One hundred years ago, Argentina, among the world’s richest countries, is now moving towards hyperinflation, and the country has been hit by economic chaos, writes Manuel Garcia Gojon, a doctoral student at George Mason University and a member of the Mises Institute.
The Argentine peso has lost half its value in one year. Both the official and parallel exchange rate (the rate that is not fixed and is determined by the market) with the dollar have doubled in one year. Consumer prices have doubled in one year. The amount of Argentine pesos has doubled in one year. The rate at which these variables are increasing has also doubled. The expectation that everything will double again in half a year is rather conservative.
At the beginning of the 20th century, Argentina was one of the richest countries in the world. Over the past century, the central bank has funded government budget deficits and spending in every way. Argentina has practiced modern money theory even before the term was introduced. Today, more than half of the people in Argentina live in poverty considering international standards. The incomes of the richest quarter of the population are comparable to the incomes of the poorest quarter in developed countries.
Argentina is doing everything that is not recommended
Argentina’s economic policy consists of everything that even mainstream economic policy textbooks do not recommend. There is aggressive and indiscriminate protectionism. The labor market is over regulated to the point that hiring workers is excessively expensive. In addition, there are price ceilings and widespread price controls. Everyone is very well aware of the problem, but the current government has decided to stay the course and use short-term measures to patch holes. All this to prevent the ship from sinking before the elections at the end of this year.
At the same time, markets are breaking down, and people are starting to panic. Some companies have decided to reduce the amount of goods available and build up reserves. After receiving their salaries, people buy long-life food products. This indicates that demand for Argentine pesos is falling very quickly. This currency has no anchor or bottom.
This difficult situation may also have one advantage – it can trigger large changes throughout the region. Many people in Argentina have been expecting this and are prepared for it. They have invested their savings in the US dollar and in real assets. Some of these savings are in the banking system, but there is a general mistrust in banking. Some economists speculate that billions of dollars have been stashed under mattresses. The currency exchange has de facto already begun. Most durable goods, such as houses and cars, are already priced in dollars. Transactions are also conducted in dollars. This trend is likely to continue and extend into employment contracts and supply chain transactions, if possible.
The most popular presidential candidate wants major reforms
Argentinian economist and presidential candidate Javier Milei was fairly unknown in the country until recently. He is now leading in the polls – 27 percent of voters are for him. He is followed by the current Mayor of Buenos Aires, Rodriguez Larreta, whose support is at 22 percent.
Milei has proposed major reforms aimed at getting the economy back on its feet. His main promise is to get rid of the central bank, provide a legal system for the introduction of the dollar, and reduce government spending by 15-20 percent. To do this, he plans to abandon infrastructure expenses, but initially will not cut social welfare. He also wants to relax labor market regulations, simplify the tax system, and remove tariffs and restrictions on international trade.
Since Milei wants to remove Argentine pesos from circulation, he has come under intense fire from political opponents and experts close to power. It is believed that his plan is not feasible.
The number of dollars needed to remove pesos from circulation and repurchase bonds depends on the exchange rate. At the current rate, 30-35 billion dollars are needed. The face value of Argentine bonds held by the central bank is 70 billion dollars, but their actual market value on Wall Street is only a quarter of that. If the government stops excessive spending, the market price may reach half of the face value, as that’s the level at which the bonds of bankrupt Sri Lanka are trading.
The use of power for personal interests is normal in Argentina
Although Larreta is not from the same party as the current administration, he supports continuing the same economic course. During the coronavirus pandemic, he supported and legalised strict restrictions similar to those used by the states of California and New York. He has been unable to control crime, and he has used the power apparatus of Buenos Aires for his personal interests. Such behaviour is the norm for Argentine politicians. Social assistance recipients have, in the meantime, blocked streets in anticipation of larger funds.
Larreta represents experienced opposition, but he does not have strong beliefs or convictions. He is guided by target groups, and his dialogue consists of phrases that sound good but lack any deeper meaning. For months, he has been talking about a so-called comprehensive plan with which he wants to solve current problems. However, he has not provided any specific details.
Larreta has called himself a Keynesian and supported price control. He is strongly opposed to the reforms proposed by Milei. He wants to be a “responsible” choice for voters. Incidentally, the reforms are also contrary to his personal interests.
A comment by Tavex’s analysts:
People have a tendency to think that things are permanent – we believe that our wealthy Western welfare society is lasting and we will continue to be wealthier than the rest of the world in the future. A hundred years ago, Argentina was one of the wealthiest countries in the world. They were richer than Germany and France, and their standard of living was twice as high as Spain’s. Their GDP per capita was almost on par with Canada.
A century of irresponsible economic and monetary policy has relegated Argentina to the ranks of poor countries by Western standards. The country has gone bankrupt as many as seven times since 1930. They are constantly hit by rapid waves of inflation, which culminate in the impoverishment of the people. This should be an alarm bell for our Western politicians that prosperity is not a given.
The example of Argentina sheds light on what happens when we continue with endless spending, budget deficits, and expansive monetary policy. Recently, price control has been added to the formula, which is a very dangerous tendency and, in the event of deepening problems, can spread beyond the energy sector to other areas.