What the strong dollar and inflation mean around the world : Planet Money When it comes to international trade and finance, everyone pretty much speaks one language: the U.S. dollar. So when the Federal Reserve hikes interest rates and the dollar suddenly gets strong, it can cause huge headaches all over the world.

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The high cost of a strong dollar

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SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.

GREG ROSALSKY, HOST:

In 1982, economist Miguel Messmacher was just a little kid growing up in Mexico City, so he only remembers a tiny bit about a painful time in his region's history, a period that came to be known as the Latin American debt crisis.

MIGUEL MESSMACHER: Yeah. I was 10 years old at the time. I remember hearing the news and my parents being very worried about how things were going.

AMANDA ARONCZYK, HOST:

Miguel's parents were worried about losing their jobs and, if the banks failed, their savings because the economy was falling apart. At the heart of the Latin American debt crisis was, you guessed it, debt. Throughout the 1970s, it was cheap to borrow money. And so countries like Mexico borrowed a lot of U.S. dollars to build stuff that they'd always wanted, like infrastructure to build up their oil production, new roads, bridges. But when the U.S. started experiencing high inflation - this is going to sound a little familiar - the Federal Reserve began hiking interest rates up a lot. That made it hard for countries like Mexico to pay back their dollar debts.

ROSALSKY: It also meant that the peso was becoming worth less and less against the dollar. Things like foreign imports were getting much more expensive. At the time, the 10-year-old Miguel was just getting into rock music, and he remembers this historic macroeconomic event as basically destroying his record collection.

MESSMACHER: So I was getting into David Bowie records, for example, and I remember how the price of those things suddenly skyrocketed.

ROSALSKY: So are you talking, like, vinyl, or are we talking cassette tapes?

MESSMACHER: Yeah. No, no, vinyl. Yeah, yeah, yeah - the old vinyl records. So suddenly my allowance wouldn't be able to get me as much bang for the buck, in a sense.

ROSALSKY: Wait, so you experienced the Latin American debt crisis through the lens of David Bowie.

MESSMACHER: I mean, that's how I understood it at the time.

ARONCZYK: So there is young Miguel. He's discovering David Bowie, and he wants to get a copy of, I don't know, maybe his most recent album, "Scary Monsters." Maybe he's looking for a classic like "Ziggy Stardust." So he gets as much money together as he can to buy a new album.

ROSALSKY: But the value of the peso just kept dropping and dropping, so much so that record stores in Mexico were forced to invent a whole new way to do their pricing.

MESSMACHER: So record stores, actually, in Mexico City - they devised this very sophisticated system to take into account exchange rate movements. So what they did is they would put a label on the record. So let's say a David Bowie record would have an A-1 label.

ROSALSKY: The new AC/DC album "Back In Black" would be, like, B-2. The Clash, "London Calling" - that would be, like, C-5.

ARONCZYK: Then beside the cash register, guys at the record store would set up a blackboard, and they would write down the prices. A-1 might be 80 pesos. B-2 - that'd be 100 pesos.

MESSMACHER: And then every week, depending on what happened with the exchange rate, the guys would just erase the blackboard and would put the new prices without the need to change the labels in the records.

ARONCZYK: They did this because the exchange rate was changing so often. The value of the peso kept dropping.

ROSALSKY: Meanwhile, the Fed kept raising interest rates, which kept putting more and more pressure on Mexico's ability to pay back debts that it owed in dollars. Finally, on August 12, 1982, the nation's leaders declared they'd had enough. They couldn't afford to continue making their loan payments anymore. That's when a volatile situation became an economic collapse. Miguel says that all aspects of life in Mexico were impacted by the debt crisis.

MESSMACHER: I mean, I was fortunate in the sense that I was from a well-to-do family, and my parents didn't lose their jobs. And we didn't lose our house. So obviously there were a lot of people who had a much tougher time than I actually had.

ARONCZYK: People lost their jobs. Poverty rates increased dramatically, and an economy that had looked strong and growing suddenly looked like one in the middle of a depression. The crisis spread to 15 other Latin American countries, into other parts of the world, too - in Latin America, basically destroyed all economic progress for the next 10 years. It's even called the Lost Decade.

ROSALSKY: We're now in another period that some worry could look like the start of the Latin American debt crisis. Inflation is again really high. The Federal Reserve is again hiking interest rates, and the dollar is at its highest level in 20 years.

ARONCZYK: Which is important because the U.S. dollar - it's not just the currency of the United States. In a lot of ways, it is also the currency of the world.

ROSALSKY: Look, we are probably not on the verge of, like, a full-blown Latin American-wide debt crisis that engulfs an entire continent. But the Fed's rate hikes and the strong dollar are causing ripple effects around the world.

(SOUNDBITE OF RALPH SALMINS AND STEVE PEARCE’S "BROOKLYN RHYTHM")

ROSALSKY: Hello, and welcome to PLANET MONEY. I'm Greg Rosalsky.

ARONCZYK: And I'm Amanda Aronczyk.

JEFF GUO, HOST:

And I'm Jeff Guo.

ARONCZYK: We have got such a big, macro show for you today. It is going to take not one, not two, but three hosts to pull this off.

GUO: Today on the show, we talked to people in three different countries in Latin America to see what effect the strong U.S. dollar is having on their economies.

ROSALSKY: We talked to an amateur currency expert in Argentina, a wine baron in Chile. And we go back to Miguel to see if there have been any ch-ch-ch-changes in Mexico.

ARONCZYK: Greg, stop.

ROSALSKY: (Singing) I'm an alligator.

ARONCZYK: We are going to start today in Argentina. Why? Because they are being hit really hard by the strong U.S. dollar right now. In the past six months, the Argentine peso has dropped more than 25% compared to the dollar. Now, exchange rates are one of the most obvious places where you can see the impact of the strong dollar. But exchange rates in Argentina don't just refer to a single rate. It's a whole thing. We'll get to it.

GUO: But first, a bit of context - economically speaking, Argentina is a hot mess. Since the Latin American debt crisis in the '80s, it's cycled through recessions and hyperinflation.

ARONCZYK: Since 1982, the country's government has had to call up the international lenders that it owes billions of dollars to on five separate occasions - five times - to say, you know what? Can't pay you back. We don't have the money.

GUO: The economy in Argentina is so chaotic that everyone there has become an amateur economist. You can call up pretty much anyone to find out what they're doing to outrun this chaos.

LUCAS BABIC: My name is Lucas Babic - B-A-B-I-C.

ARONCZYK: Lucas is in his early 40s. He's a freelance video editor. And I'll admit, I just found him through some guy who wrote into PLANET MONEY. Lucas is originally from Brazil, but he's lived in Argentina for 30 years.

BABIC: I've been suffering Argentina since '92, OK?

ARONCZYK: And why do you stay?

BABIC: Because Argentina is awesome, like, for real. But everything is wrong with this place. Like, everything is wrong with Argentina.

GUO: And one of the biggest things that's wrong, according to Lucas, is that you can't trust the peso. So like a lot of people in the country, he stashes away U.S. dollars.

BABIC: If you can, like, hold on like a grudge to dollars in Argentina, yes, you're rich. So I'm not rich. But, yes, I do have, like, $500 in my shoebox. Like, Jay-Z said it. You've got to start with a shoebox.

ARONCZYK: So Lucas and I are talking over Zoom, and mid-sentence...

BABIC: I'm really, like, standing up and going away. I'm sorry.

ARONCZYK: OK. Lucas has, like, wandered away.

BABIC: But, like, for real...

(SOUNDBITE OF CONTAINER SHAKING)

BABIC: ...This is my shoebox.

ARONCZYK: Oh, he's back. And he's holding - it's not exactly a Nike shoebox, but a plastic bin.

BABIC: I got, let me say, like, 200 right now. And...

ARONCZYK: Lucas is showing me each and every American bill.

BABIC: Ten and 20, 20 and 10 - and I wish I had more.

ARONCZYK: Lucas, what are you saving the American dollars for?

BABIC: I hold this thing because this is not going to devaluate. Like, $10 is going to still be $10. Bro, I can live, like, a week and a half with this, just this.

ARONCZYK: Next, he picks up some Argentine money.

BABIC: This is a thousand pesos.

ARONCZYK: Lucas waves it at me, and he's kind of like, what can I buy with this?

ROSALSKY: I can go to McDonald's and buy, like, a really big combo with, like, bacon and cheese. And, like, for real, like, a big combo on McDonald's - I'm not going to be able to pay it with a thousand pesos. I got to go with two of this.

ARONCZYK: He shakes his sad peso. And in a year or two he might need to take three or four of these thousand-peso bills to go get that combo meal.

GUO: Because inflation in Argentina this year might hit 100%. And what Lucas wants to buy with his pesos - it's not combo meals. It's more U.S. dollars to stash in his shoebox.

ARONCZYK: And this is where the story gets kind of weird - because buying dollars is not straightforward. The Argentine government controls foreign exchange transactions because they don't want U.S. dollars to run off and leave Argentina.

GUO: OK. So here we go. There is an official rate. So if Lucas wants to play by the rules, he can go to a bank and buy dollars. But the government says there is a limit - no more than $200 a month. And this is going to cost Lucas a lot because they add on a 75% tax.

ARONCZYK: Instead, what most people do is go to one of these not really legal, but they're kind of everywhere places known as cuevas, or caves. These have a different exchange rate than the bank - no $200 limit, no 75% tax to get dollars this way.

BABIC: That's what we call the blue dollar, OK?

GUO: It's still an American dollar. It's not, like, literally blue. The blue dollar just means you bought it on the black market. Lucas says that if you've got a guy, you might even be able to get a better deal.

BABIC: I have a friend, a guy that does, like...

ARONCZYK: He's giving me a pretty elaborate wink.

BABIC: I have a friend that will give me more money for this bill.

GUO: So there is the official rate. There's a black-market rate. There is a you-got-a-friend rate.

ARONCZYK: But then, on top of that, there are these other rates which, like the official rate, are set by the government. There's one for buying stocks and bonds. There's another for using a credit card.

GUO: There are more than a dozen of these different rates. Some even have cute names like the soy dollar or the tech dollar.

ARONCZYK: Now, at this point in Lucas' explanation, he's kind of fuming. He's also literally fuming. I am watching him chain-smoke three cigarettes in a row.

BABIC: And you know what? Coldplay. Coldplay is coming to Argentina. They're going to come to Argentina and play their songs that I hate. It's, like, boring or whatever. But there is a Coldplay dollar. Can you believe it?

ARONCZYK: The Coldplay dollar. Coldplay is supposed to play 10 shows in Argentina. Lucas says he will not be there. And Coldplay, well, the band doesn't want to be paid in quickly devaluing pesos. But the show promoters, they need to pay Coldplay, probably in dollars, and a lot more than the 200 that they're officially allowed to get each month. So the government set up a special exchange rate for promoters so they can pay international talent. And I guess that describes Coldplay.

GUO: There's also this Qatar dollar that was recently introduced. This one's aimed at Argentines who will spend dollars at the World Cup in Qatar. But this is a bad exchange rate. It's kind of like a tax.

ARONCZYK: And it's there because the government wants to discourage people from spending money outside the country.

GUO: Basically, the Argentine government is using all these different rules and rates to fix problems like with the Coldplay dollar. But more importantly, they're doing this as a way to keep scarce dollars from leaving the country and to try to prevent their peso from collapsing.

ARONCZYK: Now, for Lucas, these, like a lot of people in Argentina right now, hit by rising inflation, a shrinking peso, a rising dollar.

BABIC: You have to really work it out. Like, to get to the end of the month, you have to really, really, really work it out to get to pay the rent and the lights and the water and your phone.

GUO: Which is also what the government of Argentina is now doing, trying to work it out, because most of their bills, billions of dollars of debt, need to be paid back in dollars. And with the value of the U.S. dollar so high, it makes it that much harder to pay all those debts back.

ARONCZYK: In Argentina's government, their shoebox is looking pretty empty. Just like Lucas, they still need to pay for their phone and their water, and they want to keep the lights on.

(SOUNDBITE OF ERIC HEBER SUFFRIN'S "CUTIE PIE")

ARONCZYK: Next, we're going to turn our attention to Chile. In the last six months, the Chilean peso has dropped about 16% compared to the dollar. But the situation in Chile is way less dire than in Argentina.

GUO: Yeah. And, you know, Chile was one of the countries that got hit the worst during the 1982 debt crisis. Back then, Chileans took out a lot of loans in dollars, like 70% of their GDP. So when the value of the dollar shot up, the amount they owed suddenly shot up, too.

ARONCZYK: Businesses went bankrupt. More than 20% of Chileans were out of work. The entire economy shrank by 14% in a single year.

GUO: It was like the music had suddenly stopped. The party was over, and everybody had to go to the kitchen to wash the dishes. It was like that for almost a decade.

ARONCZYK: Since then, the Chileans have completely restructured their economy in a way that makes them pretty well prepared for the return of the strong dollar. And one of the ways they've done that is by massively boosting their exports.

GUO: To learn how Chile got to this point, we talked to a guy at the center of Chile's export boom.

AURELIO MONTES: My name is Aurelio Montes, and I'd been already 50 years making wine and moving around my own country and around the world.

ARONCZYK: Aurelio runs Montes Wines, which he started with three friends back in 1988. Before that, he'd been a winemaker for some of Chile's top wineries. But then he lost his job. He was 39 with a big family and lots of bills to pay.

MONTES: I had to make a living. I was married. I had five kids at home. So I need to bring money home, you know, for education, clothes, you know, medicine.

GUO: But Aurelio wanted to build his own winery. And he had a plan. There's just one problem.

MONTES: We had no money - no personal money. We're coming from normal Chilean families - no fortune behind ourselves.

ARONCZYK: This was not the greatest time to be starting a company in Chile. The country was still crawling back from the debt crisis. And the Chilean banks, they weren't that interested in lending to four wannabe wine entrepreneurs.

MONTES: So we're not reliable. You know, four dreamers, you know, to build a winery, you know, in a certain way - well, the bank, the banking system didn't believe in us. Well, that's why the beginning was very, very slow.

GUO: Aurelio's plan wasn't just to make wine. He wanted to make wine for export. He wanted his wine to go out in the world and to bring dollars back home.

ARONCZYK: At that time, Chile wasn't really doing that. But Aurelio had all of these big ideas like bringing in new varieties of grapes, planting them where no one had planted grapes before. And over the last three decades, he has built one of Chile's most famous wineries. He sold millions of dollars' worth of wine and almost all of it outside of Chile.

MONTES: The wine industry - they said, no, it's impossible to compete against France, Italy, Spain. Chile's too far. No one knows about Chile. But it would demonstrate that a good wine, no matter from where it comes - it's got a place in the market.

GUO: These days, around 70% of Chilean wine is sold internationally. Chile has become the No. 4 wine exporter in the entire world, right behind France, Italy and Spain.

ARONCZYK: The rise of Chile's wine industry kind of goes hand in hand with the rise of Chile's economy in the last 30 years. Coming out of the debt crisis, the Chileans started to really focus on growing their exports. They planted and upgraded lots of vineyards. They built a lot of copper mines, and they expanded their commercial fishing fleet, all with the goal of selling more stuff overseas.

GUO: Economists call this export-led growth, and they point to Chile as one of the best examples. To grow your economy, figure out the most valuable thing you can sell to the rest of the world, and just make a lot of that. That's how exports went from a $5 billion industry in Chile to a $100 billion industry. Exports now make up 30% of the Chilean economy.

ARONCZYK: And for all the exporters like Aurelio, the strong dollar has been mostly good news.

MONTES: In our case, we export 95% of our production. So we were very happy because we're getting more pesos for every dollar.

GUO: Aurelio sells his wine mostly in dollars, but his costs are mostly in pesos. Some of his materials, like cork and bottles, are imported, but pretty much everything else, he pays for in pesos. He buys the land for his vineyards in pesos. He pays his employees in pesos.

ARONCZYK: So the strong dollar has been helping Chile's exporters, which again, are a big chunk of its economy.

GUO: But for any new would-be Aurelios, the strong dollar has made life a lot harder. Investors these days - they want to put their money into the U.S. and not Chile.

MONTES: So I think that investment has stopped because of this crazy think of the strength of the dollar. So the investment in Chile - it's nearly totally dry.

ARONCZYK: And most importantly, strong dollar also means imports become more expensive, which can drive inflation.

MONTES: Inflation will go up to 14% this year. When we were used to a 3-, 2.5-, 3- or 4% the most. And that's very bad, especially for poor people, that they need to work a lot just for the sake of educating their children and having food on the table.

GUO: Economists say that for export-focused countries like Chile, if you add everything up, the benefits of a strong dollar might outweigh the costs. But those benefits and those costs - they can be shared really unevenly.

(SOUNDBITE OF LUCAS CANTOR AND MB GORDY'S "CAVIAR")

ARONCZYK: After the break, we visit Mexico, where the strong dollar turns out actually to not be that strong at all.

Now, while Argentina is very much struggling with a rising dollar and in Chile there are worries, although much less so, there are other places in Latin America where the strong dollar actually isn't strong at all. Over the past six months, the value of the dollar has gone down against the Mexican peso. It's gone down. And Mexico seems to be weathering the storm just fine. So what is different about Mexico now versus the Mexico of the Latin American debt crisis time? Why is the story so different? To answer that question, Greg Rosalsky.

Hello again. You're back.

ROSALSKY: Hey, Amanda. So remember Miguel, the David Bowie fan? Well, I called him because I wanted to figure out why the Mexican peso is holding up so much better today than it did in the past. After the lost decade, Miguel went on to play a pretty big role in the Mexican economy. He worked at the central bank. He was the chief economist for the Ministry of Finance. And then in 2012, he was promoted.

MESSMACHER: For five years, I was the undersecretary for revenue. So I was a tax man.

ROSALSKY: After all of our talk about David Bowie - I mean, come on - I had to bring up the Beatles song "Taxman."

MESSMACHER: Oh, I love that song. I don't listen to it every morning, but I really like it. And I really appreciate it.

ROSALSKY: Anyway, Miguel says there are a few important explanations for why the peso in Mexico is behaving differently than the pesos in Argentina or Chile.

ARONCZYK: First up, Mexico's financial sector. Back in the 1980s, Miguel says Mexico lacked strong financial regulations. More importantly, its central bank did not have any real independence from politicians.

MESSMACHER: So the problem with not having an independent central bank is that the federal government can actually try to strong-arm the central bank to help it finance its expenditures and, therefore, just have too much money going around, and that translating eventually into much higher levels of inflation. That's a little bit what you see in Argentina right now.

ROSALSKY: So if the president wanted to run large deficits to you know, juice the economy, he could basically order the central bank to print more and more money, which was not a great way to manage an economy.

ARONCZYK: But in the mid-1990s, Mexico adopted a number of reforms, which strengthened its financial sector and created an independent central bank. In the last year or so, that central bank has been working aggressively to hike interest rates to fight inflation and keep the peso strong. It's also kind of been flexing its independence, hiking rates despite pressure from Mexico's president not to raise them. OK, so that is reason No. 1.

ROSALSKY: Reason No. 2 for why the Mexican peso is staying strong, Mexico's economy is stronger and more resilient than it was in the past. Back in the 1980s, Miguel says the country was superdependent on oil production. But over the last several decades, with the help of trade agreements like NAFTA, the Mexican economy has become way more industrialized and diversified.

MESSMACHER: So nowadays, Mexico exports are 80% manufacturers, and only 10% is oil. And therefore, Mexico's much less vulnerable to sort of what happens just with the price of oil in the global economy. And that actually provides much more resilience.

ARONCZYK: Now, even if the price of oil drops, Mexico can fall back on other things it exports like auto parts or textiles or appliances. So the economy keeps chugging along in a way it couldn't in the past. And the peso stays strong.

ROSALSKY: The third, and perhaps the most important reason for the strong peso, Miguel says, has to do with the way the Mexican government has been managing its finances.

MESSMACHER: One very important thing is that - and there are pros and cons behind this. But I think that overall, Mexico, during the last let's say 10, 15 years, has tried to be very careful on its fiscal side.

ARONCZYK: Its fiscal side, as in taxing and spending. Mexico has been very conservative with its spending over the last few decades. In fact, for a relatively rich country, Mexico has a really small amount of debt relative to its GDP. It is way below average.

ROSALSKY: But depending on where you sit politically and how you read the data, that might not actually be a great thing. Some argue that Mexico could be spending a lot more on its problems like its high poverty rate or its weak recovery from the pandemic.

MESSMACHER: So, yeah, it's clear that Mexico is in a very solid financial position. And this is reflected in this very strong peso, for example, and this very stable financial situation. But on the other hand, economic activity has been weaker in Mexico than it has been in other places. So there is clearly a trade-off.

ARONCZYK: Mexico has come a long way since the 1980s. These days, it's more insulated from the ups and downs of the dollar. But Miguel says the country still lives in the shadow of the U.S. economy.

ROSALSKY: When the U.S. Federal Reserve hikes interest rates and strengthens the dollar, Mexican policymakers have to respond usually by raising their own interest rates and potentially slowing down their economy more than they would otherwise need to.

MESSMACHER: For Mexico, anything that happens in the U.S. is important. And we have this joke in Mexico that whenever the U.S. gets a cold, Mexico gets a pneumonia.

ROSALSKY: Oh, no.

MESSMACHER: Or whenever the U.S. sneezes, we get a cold.

ROSALSKY: But is it - when the U.S. has a party, Mexico, does it also get invited to the party?

MESSMACHER: No, that's the issue, no? I mean, there are pros and cons, again, in the relationship between Mexico and the U.S. So, I mean, overall, I think that that relationship between Mexico and the U.S. is an extraordinarily positive one. The only thing is that in that relationship, the U.S. is the giant. So whenever the U.S. goes up or goes down, Mexico has to go up or down by a larger amount just because it's a smaller party in the relationship.

ARONCZYK: Today, Mexico is better prepared. It can deal with the ripple effects of these big changes coming out of the U.S. economy better than it did in 1982. But that doesn't mean it doesn't feel them.

ROSALSKY: In the words of the great lyricist David Bowie, I'm afraid of Americans. I'm afraid of the world. I'm afraid of the ups and downs of the dollar. OK, so he didn't say that last line, but maybe he should have.

(SOUNDBITE OF DAMIEN RICHIE'S "BIG ON ZIGGY")

ROSALSKY: Hey, so PLANET MONEY has a newsletter. I tend to write it. Maybe you should subscribe. There's so much cool stuff. Sign up at npr.org/planetmoneynewsletter.

GUO: Today's show was produced by Willa Rubin with help from Dave Blanchard. It was mastered by Robert Rodriguez and edited by Keith Romer. Jess Jiang is PLANET MONEY's acting executive producer.

ARONCZYK: So many people to thank this week - we really had a lot of help. Thank you, thank you, thank you to Julio Alonso, to Cristina Arellano at the Federal Reserve Bank of Minneapolis, to Carrie Kahn, Edward Gilleland (ph), Guillermo Ortiz, Nicolas Saldias and independent economist Zachary Sears. Thank you all very much. I'm Amanda Aronczyk.

GUO: I'm Jeff Guo.

ROSALSKY: And I'm Greg Rosalsky. This is NPR. Thanks for listening.

(SOUNDBITE OF DAMIEN RICHIE'S "BIG ON ZIGGY")

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