The Road to Argentina

A look at one possible future for America...

(Source: Getty Images)

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

Today’s the big day. There are only two ways to resolve the debt crisis – either inflation or deflation. Either the bad debt (as much as $50 trillion of it, by our estimate) gets written off or inflated away.

And today, the Fed signals which way it will go. Bloomberg:

Fed Caught Between Inflation and Bank Crisis

All eyes in the financial and economic world will be laser-focused Wednesday on the Federal Reserve as Chair Jerome Powell tries to balance his fight against inflation against a sudden banking crisis.

Powell and his colleagues began their meeting Tuesday with the outcome unusually unclear. While most economists expect a quarter-point interest-rate hike, some say policymakers should pause…

By the time you read this, you may already have the news. But from our point of view, it hardly matters. The Fed has already begun its ‘stealth pivot.’ And even though Wall Street still hasn’t crashed….and the economy still hasn’t gone into an official recession…the powers-that-be are on the brink of panic.

Meanwhile, at the End of the World…

But here in Argentina, we are steeped in crisis…surrounded by ineptitude…immersed in corruption. It gives us a sense of deja-vu…as if the future of the USA could be read in the pages of the Buenos Aires Herald over the last 70 years.

So rather than speculate about what the Fed will do…we will look around us.  

Rick Rule invited us to open our eyes last week. Rick is an old friend, who was tracking puma in Patagonia and decided to stop for a visit. He asked the same question many Dear Readers have posed:

“You could live anywhere, why do you live here? Yes, it’s beautiful in a rugged kinda way. But so is it where Dan lives in Wyoming. And they don’t have inflation at 105% in Laramie.”

Rick was referring to the latest inflation report. Over the last 12 months, Argentina’s inflation rate has gone up from 100% to 105%.

INDEC: Prices jumped 6.6% in February, inflation 105.8% over last year….

That is the highest inflation reading in 32 years. It reminds people of what may come next: hyperinflation. The last time inflation hit over 100%, it ran all the way to 5,000%...when people needed a wheelbarrow full of pesos in order to buy a cup of coffee.  

The peso is going down against the dollar fast, too. When we arrived just a month ago, we were offered 370 pesos per dollar, on the black market, of course. Now, the exchange rate is 392 per dollar.

Functional Disfunction

“I’d also like to know how an economy can function with 105% inflation,” said Rick. “It seems impossible. Who comes to work? Who votes for a president who allows inflation to get so high? How do people make ends meet? And yet, the electricity works. The airports are open and the planes fly. The steaks are thick and tasty. The wine is delicious. You’d almost think nothing was wrong.”

Our reply follows:

“Economists long ago singled out Japan and Argentina as economies that didn’t seem to fit any of their models. But there are some things that are always and everywhere true…

“…and as Milton Friedman put it “if you want more of something, subsidize it; if you want less of something, tax it.”

“We don’t know anything about Japan, but we’ve been coming down to Argentina for nearly 20 years. It’s a country rich in resources. And know-how. But poor in public policies. Here, they subsidize poverty and tax the producers. And they’ve turned Argentina into a poor country.

“People around here are poor. Most are unemployed. But it’s hard to find people to pick grapes. You almost have to beg them to come to work. It wasn’t always like that. Even 20 years ago, when we first came here [we had come in a group…with Rick], it wasn’t like this.”

“Just look at Buenos Aires. There are thousands of buildings that are relics of a Belle Epoch…a time when average Argentines had the money and the ambition to build nice buildings. Now, a few still want fine suburban houses…but most live in the run-down relics of Buenos Aires…or the unfinished, improvised housing in the outer boroughs.

“The GDP per capita is only $10,000 per person. Even people on Social Security get three times as much in the US.

When the Music Stops

We invited Rick into the living room, where we have a grand piano given to us by a friend.

“That piano was owned by Robustiano Patron-Costas. His story tells us a lot about what happened here. He was a very energetic investor who became one of the richest men in the country (at a time when the country had a lot of rich men) by doing something remarkable. He developed a vast sugar-producing industry, in the middle of what had been almost wasteland. He built a refinery…houses for the staff…a hospital…a railroad.    

“He got very rich. And he was urged to run for president… a kind of gaucho Calvin Coolidge who represented ‘conservative’ voters who believed that they could improve their lives by hard work and hard money. That is, he approved of what we called in our latest book “the win-win deal” and disapproved of anything that got in the way.

“But there was another, fast-growing element in Argentine society. Back then, people believed that democracy would solve all their political problems…and the idealists were eager to extend the vote to all citizens. Today, that seems like the right thing to do. But it suddenly changed the political calculus of the country.  Politicians found they could win by appealing to the masses of immigrants in the capital city, Buenos Aires. And they appealed to them by offering them various “social” benefits – that is, free stuff.  

“This is essentially what the ‘Peronists’ did. And they won election after election, promising more and more programs, for the next 7 decades. More and more unproductive jobs. More and more welfare.  

“But wait…where to get the money? Tax the rich!  

“Robustiano was the perfect enemy. Immensely wealthy. Old-fashioned. A bit of a fuddy-duddy. And he represented the Old Order…people who had gotten rich before the government began actively managing the economy.    

“He was accused of exploiting his workers (who previously had no jobs, no education, no incomes and no health care.) His gentleman’s club in Salta was confiscated by the new, leftist government. And the political situation became so tense, he had to flee to Uruguay.

“From then on, it was one disaster after another. 

“Boom, bust, boom again… Inflation, crash, default, coup d’etat, military takeover, war, new currency, new government, inflation again.

“Whee! What a ride!

“After 7 decades, Argentines have learned how to survive,” we concluded, “but not to prosper.” 

Our advice: invest in wheelbarrows.       

Regards,

Bill Bonner

Joel’s Note: Do you smell the blood in the water, dear reader? The insiders are getting jittery... and looking for someone to push overboard. Yellen? Powell? Headlines point to the latter…

So far, Mr. Powell has held the line… promising to do “what it takes” to rein in the very inflation his policies likely caused. “The road ahead will be bumpy,” he mumbled during his last public appearance, as opportunistic politicos reached for the oars to whack his generous forehead. “But we will stay the course.”

The honchos in congress, meanwhile, who gleefully called for trillions of dollars in free money handouts during the Great Covid Hysteria, need someone to feed to the piranhas below.

“The Fed chair has failed at both his jobs,” blared Elizabeth Warren on NBC’s Meet the Press on Sunday. “I don’t think he should be chairman of the Federal Reserve. I have said it as publicly as I know how to say it. I’ve said it to everyone.”

Senator Warren, the great embarrassment of the Cherokee Nation, is not alone in calling for Mr. Powell’s job. A hack piece truly worthy of The New Republic argues that, while “Powell was taming inflation without harming the U.S. economy” all was fine… but since the SVB collapse, “it’s fair to ask whether Biden should fire him.”

Sheesh… tough crowd!

“Until something breaks” has been the refrain here in these pages. That is, we’ve long held that the Fed will continue its gallant fight… until the going gets tough and the landscape materially changes.

Here’s Bill Bonner, with some characteristically prescient remarks from waaay back in January 9, when bank runs were but a twinkle in Mr. Powell’s eye.

“Will [The Fed] ‘pivot’ this year?” wondered Bill.  

The Fed says “no pivot”…un un…no way, Jose… Fed minutes:

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”

Do you believe that, dear reader? We do. But we also believe that the participants can change their minds. And if we get a real crisis – a major bankruptcy…a run on a bank…a crash in the stock market…a hotter war…a new virus… any excuse at all…then Fed governors’ foreheads will grow damp…their knees will tremble…their backs will bend – and they will fold like lawn chairs.

For its part, the market is pricing in a 25-basis point hike after today’s meeting. Gold is bracing for a breakout, just shy of $2,000/oz… Bitcoin is skyrocketing toward $30,000… bums are on the edge of their seats…

Has “something broken” yet? We’ll soon see…