Don’t Be Baffled by Argentina’s Crisis

The collapse in Argentina’s currency underlines two facts about global finance that are well understood yet far too easily forgotten. First, the effort to normalize U.S. monetary policy after a decade of extraordinary monetary stimulus has put many other economies, especially those at risk for domestic reasons, under greater financial pressure. Second, once a crisis of confidence gets going, it can be impossible to control.

Few would say that the recent monetary tightening in the U.S. has been hasty. With the economy at full employment and growing well (more than 4 percent in annual terms in the second quarter) interest rates remain low and the central bank’s balance sheet is still engorged with bonds purchased under the Fed’s enormous bond-buying program. Even so, gentle tightening has pushed up the dollar, making it harder for countries such as Argentina to sell or service dollar-denominated debt.