Crucified on a Cross of Paper Money

Notes on how to destroy an economy, from the "fin del mundo"...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

Good Friday, 2022

As long time sufferers of this blog know, we are part-time residents of a country that is way ahead of the US. Whatever dumbbell thing US politicians, opinion mongers, and the Establishment Elite do in America… the Argentines have already done it, more than once… and with style.

And so… when we are down here, we keep our eyes open… and learn something.

This morning, for example, we have a crew of 5 masons and laborers working on a low stone-and-adobe wall. It is meant to hide the irrigation canal from the house.  

(The Great Wall of San Martin. Photo: Bill)

At least three of them are skilled stone masons. They’ve been working for three days already – assembling stone and adobes, sand, mud and cement. They begin at 7:30 in the morning. They take a two-hour break for lunch… and work until about 7 in the evening. It looks like they will spend a total of 3 weeks on the job.

They bid $3,000 to get the job. After materials, that works out to about $33 per person/day. They will consider that a very good wage.  

In the US, a mason should be able to earn about $25 an hour. Or around $50,000 per year. Why the big difference? What makes a mud-slinger so much more valuable in the US than in Argentina?

Unions, Socialism and Demagoguery

Could it simply be a matter of public policy? Like the US, Argentina has abundant resources and a European culture. And until the 1940s, it was on a similar path of development with income per capita much like England or France.

But Argentina had more Italian immigrants than the US. They were fond of trade unions, socialism and demagoguery. They poured into Buenos Aires early in the 20th century and quickly became the dominant base of voting power. Ever since, the political math always adds up to the same thing: promise the Buenos Aires mobs more free stuff… and get elected.  

Like the US, the Argentine government routinely spends more than it can afford.  Typically, it borrows the rest… and then stiffs its creditors 10 years later.

Private lenders are naturally wary. If they’re going to lend any more money to the gauchos, they need high interest rates to make up for the high likelihood that the latter won’t pay. This limited how much the Argentines could borrow. 

But then, along came the Great and the Good… central bankers from the US and Europe… who decided that the world would be a better place if it had lower interest rates… and more money sloshing through its accounts. The idea is that money begets output. And more output equals more real wealth.

On the surface of it, any dope can see that the proposition is fraudulent. The whole thing is backward. The great French economist, Jean Baptiste Say explained it in the 19th century. You don’t actually buy products with money, said he; you buy them with other products.

You have to give to get, in other words. You provide something of value to others… so they will provide something of value to you. Each person, trying to get more for himself, is thereby forced to give more… and thus (as if guided by an ‘invisible hand’) contributes to the material progress of the entire world.

Money is just a ‘medium of exchange.’ It is like a claim ticket for a car in a parking garage. The attendant can give you two tickets; you still won’t have two cars.

A Century of Debt

But persisting in the old fallacy – that money itself is the source of prosperity… and that printing up more money will ‘stimulate’ output – central bankers provided the world with so much new credit that even the Argentines could borrow at low rates. Naturally, they were happy to let others err on their behalf.

The Wall Street Journal reported in 2017:

Argentina sold a 100-year bond on Monday, the latest sign of investor hunger for yield as the country joined a small group to sell so-called century bonds. The Argentine government raised $2.75 billion through the debt issue with a yield of 7.9%, the country’s Ministry of Finance said.

A one hundred-year bond? From Argentina?

Your editor laughed out loud. Statistically, the country would go broke 10 times before the bond was repaid. But for a few months, the joke was on him. In December of 2017, the ‘Century’ bond traded above par. And then gravity took over. By 2019, the bond had lost 60% of its value.  

And then, yesterday, the gauchos announced a new central bank lending rate. Not because they wanted to; but because the IMF – the only lender still dumb enough to talk to them – insists upon it. Bloomberg:     

Argentina Raises Key Rate To 47% as Inflation Hits 20-Year High

Fourth rate hike this year as prices rose 6.7% m/m in March

IMF agreement calls for real positive interest rates

Argentina’s central bank raised interest rates for the fourth time this year after inflation data published earlier in the day showed prices increasing at the fastest monthly pace in 20 years. 

Yesterday, the 10-year Argie bond yielded 49%. If you could earn 49% on a 10-year bond, how much would a bond with a coupon of 7.2%, maturing in 2117 be worth?

Not much.

But while Argentines slide smoothly into poverty, Americans stumble. With no IMF to discipline them, their central bank lends at a rate that is deeply negative – about MINUS 7.7%.  

And pity the poor US mason. He is being crucified on a cross of paper money. If he is lucky, he may get a 5% wage increase this year. Correctly measured, consumer prices are rising at about a 13% rate. This will mean a pay cut for him of about 8%... or a loss of $2 per hour.

That’s just the way it’s supposed to work. Inflation is a tax… a way of ripping off the working classes. It worked for Argentina’s political bosses. It will work for America’s jefes too.

And perhaps on some Good Friday, in the glorious future, you’ll be able to hire an American bricklayer – in the post-dollar money of the time – for about $33 per day.

Happy Easter.

Bill Bonner

Joel’s Note: Inflation may be at a two decade high here in Argentina, but it has raced away to its highest levels in over 40 years in the US. Meanwhile, as our macro analyst Dan Denning points out, real wage growth is going backwards...

“With ‘official’ inflation at 8.5% and nominal wage growth at just 5.6%, workers are actually seeing a 2.7% decrease in their real wages.”

The bottom line: in an era of “inflation volatility,” you’re unlikely to “earn” your way out of the hole the Feds are so kindly digging on your behalf.

Dan and Tom are on the case, helping our paying subscribers navigate the rough seas with an asset allocation strategy designed to both protect and grow your savings. The way we see it, you can either rely on the government’s deft financial stewardship… or take control and captain your own ship. Join the BPR team today, right here:

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