Two to Tango

What happens when income and expenses fall out of step? Lessons from Argentina...

(Source: Getty Images)

Bill Bonner, reckoning today from Poitou, France...

It’s a new week. So, let’s turn to the New World. Yes, it’s time to check in on one of the world’s daffiest, most mismanaged and most entertaining economies – Argentina.

Today, we’ll visit the land of the pampas, the tango… Piazzolla and Gardel… gauchos… llamas… pickpockets… and slums…

…the vast country at the foot of South America, where 45 million people live, a third of them in and around the capital city, Buenos Aires.

We’ve been visiting Argentina for 25 years… invested in property there 15 years ago…and typically spend two or three months a year there, mostly trying to keep the locals from stealing our property.

During that quarter of a century, the Argentine currency – the peso – has gone from 1 to 1 with the dollar… to 3 to 1… when we bought our property… to 150 to 1 now. (At the parallel ‘blue’ rate – which is to say, the ‘unofficial’ or black market – the rate is almost twice that; 270 – 1.)

In 1910, Argentina was the 7th richest country in the world. Now, its GDP per person puts it at #65, below Kazakhstan, Turkey and Guyana.

Whee!

But not everyone is enjoying the ride. Associated Press is on the story:

BUENOS AIRES, Argentina (AP) — A man tried to kill Argentina's politically powerful Vice President Cristina Fernández outside her home, but the handgun misfired, the country's president said.

The man was quickly overpowered by her security officers in the incident Thursday night, officials said.

President Alberto Fernández, who is not related to the vice president, a former president herself, said the pistol did not discharge when the man tried to fire it.

A close call!

Broken Promises

Many think the attempted murder was really a stunt to bring attention and sympathy to Ms. Fernandez. You might wonder, for example, why a fellow who really intended to kill the VP of a country wouldn’t make sure he had a working pistol in his hand.

But what sadness it would have brought if the man had actually killed her. And what joy too!

Ms. Fernandez is one of the most corrupt figures in Argentine history… which offers some pretty heavy competition. She is a ‘Peronist,’ a follower of Juan Peron, who was no slouch at corruption either. He was also a master politician, a skill he learned by observing Benito Mussolini in the 1930s.

Immediately after winning the Casa Rosada (the Rose House, Argentina’s answer to the White House) Peron headed down the wrong track, developing a ‘Five Year Plan” that put the government in charge of the economy and doomed the nation to slow growth and fast politics. Since then, it has been a long slide into on-again, off-again recession, poverty and inflation. By the early 1990s, consumer prices in Argentina were rising at a rate over 20,000%. 

Inflation was brought under control by Carlos Menem, when he pegged the Argentine peso to the dollar. But it didn’t last. Menem broke the peg in 2002. Since then, inflation has increased amid episodic and bizarre financial crises.  

A friend of ours, for example, a lawyer in New York, was once hired by the Argentine government to try to get back an Argentine navy ship in 2012. It had been tracked as it crossed the Atlantic then, by court order, was seized when it went into port in Ghana. It was the first time in history that a naval vessel was captured by a hedge fund.  
 

Only Possible Outcome

Today, the inflation rate is supposed to be around 70%, with more than a third of the country living in poverty. And the inflation rate is rising. Argentines keep their money in dollar deposits – if they can. But now, the government is getting desperate. The ‘treasury secretary’ gave up trying to match income with outgo; he resigned suddenly in July. The ‘treasury secretary’ gave up trying to match income with outgo; he resigned suddenly in July. But what he was doing was idiotic. Mises.Org explains:

After the pandemic was over, instead of returning toward a path of fiscal balance and debt reduction, Guzmán accelerated the path toward high deficits, which can only be sustained by money printing… As a result, public spending currently is increasing more rapidly than revenue, and it is uncertain whether the country will meet the deficit target that was agreed with the IMF only last year in order to avoid defaulting on its debt.

[…]

But if government policies on public spending stay the same, they will drive Argentina’s economy toward hyperinflation, which is the only possible outcome for a country with perpetually high deficits and no access to debt markets.

The Argentines have seen this show before. Bloomberg:

Argentines Withdraw $1 Billion From Bank Accounts During Turmoil

Savers started pulling out their dollars from bank accounts at a fast pace when former Economy Minister Martin Guzman resigned on July 2, plunging the government deeper into crisis.  

Argentina’s third economy minister since then, Sergio Massa, enjoyed a brief market rally upon arrival before deposits declined again. 

Deposits offer an almost real-time pulse of Argentines’ economic expectations. 

In late 2001 during one of the country’s worst crisis, the government banned large ATM withdrawals, helping to fuel social chaos.

Hereditary Kleptocracy

But this weekend, crowds gathered outside Christina Fernandez de Kirchner’s apartment. They claimed they were there to “defend democracy.” Why they wanted to defend the system that has ruined the country was not explained. Besides, Argentina functions more like a hereditary kleptocracy. Like ‘Isabelita’ Peron before her, Ms. Fernandez was elected to take the place of her dead husband.

“Why do you stay there,” people ask?

Maybe we’ll have a better answer some day. But for now, we can only say that we like the food, the wine, the challenge, the people and the learning experience. Yes, we’ve had some financial losses, but at least we’ve learned to ride a horse, and yell at cattle in Spanish.

 “Aiiihuuurrup! Vamonos!”

Regards,

Bill Bonner

Joel’s Note: “Is the problem cultural, we often ask ourselves, or systemic? Perhaps it’s both?”

Yesterday morning your weekend editor attended a private conference in the Hotel Club Francés, down in the Recoleta neighborhood. Seated around the table were perhaps thirty men and women, all with the kinds of surnames you see on street signs and bronze plaques around the city. The speaker, himself a dapper, silver-haired gentleman in his 70s, was ruminating on his nation’s sordid political history.

“I’ve heard it said that you could drop the population of Switzerland into Paraguay and, within a few short years, the Swiss will have turned the place into a safe and prosperous place to live. I don’t know that could be said of our sorry nation.”

A collective grimace rumbled around the table.

“We have the natural resources,” he continued, “Oil, water, fertile plains for our cattle, our agriculture. What’s lacking is character. I wonder, even if we had a better system in place, with fairer rules and less corruption, we wouldn’t find some way to spoil it after all.”

Following a morning spent debating politics and economics, the group gathered for lunch in the grand old building’s atrium. There was lamb from Patagonia… wine from Mendoza… espresso and little cakes filled with dulce de leche for desert. Porteños are an amiable bunch. They welcome foreigners with open arms, even if they are confused by those of us who choose, voluntarily, to live in their midst.

“So you could have stayed in Australia, where everything… works?” inquired one attendee.

“And your wife was born in Norway? And you’ve family in Texas?” echoed another.

“And you’re okay, mentally speaking? Not crazy or anything?” joked a third, shaking her head just the same.

Fair questions. Why would anyone choose to live in a basket case economy like Argentina, with 90% projected inflation by year’s end and a seventy-year history of rolling political disaster?

We addressed some of these points in Part I of an essay we published a few weeks back. (See here: Journey to the End of the Earth.) This Sunday, in Part II, we’ll take a look at some of the more practical aspects of life here in the Paris of the South… like access to private healthcare, cost of living, education options, safety/crime, lifestyle, etc. Stay tuned…