A Sorry History of Statism and Inflationism

Early in the 20^thcentury, Argentina was fully developed by the standards of the time, and the 5^thrichest nation on earth in terms of per capita GDP. Then several  generations of Argentine politicians (which included, off and on, the armed forces) proceeded to squander it all.

The main reason for Argentina's downfall from an economic point of view is that its politicians first thought they had to reverse the gains made during the era of liberalism as thoroughly as possible. They did so by nationalizing vast swathes of industry and introducing socialist as well as fascist/militarist economic policies in alternating fashion. Then, whenever the predictable economic failure could no longer be denied, they invariably turned to the printing press to bail them out.

This mixture of statism and inflationism managed to squander so much capital with such unwavering regularity that Argentina eventually became the basket case it remains to this day. Have its politicians learned anything at all from this? Of course not.  The main claim to fame of the country's current minister of economics Axel Kicillof is that he “reinterpreted Keynes from a Marxian perspective”. He was incidentally one of the principal architects of the expropriation of YPF. Just what Argentina needs like a hole in the head in other words, yet another statism-infested high IQ moron. Argentina is so rich in natural resources that it should by rights continue to be a highly successful place, but as so often, it is the political and economic policy backdrop that is the decisive variable. All that its natural riches have done for Argentina was to avert its complete collapse, while allowing its ruling classes to go on squandering its resources.

The root cause of Argentina's decline from being one of the richest nations in the world to becoming practically a third world poorhouse: incessant inflation coupled with statist economic policies - click to enlarge.

Argentina's per capita GDP as a percentage of US per capita GDP over time. The most recent downturn is not yet shown on this chart – click to enlarge.

The current government of president Fernandez-Kirchner pursues policies that are very similar to those that have so successfully ruined the country over the past century. It continually inflates the money supply, pursues economic autarky, expropriates foreign investors, has introduced a harsh regime of capital controls and actively persecutes anyone who dares speak up about the lies it is promoting with respect to economic statistics (chiefly the speed at which the currency loses its domestic purchasing power, which is about 3 times faster than the official data admit).

13 years after the government's default, there has still been no solution to its perennial fight against bondholders who insist getting paid. However, the government has just been dealt a serious blow.

US Supreme Court Decides in Favor of 'Hold-Outs'

As Reuters reports, the Argentinian government's ongoing attempts to stiff its creditors may have run into a serious snag:

“The U.S. Supreme Court declined on Monday to hear Argentina’s appeal over its battle with hedge funds that refused to take part in its debt restructurings, an unexpected move that risks toppling Latin America's No 3 economy into a new default.

The high court left intact lower court rulings that ordered Argentina to pay $1.33 billion to the so-called holdouts who refused 2005 and 2010 debt swaps in the wake of its catastrophic 2001-02 default on $100 billion. This could open the door to claims from other holdouts worth as much as $15 billion, a hefty sum for a slowing economy struggling with rapidly dwindling foreign reserves.

The news triggered a nosedive in Argentine stocks and bonds after investors expected the court to delay its decision and give Argentina time to negotiate with holdouts or restructure its exchange bonds outside of New York legislation. The impact on global markets was muted given the country's economic isolation since its default.

Argentina has previously refused to pay up. It argues it does not have the funds and cannot give holdouts preferential treatment over exchange bondholders after many of them bought the debt at a massive discount and are claiming payback in full. If it sticks to that position, U.S. District Judge Thomas Griesa could prevent full payment to exchange bondholders even though the country is able and willing to pay them.

This could result in a default by June 30, when payments are due on discount bonds governed by New York, further setting back Argentina's return to international capital markets.

"It's a very damaging scenario for Argentina," said Marco Lavagna at Ecolatina consultancy, noting that how lower courts implemented their rulings was key. "Maybe something could open up there and allow for negotiation. Argentina hinted last month it might consider negotiating with holdouts but could not do so until December 31 of this year when a clause in its debt swaps prohibiting it from offering holdouts better terms expires. Whether Argentina can keep stalling investors and U.S. courts until that date remains to be seen.”

That is however not all – in another decision favoring creditors, the court allowed them to go after Argentinian government assets wherever they may find them:

“In a double blow to Argentina on Monday, the U.S. Supreme Court also ruled that creditors can seek information about Argentina's non-U.S. assets in a case about bank subpoenas that is part of the country's decade-long litigation with holdouts.

The question was whether NML could enforce subpoenas against Bank of America and Banco de la Nacion Argentina. The court's ruling may nonetheless have limited impact in part because of Argentina's limited assets around the world.

NML has in the past pursued Argentine assets aggressively in its fight to get full repayment for its bonds, in 2012 even seizing an Argentine navy ship in Ghana.

We have obviously little sympathy for the current Argentine ruling kleptocracy, but government debt is odious in principle. If bondholders manage to enforce their claims, Argentina's citizens will pay the price. Some might argue that they should have elected different governments, and thus have only themselves to blame. However, similar to the situation in many other countries, voters usually have the choice between Tweedle-dee and Tweedle-dum, something Argentina's history from the beginning of the 20^th century quite starkly illustrates.

Argentina's markets were roiled by the news, but due to the country's enormous inflation rates and the fact that capital controls have cut off any legitimate avenues for citizens to preserve their wealth against the disastrous policies of the government, real estate and stock market prices have soared over the past few years, reflecting the currency's ongoing demise.

Thus the almost 8% one-day decline in the Merval index on the news actually amounted to a mere flesh wound, even though it looks impressive on a daily chart

As mini crashes go, the decline looked impressive, but if one looks at a longer term chart, one can see it actually means little – click to enlarge.

Here is a weekly chart showing the bubble-like characteristics the market has developed:

The Merval index over the longer term is putting the recent decline into perspective. As so often when an economy collapses amid hyper-inflation, many of its economic 'data' actually look superficially 'good' and stock prices soar, even while scarce capital is consumed and impoverishment inevitably takes hold underneath the glitter – click to enlarge.

To see how little this stock market rally actually means, a quick glance at the exchange rate of Argentina's peso is all that is required. Below we show a long term chart of the 'official' dollar-peso rate, as well as the black market rate, which is obviously a far better reflection of the currency's value. Stock market and real estate investors in Argentina presumably care more about the latter.

The ongoing collapse of the latest incarnation of Argentine funny money at the official exchange rate – click to enlarge.

The official exchange rate compared to the black market rate (blue line). Not as extreme as in Venezuela, but bad enough – click to enlarge..

Conclusion:

One good thing may come from the victory of the 'hold-outs': the government will find it difficult to rack up more debt. Some people quoted by Reuters bemoan that the situation will delay Argentina's return to international capital markets, but Argentina's citizens should probably be relieved to hear it. On the other hand, it may well mean that even more money printing is in store, so we cannot be entirely certain whether the news is actually good or bad in that sense.

One thing is certain though: the economic policies pursued in the country over the past century have consistently failed. No end to this failure is in sight as of yet. The country doesn't need people specializing in Keynes and Marx, it needs a dose of Mises and Hayek.

charts by wikipedia, investing.com, dolarblu.net