Lipstick and Currency Bruises

A second look at the south american economy

A few friends returned a few months ago from a Uruguayan beach expedition, bringing home confusion surrounding US dollar (USD), the Argentine peso (ARS) vs. the Uruguayan peso (UYU). Unraveling their tale, I realized this is a story everyone should mull over to understand better the larger effects of a currency black market.

Upon arrival, my friends withdrew Uruguayan pesos from their US dollar bank accounts via an ATM and received 19 UYU/USD. Later in the trip, they physically exchanged Argentine Pesos and received only 2 UYU/ARS. A few medio medios and some mental math later, they realized this implies a rate of about 10.5 ARS/ USD. A few more and they concluded that Uruguay was cheap in dollars, not so much in Argentine pesos.

What’s happening here is massive influx of Argentine pesos into Uruguay, coupled with a bullshit overvalued official exchange rate. Or just because the black rate in Argentina is expressed in U.S. dollars or sometimes Euros, doesn’t mean there isn’t a dual rate vís a vís most every other currency in the world.

Arbitrage

Sounds like a sexy high-risk international crime, but really just means that when there are two prices for one thing a clever person with adequate transportation can create a little money making loop.

For example: let’s say that in one shop, red lipsticks cost $3 and across the street the same lipstick costs $6. Bianca, being an economist and connoisseur of red lipstick, could take $3 and buy a lipstick in shop one and if she could resist the temptation of wearing it, sashay across the street and sell it for $6. Using the profit, Bianca could then buy two lipsticks at shop one, then sell them for $12, and repeat this process until either she caved and wore the lipstick, or the shops wised up and both moved their prices to a reasonable $4.50.

The same thing happens in international currency markets, except it’s a web of prices rather than just one to one. Kind of like lots of colors of lipsticks of varying qualities. And instead of crossing streets and pocketing lipstick money, international currency traders sit 24 hours a dayin front of multiple monitors displaying quickly fluctuating prices, jumping on even the most minor discrepancies to realize quite tidy profits.

And while yes, this seems like a function more or less barren of obvious societal value, these traders keep currency prices equal across countries, which allow people like you to look up official exchange rates on Google and be more or less confident you can travel to a foreign country and exchange your money for that rate.

Back to the Uruguay/Argentina/USA case though, you see the implication of a dazzling array of differing rates. And nothing begs for a chart quite like a dazzling array.

So the answer to the question of why in the WORLD do you only get two Uruguayan pesos for your Argentine pesos when you’re on vacation in Punta? If you got the official rate of 3.81, this would create a slightly less beautiful but more lucrative arbitrage loop that would look something like 3-rd chart.

In order to not be bankrupted by Argentina’s dual currency market drama, Uruguay has to throw a wrench somewhere into this cycle. If they change the red lipstick, they would stop having a globally traded currency at the expense of trade, international investment and generally being considered a real country. They can’t control the red lipstick, so they basically change the purple lipstick to make the equation balance out.

And so my friends, this is why if you plan on financing your Uruguayan summer debauchery in Argentine pesos, you will end up footing quite a hefty bill.

The solution? Use dollars. Or Euros or yen or reais or francs or really any currency that’s not from Argentina, Zimbabwe, Venezuela or Iran.

Or (and the verdict is still out on this), put your pesos in an Argentine bank account and then pull them out of the ATM in Uruguay. I will update once I know what that looks like.

Regardless, wear sunscreen. And invite Bianca, that bitch could use a tan.

 

BIANCA FERNET is a Buenos Aires, Argentina-based economist who has written the blog notParis.com, and is currently on bubblear.com This is one of her stories posted in late 2013.