by Ron Holland: CUT,
Don't Freeze Federal Employee Pay
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!
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
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.
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.
live in interesting times” ~ A Chinese Curse
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.
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.”
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?
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
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.
Back At Argentina in 1913
It was an important
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.
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?
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.
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
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.
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.
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.
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
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.
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.
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.
“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
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.
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.
Runs the Risk of Being Blamed for the Greatest Depression
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
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.
Is the New Argentina!
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.
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
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.