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 to 1.)
In 1910, Argentina was the seventh richest country in the world. Now, its GDP per person puts it at #65, below Kazakhstan, Turkey, and Guyana.
But not everyone is enjoying the ride. Associated Press is on the story:
‘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!
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 of more than 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. But what he was doing was idiotic.
‘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.’
But this weekend, crowds gathered outside Cristina 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.
For The Daily Reckoning Australia