he chose to use a simple word like "recovery". For example, he could have used a word like "reestablishment"--"the reestablishment of the American economy" has a certain Bernanke-esque ring to it, no?

The times they are a-changing!

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Catching a Falling Financial Knife