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
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
10 Responses to “Argentina’s Sorrows Deepen”
Most read in the last 20 days:
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- US Economy – Something is not Right
Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong? Quo vadis, economy? Image credit: Paul Raphaelson As we usually point out at this juncture: apart from the problem that US labor force participation has...
- Investing in Gold in 2016: Global Paradigm Shifts in Politics and Markets
Crumbling Stability In the past few months, we have witnessed a series of defining events in modern political history, with Britain’s vote to exit the EU, (several) terror attacks in France and Germany, as well as the recent attempted military coup in Europe’s backyard, Turkey. Global stability continues to be undermined Uncertainty over Europe’s political stability and the future of the EU keeps growing. These worries are quite valid, as geopolitical...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- Why Americans Get Poorer
Secular Stagnation OUZILLY, France – Both our daughters have now arrived at our place in the French countryside. One brought a grandson, James, now 14 months old. He walks along unsteadily, big blue eyes studying everything around him. Put to sleep by monetary lullaby! This is what children look like approximately five minutes into a rant on the Fed's policy mistakes. It never fails! Photo credit: Jack Weid He adjusted quickly to the change in time zones. And...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...