A Sorry History of Statism and Inflationism
Early in the 20th century, Argentina was fully developed by the standards of the time, and the 5th richest nation on earth in terms of per capita GDP. Then several generations of Argentine politicians (which included, off and on, the armed forces) proceeded to squander it all.
The main reason for Argentina's downfall from an economic point of view is that its politicians first thought they had to reverse the gains made during the era of liberalism as thoroughly as possible. They did so by nationalizing vast swathes of industry and introducing socialist as well as fascist/militarist economic policies in alternating fashion. Then, whenever the predictable economic failure could no longer be denied, they invariably turned to the printing press to bail them out.
This mixture of statism and inflationism managed to squander so much capital with such unwavering regularity that Argentina eventually became the basket case it remains to this day. Have its politicians learned anything at all from this? Of course not. The main claim to fame of the country's current minister of economics Axel Kicillof is that he “reinterpreted Keynes from a Marxian perspective”. He was incidentally one of the principal architects of the expropriation of YPF. Just what Argentina needs like a hole in the head in other words, yet another statism-infested high IQ moron. Argentina is so rich in natural resources that it should by rights continue to be a highly successful place, but as so often, it is the political and economic policy backdrop that is the decisive variable. All that its natural riches have done for Argentina was to avert its complete collapse, while allowing its ruling classes to go on squandering its resources.
The root cause of Argentina's decline from being one of the richest nations in the world to becoming practically a third world poorhouse: incessant inflation coupled with statist economic policies – click to enlarge.
Argentina's per capita GDP as a percentage of US per capita GDP over time. The most recent downturn is not yet shown on this chart – click to enlarge.
The current government of president Fernandez-Kirchner pursues policies that are very similar to those that have so successfully ruined the country over the past century. It continually inflates the money supply, pursues economic autarky, expropriates foreign investors, has introduced a harsh regime of capital controls and actively persecutes anyone who dares speak up about the lies it is promoting with respect to economic statistics (chiefly the speed at which the currency loses its domestic purchasing power, which is about 3 times faster than the official data admit).
13 years after the government's default, there has still been no solution to its perennial fight against bondholders who insist getting paid. However, the government has just been dealt a serious blow.
US Supreme Court Decides in Favor of 'Hold-Outs'
As Reuters reports, the Argentinian government's ongoing attempts to stiff its creditors may have run into a serious snag:
“The U.S. Supreme Court declined on Monday to hear Argentina’s appeal over its battle with hedge funds that refused to take part in its debt restructurings, an unexpected move that risks toppling Latin America's No 3 economy into a new default.
The high court left intact lower court rulings that ordered Argentina to pay $1.33 billion to the so-called holdouts who refused 2005 and 2010 debt swaps in the wake of its catastrophic 2001-02 default on $100 billion. This could open the door to claims from other holdouts worth as much as $15 billion, a hefty sum for a slowing economy struggling with rapidly dwindling foreign reserves.
The news triggered a nosedive in Argentine stocks and bonds after investors expected the court to delay its decision and give Argentina time to negotiate with holdouts or restructure its exchange bonds outside of New York legislation. The impact on global markets was muted given the country's economic isolation since its default.
Argentina has previously refused to pay up. It argues it does not have the funds and cannot give holdouts preferential treatment over exchange bondholders after many of them bought the debt at a massive discount and are claiming payback in full. If it sticks to that position, U.S. District Judge Thomas Griesa could prevent full payment to exchange bondholders even though the country is able and willing to pay them.
This could result in a default by June 30, when payments are due on discount bonds governed by New York, further setting back Argentina's return to international capital markets.
"It's a very damaging scenario for Argentina," said Marco Lavagna at Ecolatina consultancy, noting that how lower courts implemented their rulings was key. "Maybe something could open up there and allow for negotiation. Argentina hinted last month it might consider negotiating with holdouts but could not do so until December 31 of this year when a clause in its debt swaps prohibiting it from offering holdouts better terms expires. Whether Argentina can keep stalling investors and U.S. courts until that date remains to be seen.”
That is however not all – in another decision favoring creditors, the court allowed them to go after Argentinian government assets wherever they may find them:
“In a double blow to Argentina on Monday, the U.S. Supreme Court also ruled that creditors can seek information about Argentina's non-U.S. assets in a case about bank subpoenas that is part of the country's decade-long litigation with holdouts.
The question was whether NML could enforce subpoenas against Bank of America and Banco de la Nacion Argentina. The court's ruling may nonetheless have limited impact in part because of Argentina's limited assets around the world.
NML has in the past pursued Argentine assets aggressively in its fight to get full repayment for its bonds, in 2012 even seizing an Argentine navy ship in Ghana.
We have obviously little sympathy for the current Argentine ruling kleptocracy, but government debt is odious in principle. If bondholders manage to enforce their claims, Argentina's citizens will pay the price. Some might argue that they should have elected different governments, and thus have only themselves to blame. However, similar to the situation in many other countries, voters usually have the choice between Tweedle-dee and Tweedle-dum, something Argentina's history from the beginning of the 20th century quite starkly illustrates.
Argentina's markets were roiled by the news, but due to the country's enormous inflation rates and the fact that capital controls have cut off any legitimate avenues for citizens to preserve their wealth against the disastrous policies of the government, real estate and stock market prices have soared over the past few years, reflecting the currency's ongoing demise.
Thus the almost 8% one-day decline in the Merval index on the news actually amounted to a mere flesh wound, even though it looks impressive on a daily chart:
Here is a weekly chart showing the bubble-like characteristics the market has developed:
The Merval index over the longer term is putting the recent decline into perspective. As so often when an economy collapses amid hyper-inflation, many of its economic 'data' actually look superficially 'good' and stock prices soar, even while scarce capital is consumed and impoverishment inevitably takes hold underneath the glitter – click to enlarge.
To see how little this stock market rally actually means, a quick glance at the exchange rate of Argentina's peso is all that is required. Below we show a long term chart of the 'official' dollar-peso rate, as well as the black market rate, which is obviously a far better reflection of the currency's value. Stock market and real estate investors in Argentina presumably care more about the latter.
One good thing may come from the victory of the 'hold-outs': the government will find it difficult to rack up more debt. Some people quoted by Reuters bemoan that the situation will delay Argentina's return to international capital markets, but Argentina's citizens should probably be relieved to hear it. On the other hand, it may well mean that even more money printing is in store, so we cannot be entirely certain whether the news is actually good or bad in that sense.
One thing is certain though: the economic policies pursued in the country over the past century have consistently failed. No end to this failure is in sight as of yet. The country doesn't need people specializing in Keynes and Marx, it needs a dose of Mises and Hayek.
charts by wikipedia, investing.com, dolarblu.net
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
10 Responses to “Argentina’s Sorrows Deepen”
Most read in the last 20 days:
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...