A recent article in the NYTimes raises some interesting issues in
monetary economics.  (Might be fun for class discussion.)  The article
has been emailed to this list under separate title.


   Provincial governments in Argentina are short of pesos so they are
paying their workers in patacones which are bonds that pay-off in
dollars in one year at a 7% interest rate.  (It's somewhat unclear
whether there is a general shortage of cash, because of the withdrawal
of U.S. investment funds and sticky prices (?), or whether the issue is
that due to a recession the local governments simply have less revenues
than expenditures.)  The governments tried to borrow in pesos
internationally but failed.  Presumably they can't borrow nationally

     Can the bond scheme possibly work in this situation?  It seems
highly unlikely because someone who accepts patacones is really lending
the government money but we already noted that international and
national financial markets are not willing to lend the government
money.  At best, it seems that the patacones are really a way of
approaching a particular set of lenders, those who most need the
government but who may not be liquid.  That is, the workers who can't
find other jobs may accept the new currency and the stores that rely on
the worker's businesses may accept it because they too have few other
choices in the short run. But if the financial markets are correct it
seems that sooner or later the bonds will be repudiated (paid off at
less than par).  Thus the scheme is really a way of taxing those who
have the fewest alternatives to government employment/expenditure.



Dr. Alexander Tabarrok
Vice President and Director of Research
The Independent Institute
100 Swan Way
Oakland, CA, 94621-1428
Tel. 510-632-1366, FAX: 510-568-6040

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