As unlikely as it seems, we were once called upon to advise a foreign government.
Out on the vast plains of Eastern Europe lies a miserable nation called Belarus. After the break-up of the Soviet Union, the party hacks who ran the place saw the need to do things differently. But that is where their ideas began to piddle out. All they could think of was to bring in "experts" from the West to tell them how to "reform" their economy. It is a measure of the sloppiness of their approach that your editor was rounded up to offer his opinion. It is a measure of your editor’s persuasiveness that, to this day, Belarus remains the most forlorn and backward nation in Eastern Europe.
But today’s essay is not about Belarus, nor Eastern Europe. It is about a place in which we have recently developed a keen interest…not the steppe, but the pampas. Investing in any country is a gamble. Not only have you no idea what cards might turn up, you also have a sneaking suspicion that the dealer may have one or two up his sleeve. But the burden of this little reflection is that Argentina may be worth a bet.
We only mention our Belarus experience because it illuminated us. We realized that we might as well be giving culinary advice to cannibals.
"Well…you would probably rather have some canard a l’orange," we might suggest. "Pity you don’t have any canard…or any oranges."
An economy is a natural thing. Each one has to follow its own course. All public officials can do, generally, is make sure private property is protected by the courts, and otherwise get out of the way — eliminating all the many restrictions, taxes, permits, prohibitions, pay-offs, and emoluments that inhibit commerce. This, of course, is the last thing public officials want to do, and it could only have been done in Belarus over the dead bodies of the people we were advising. Which would have been fine with us, but we had no means of laying them out or preventing their friends from returning the favor. So, the whole trip was a preposterous farce.
Before WWII, Argentina was one of the world’s richest countries. "As rich as an Argentine," was a common expression in England. Between the wars, the English gentry, down on their luck but up on their manners, hoped to marry off its daughters to prosperous Argentine planters. Some did.
But then, Argentina slipped into a puddle of socialist do-goodism from which it never was able to climb out. Economic growth was spotty. Inflation was chronic. Rules were imposed to prevent this…stop that…and inhibit something else. Labor restrictions made it hard to employ people even during boom periods. But in 1989, the country seemed to hit bottom. Inflation hit 3000% that year. Soon after, the Argentines were told to get to work and stop complaining.
By 1997, the country was growing at a 9% rate, but there were problems. The country was consuming and investing more than it produced. And the curious system of international finance tempted Argentina to borrow even more. Fund managers bought emerging economy debt based on an index of borrowers. This had the perverse consequence of increasing the availability of credit to the nation that borrowed the most. That is, as Argentina borrowed more and more, it became a bigger part of the index of emerging market debt. Why people pay fund managers to follow the indices, we don’t know, but that’s what they did. The more Argentina owed, the more the fund managers wanted to buy its bonds.
It was no easier for Argentina to resist the lure of easy credit in the ’90s than it has been for America in the 2000s. By the end of the period, Argentina’s foreign indebtedness approached $150 billion. That would be peanuts for the United States, but it was a lot of money for a country like Argentina. A few smart fund managers saw the disaster coming (Asian central banks, take notice.) They sold off Argentina’s bonds. Pretty soon, the country was in crisis again, unable to make its debt payments. In December 2001, riots and looting broke out. President De la Rua decided that it would be better to stiff the foreign creditors than to further annoy the locals with austerity measures. Before the month was up, Argentina made history with the biggest debt default ever.
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.
We have been favored with a letter from a reader, resident in Argentina, who puts the country’s financial history into perspective for us:
"I am 72 years of age and am writing you from Argentina. It is well worthwhile to study what happened in Argentina over the years. This country goes crazy about every five years or so. It has been my painful experience that it is better to be a debtor than a creditor when this time comes around. When the crunch comes somehow, debtors who are in the majority always seem to be protected by politicians who need their votes. I don’t see why this will not also be true in America."
Nor do we.
In September, the Argentine economy reported its 37th consecutive month of GDP growth. It is growing about 7.3% this year, 5.6% projected for next year.
"The government has been incredibly lucky," says Luis Secco, a Buenos Aires consultant.
And here we find the big difference between the United Sates and Argentina. If a country such as Argentina does well, it has luck to thank. North of the Rio Grande, people thank neither the stars nor the fates. Instead, they salute their Fed chief and pat themselves on the back.
Argentine economists have even tried to quantify their good fortune with a "luck index" — said to measure the impact of global economic conditions. The index hit a high of 9.8 (on a 10-point scale), last year. This year, it is expected to be around eight. Meanwhile, the government budget is in surplus (before interest payments). Foreign currency reserves are increasing. Foreign debt, as a proportion of GDP, has fallen below 40%. Inflation is below 10%. The trade balance is positive. And the economy is growing twice as fast as America’s.
But what America has in most abundance — confidence and credit — Argentina lacks. Just try to buy a house in Buenos Aires or a ranch out in the country. No one will offer you credit. While Alan Greenspan comments on the solidity of the U.S. economy, Argentine officials speak about their economy’s fragility. While American economists look ahead and see only progress, Argentine economists look ahead and see hesitation and backsliding. They warn of inflation. They warn of social upheaval.
While Americans see a glass half full, Argentines see one that is bone dry.
We do not know how to cure Argentina’s economic problems. But we have evidence that confidence is not permanent, but cyclical. Having been so low for so long, we expect to see it turn up on the pampas. In America, on the other hand, confidence and asset prices are likely to go in the other direction.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.