Can Australia escape Argentina’s fiscal doom?

Last night, I had too many drinks with an old friend at the Michael Collins Irish pub in Barcelona. He works with several libertarian media personalities, helping them with their online and social media presence. I asked about Argentina’s new firebrand president Javier Milei. It turns out they’re old friends and chat regularly on WhatsApp!

I’ve now met five people who knew Milei before he became president. One of my contacts is even responsible for the sudden political twist in his career.

All five have confirmed to me that Milei is the real deal. And that he just might succeed in rescuing Argentina from decades of inflationary fiscal chaos.

To be honest, I was sceptical when Milei was elected. It’s like hearing Santa Claus showed up at someone’s Christmas party. You don’t quite know what to think of the person telling you the story.

But is it time to believe the world has found a free market hero? A symbolic success story that changes the world, like Thatcher and Reagan? Could he inspire similar radical changes elsewhere? Here in Australia, perhaps?

Let’s hope not. Thatcher and Reagan’s legacy became a bit twisted, if you take a closer look at what they actually did.

What is clear is how desperately parts of the world need their own Milei. With very few exceptions. Australia might just be one of them. More on that in a moment.

So far, things are going very well in Argentina. Milei is coming under criticism after doing something truly radical. He actually implemented the very policies he was elected for!

Shocking, I know.

You can sense the media’s complete confusion. How are they going to criticise the guy? He’s only doing what voters asked him to…

Part of Milei’s promise was to cut government spending. And not in the way Western politicians do. He isn’t lowering the pace of spending increases in 10 years’ time, or some other obfuscation. He’s cutting outright, chainsaw style.

This is crucial because it’s government spending that actually matters to the prosperity of a country…or lack of it. Spending is what went wrong in Argentina. And it’s what’s going wrong in Europe and the US today.

Sure, politicians will wail about a lack of taxes when their deficits blow out. And they claim raising taxes is always the solution to a deficit. On the rare occasion it’s even acknowledged, that is. Actually, cutting spending isn’t even an option.

But all government spending must be financed somehow. That’s why we have to tax in the first place. So, spending is by definition the key metric. The one that politicians should be focusing on. Taxes are just the consequences.

There is another option — inflation. Why tax people when you can just create the money which government spends?

Well, the last three years exposed why. Inflation makes politicians very unpopular.

And if people ever realise inflation is a deliberate policy by government to devalue its debt, they’ll begin to get outright angry.

For now, few voters are aware that all economists agree on one thing: inflation is taxation without legislation.

What about borrowing the money to fund government spending? Well, borrowing is just a deferral of either more taxes or more inflation in the future. Complaining about taxes and inflation is just a consequence of the spending that already happened.

In Argentina, the government chose inflation to fund its deficits. Most of the Western world uses high taxes. Except for a brief stint in 2021-2023.

As I write this, the UK budget is being “handed down” — an ironic choice of words given it’s all about raising taxes. People are in an absolute furore over all the tax increases.

But it hardly matters how much you tax. Government spending is obviously the real issue.

Just take a look at these charts from the UK’s Office for Budget Responsibility and it’s US’ Heritage Foundation. They show spending spiralling out of control while taxes languish in the UK and US, long term. No amount of taxation can cover the spending. And the amount of inflation it’d take is terrifying.

Cutting spending radically is the only way to bring this back under control. The only question is, how bad do things have to get first. As bad as in Argentina?

By the way, I’ve been researching how demographics are deteriorating far more rapidly than official projections predict. Which implies long-term fiscal projections should be looking a lot worse too. But things are bad enough without that consideration.

The Lucky Country, again?

All this is looking rather miserable. Especially for those counting on government benefits in their retirement. But here’s the good news: Australia might not need to learn these lessons the hard way. We may never reach the taxation nightmare of Europe, nor the inflationary hell of Argentina.

Thanks to our comparatively low debt level, Europe and the US will experience some sort of fiscal crisis long before Australia is at risk. That means we’ll have a clear example of what happens when you run persistent fiscal deficits. Voters Down Under might wake up before the consequences show up on their doorstep.

While the US and Europe serve as canaries in the coal mine, Javier Milei’s Argentina’ could provide the shining example to follow. Proof of a viable alternative that we decide to emulate to stabilise our own country before things get dire rather than after.

To be honest, I’m hedging my own family’s bets between living in Australia and Japan for precisely these reasons.

Japan’s debt levels are the worst in the world. The country risks becoming the sort of economic basket case that is very pleasant to live in, if you have a foreign income. A bit like Germany was for Americans during hyperinflation. The parties were legendary because a US dollar could buy anything.

And what better foreign income than from a country that has a chance of escaping the fiscal doom of Europe and the US altogether?

While I’m optimistic about Australia’s economic and political stability, things are more worrying for investors, even Down Under. We can’t expect our asset prices to withstand the struggles Europe and the US face.

Although, Argentina’s markets are doing quite well…

I believe one of the best ways to play the coming fiscal chaos in Europe and the US, wherever you might live, is a combination of gold and cryptocurrencies. They are the opt out function from the chaos. Find out more here.

Regards,

Nick Hubble,
Editor, Strategic Intelligence Australia