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TheStreet Open House

Argentina Defaults and Will Repeg to the Dollar, but What if the U.S. Defaults?

Stocks in this article: UUP

NEW YORK (TheStreet) -- Argentina defaults, and the cycle repeats once again, exactly as before. After defaulting, the government pegs to the dollar, as tracked in the PowerShares DB U.S. Dollar Index Bullish (UUP). Then it spends too much money buying votes, prints money to compensate (currency devaluation, no more peg), inflation results, the printing presses are shut on the verge of hyperinflation, government can't pay its debts, it defaults, and everyone loses their savings and starts over, Fight Club style. Then someone else is elected and promises to peg to the dollar, and everything happens again.

According to PriceStats, which tracks hundreds of millions of prices online, monthly price inflation hit a high of 6.321% on March 2, 2014. That put annual price inflation at 76% at its peak. Inflation enables a government to pay its debts, but hyperinflation destroys everything.

If Argentina didn't stop printing then, the Argentine Peso would have become totally worthless, so it had no choice. And it defaulted.

Read More: Argentina Defaults, but Analyst Says Don't Fear Others Will Follow



In order for an economy to function on the most basic level, prices have to mean something. They have to make sense -- calculate values of scarce resources accurately in order to allocate them in the most efficient way. In order for them to make sense, they have to relate to something that represents the actual market. So Argentina will have to peg to the dollar once again. More precisely, it will have to peg to something with a recognized value, or its economy will not function. It can't just hand out new pesos and say "Whatever." Nobody would know what to do with them.

Austrian School economist Ludwig Von Mises called this the Monetary Regression Theorem. In order for a money to work, there has to be an existing array of prices recognized for that money in the market already. Otherwise, nothing would make any sense. You can't just have a Master of Coin from the government, go ahead and declare what prices are for everything and start handing out tickets. If that were to work at all, his price declaration would have to reflect an array already in existence. It can't be conjured out of sheer government will.

So how was money originally established then? It seems like an infinite regress. The answer is, as a commodity. Commodities were traded for goods in a barter system, out of which one or two commodities eventually came to be traded more than any other, organically. There were the money commodities, which usually ended up being gold or silver. Money evolved from there, without governments, without any central planning of any kind.

Nowadays, the dollar has taken the place of gold or silver, because ironically, the U.S. dollar is the gold standard of fiat money.

This raises a scary question. What happens if the U.S. defaults? The national debt keeps rising, and the possibility of paying it back keeps falling by the year. How will it re-establish a monetary order? The dollar can't peg to the dollar. The only answer, in the end, is a commodity with a recognized value in terms of other commodities. It will probably be gold or silver, the two commodities that have always ended up as money throughout human history.

Read More: Argentina Debt Looks Bad Now, but May End in a Gusher

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