By Ron Holland
December 22, 2010
There are many ominous parallels between Argentina and the U.S. and the question often asked is can America avoid the economic consequences that Argentina suffered from a fascist government combined with government debt and currency collapse? I believe the answer is likely NO!
“There are a lot of ways to ruin an economy. Argentina has experimented with most of them. It has devalued its currency, and revalued it. It has pegged it, and then knocked down the peg. It has regulated, controlled, inspected, taxed and confiscated. Following the 2001 crisis, earnings fell by 30% – with half the nation slipping below the official poverty line. What is remarkable is that the Argentine economy has survived at all.” ~ Bill Bonner
Down Argentine Way was the 1940 film that made a star of Betty Grable, who played an attractive young woman on vacation who fell in love with a wealthy racehorse owner. The storyline actually reflected a common occurrence during the 25 years prior to the film debut.
In the early 20th century, “as rich as an Argentine” was a common expression, often used in connection with poor British aristocrats attempting to marry off their daughters to wealthy Argentinians. Argentina was indeed a wealthy nation; for example, we all know about Harrods Department Store in London. Few realize that during this period of Argentine prosperity, Harrods also ran a store in Buenos Aires.
Buenos Aires is still a beautiful and interesting city. If you visit, you’ll learn that despite all the doom and gloom we hear concerning Washington debt and the dwindling dollar, there is life after debt repudiation and currency collapse. The same thing has been proven in Russia, Germany and other nations numerous times. It has even happened twice in the United States.
“May you live in interesting times” ~ A Chinese Curse
Since 2008, we’ve certainly lived in interesting times both in politics and in the markets. The US has tried standard Keynesian economic solutions with exploding deficits and trillions in government debt to solve the problems of mania, bubble and bust in real estate and the economy.
“Insanity is doing the same thing over and over again and expecting different results.” ~ Albert Einstein
If you haven’t noticed, the world is full of people who appear normal but by Einstein’s standard are insane. The problem for us is that many of them are politicians and government “leaders.”
Let’s Take A Quick Look At Some Insanity Closer To Home
Do you really think voting Democrat or Republican is going to give you less government or more liberty?
Will Americans ever vote in overwhelming numbers for a third-party candidate in a national election?
If you continue to lose money with a particular investment advisor, why do you count on the performance improving next year?
The US has been accumulating trillions in national debt since World War Two. Why would we think this will stop with the latest GOP victory in the House of Representatives or with the success of a few Tea Party candidates?
I believe America will continue down the same road toward less liberty and more debt until we reach the end of the road. There is no political solution using our special elite interests controlled two party system. We will trash the dollar and keep building up our national debt until the world stops buying our Treasury obligations.
In recent weeks, China, Brazil, Germany and France have warned the US to get its dollar and debt problems in order, to no avail. This will continue for quite a while, but just as our current foreign policies are opposed by most of the world, so our financial policies are now being questioned by world leaders and economists. One day the world will have had enough of our dollars and will tire of financing our debt. The dollar will cease to be the world’s reserve currency.
There is no way to know when this will happen; it could be next year or a decade from now. My view is before the dollar free-falls and investors flee Treasury debt the Washington politicians will be reaching hard for your wealth, to buy more time for their Madoff-style Ponzi schemes. We will see this begin with the 2011 congress and do not let your guard down because a few principled GOP candidates were elected because most are no better than the Democrats.
There is nothing unique about what we are going through as a nation; it has happened many times throughout history, to other countries. Here in the U.S. we have had so much prosperity that we forget that wealth confiscation and economic collapse are more the norm than the exception.
Look Back At Argentina in 1913
It was an important year.
While the British Empire was first in economic size, only the United States challenged Argentina for the position of the world’s second-most powerful economy. The nation was blessed with abundant agriculture, millions of acres of farmland, navigable rivers and an accessible port system.
The country’s level of industrialization was substantially higher than in many European countries and railroads, automobiles and telephones were commonplace. Argentina was one of the ten richest nations in the world, and the rate of economic growth from 1870 to 1913 far exceeded that of the United States or Germany.
In 1913 Argentina’s GDP reached 72% of the US level. But by 1998 it had fallen to 34%. What went wrong?
Politics and corruption, inflation and currency depreciation were in double digits from 1945 to 1952, from 1956 to 1968 and from 1970 to 1974 And they were in triple digits and then quadruple digits from 1975 to 1990. In 1989, the inflation rate peaked at 5,000%! In one month the Argentine currency fell 64% against the dollar. Finally, on April 28, 1989, the printing presses were shut down because the government ran out of paper for banknotes and the printers went on strike.
Argentina’s government defaulted on its debt twice between 1870 and 1914 and again in 1982, 1989, 2002 and 2004 (to foreign creditors). It led the world in selling IOUs to foreign investors, just as America does today.
On December 23, 2001, after GDP had declined 12% for the year, the government announced a moratorium on all foreign debt – $81 billion worth. It was the largest default in history. The 500,000 foreign creditors finally agreed to accept 35 cents on the dollar. China and other creditors of the US government should be looking at what happened in Argentina very closely.
More Ominous Parallels Between Argentina Then & America Today
In 1916 a new president was elected in Argentina; he had a foreign sounding name I can’t hope to pronounce it but it is spelled Juan Hipólitodel Sagrado Corazón de Jesús Irigoyen Alem. He led a party called the Radicals, and their slogan was “fundamental change,” with an appeal to the lower middle class. Doesn’t this platform and campaign rhetoric sound familiar? “Change we can believe in” with a different phrasing.
He advocated a mandatory pension program, like the mandatory or “automatic” IRA” being pushed by the Democrats and some Republicans (including deep thinkers at the supposedly conservative Heritage Foundation).
He wanted mandatory health insurance and supported construction of low-income housing to stimulate the economy. Basically, like the American bailouts of 2008, in Argentina the state assumed control of a vast swath of the country’s economy and began assessing new payroll taxes to fund its efforts.
Does This Remind You Of the United States Today?
With an increasing flow of funds into these entitlement programs, the Argentine government’s payouts quickly became overly generous. Soon the government outlays surpassed the value of the forced taxpayer contributions. Put simply, it quickly became underfunded, much like our Social Security and Medicare programs are today.
The death knell for the Argentine economy, however, came with the election of Juan Peron. He preached a fascist and corporatist philosophy much like Mussolini in Italy. He and his charismatic wife, Evita, first targeted their populist rhetoric at the nation’s rich. But as time went on the targeted group expanded to include most of the propertied middle class, who also became an enemy to be defeated and looted. Under Peron, the size of government bureaucracies exploded through massive programs of social spending and by encouraging the growth of labor unions.
Again, does this sound familiar? Remember that the automobile industry bailout was directed far more toward supporting unions and their underfunded retirement and health plans than helping GM or Chrysler. It was the same on the GOP side when Washington bailed out much of the corrupt and failing big players in the American and foreign banking systems. Trillions for Wall Street and zero for main street.
In Argentina, high taxes and economic mismanagement continued to take their toll, even after Peron had been driven from office. His socialist/populist rhetoric and ignorance of free-market economics remained on the political scene as Argentina’s federal government continued to spend far beyond its means, just like America today.
Hyperinflation exploded in 1989, which is usually the final stage of collapse brought on by protectionist policies, inflated salaries and bureaucratic regulation of the economy. The Argentinean government’s practice of printing money to pay its debts crushed the economy when inflation reached heights reminiscent of the Weimar Republic. Food riots were rampant; stores were looted; the country descended into chaos.
By 1994, Argentina’s public pensions – the equivalent of Social Security – had imploded. The payroll tax had increased from 5% to 26%, but it wasn’t enough. So Argentina implemented a value-added tax (VAT), new income taxes and a personal tax on wealth. These crushed the private sector. I fear we will soon see a similar increase in Social Security payroll taxes over the next decade in the US.
A government-controlled “privatization” effort to rescue seniors’ pensions was attempted. But by 2001 even those funds had been raided by the government, the monies replaced with defaulted Argentine government bonds. (You can read more about how this could happen in the United States in my “Get Ready for the Obama Retirement Trap.”)
By 2002, the Argentine government’s fiscal irresponsibility had produced a national economic crisis as severe as America’s Great Depression.
Our problems promise to produce worse. The dollar is still the world’s reserve currency, and our fall will resound in a way that Argentina’s did not. Germany, China, France and other nations have warned us that there is limited tolerance for continued U.S. money printing. The jury is still out; but if the printing continues, America is not going to like the verdict.
America Runs the Risk of Being Blamed for the Greatest Depression
There are, as we have seen, parallels between Argentina and the road the US has taken. Following the 2008 meltdown, the entire world is in a tough situation. The US, predictably, has decided on currency depreciation to “solve” its problems. Germany, China and Russia express their displeasure.
The United States, doubtless, will be blamed for the coming meltdown. Other countries fear quite rightly what they have seen before, a tidal wave of repudiation and currency depreciation that could dramatically change the world. They know the US will postpone the inevitable – but sooner or later the cumulative impact of profligacy, waste and corruption will become unstoppable. The US economy will likely implode, taking the current world order with it.
We are living in the midst of a paradigm shift; the Internet is having an impact on politics, information and financial markets. Such a transformation has happened before, with Gutenberg’s printing press in the 1500s, which destroyed the existing power structure and left Europe in turmoil. The invention of the press did to the religion, to the state and to the economy of the 16th century what the Internet is doing to Western society today.
This is an exciting transition period, when every established institution, from the FED to the two-party political system to Wall Street to our banking system, is being questioned and challenged by the alternative press of which we are part. Truth and change may be good in the long run, but in the near term they stress the system much like national bankruptcy and debt repudiation did in Argentina.
America Is the New Argentina!
“God grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to always tell the difference.” ~ Kurt Vonnegut, Slaughterhouse-Five
Right now we can’t change the direction our nation is heading, but with courage we can still take action now to defend our wealth while we work toward political change. The economic lesson to be learned from the Argentina experience is wealth and resources can be destroyed by big government and financial mismanagement. The United States is following a path similar to Argentina’s. Our political and financial leaders are doing the same thing that those in Argentina did and somehow expecting the outcome to be different this time.
The results will not be any different. Protect your wealth, and help us warn and educate the public through your support of the foundations like the Mises Institute and the Foundation for the Advancement of Free-Market Thinking.
This is Part 1, of a speech given in November 2010 on a FreedomFest financial cruise in Argentina. Ron Holland doesn’t want our nation to go Down Argentine Way but urges readers to prepare for the worst, which will make Argentina seem like a holiday picnic in comparison.