Cry for Argentina
In 2002, my wife Puddy and I traveled to Argentina for a business trip. We traveled south a few days early and toured Buenos Aires before our conference. We found Argentina a delightful tourist destination. The beautiful city of Buenos Aires compares favorably to other cosmopolitan cities that we have visited. We found the people polite, well-dressed, prosperous and friendly.
The U.S. dollar goes a long way down there. Our stay at a five-star hotel cost less than $100/day, and a wonderful dinner of appetizers, brochette de lomo and wine at a first class restaurant cost less than $35 for both of us. All this led Puddy to ask, “Why is everything here such a bargain?”
As with many difficult questions, knowing a little history helps one arrive at a better answer.
The history of Argentina is a bit similar to that of the United States. The vast area now known as Argentina was only sparsely populated before its colonization first by Chile, Peru and Paraguay then later by Spain. Cheap land lured many second sons to travel to the new land. In the early 1800s, Argentina fought and won a war for independence from Spain.
Immigration from Europe in the late 1800s brought another big influx of Europeans, mainly Italians. Cattle became a huge export, first in the form of easily transported leather goods and then, with the advent of refrigerated ships, beef.
By the middle of the 20th century, a number of drivers were acting on the economy. The economy grew almost fivefold, leading to the establishment of a large middle class. Inflation became a nearly permanent feature of the economy. President Juan Perón nationalized key industries. And Argentina began to suffer due to military rule and internal conflict.
As a consequence of its poor management, by the 1980s, the Argentine government was printing so much money to pay its bills that the monthly inflation rate was 200%. In an effort to reverse course, President Carlos Menem sold off industries, including many utilities, to private concerns; encouraged private enterprise; and pegged the peso to the U.S. dollar. The peg to the dollar seemed to inspire confidence in the peso and tamed the terrible inflation problem. However, pegging the peso to the U.S. dollar prevented the state from exercising a true monetary policy. The government continued to borrow from the International Monetary Fund to support the dollar peg and to pay for government programs. In addition, when Menem put utilities in private hands, prices for those crucial services skyrocketed, putting further strain on Argentina’s economy.
To make matters worse, the government increased the country’s economic problems by raising taxes in the late 1990s. Taxes supporting retirement benefits were 32%, the VAT was 21% and the income tax on high incomes was an additional 35%. The steep increase in tax rates caused more people to drop into the underground economy, therefore reducing the government’s income even further.
Citizens began to lose confidence and withdrew cash from the banks, causing a run. In December, 2001, the government froze all bank accounts.
Finally, in late 2001, the Argentine government could no longer pay even the interest on its debt and according to the Economist, defaulted on 155 billion dollars of debt. Early in 2002, the peg on the dollar was pulled. The government also transferred all dollar-denominated accounts to pesos and limited cash withdrawals. When the citizens could finally get to their money in the banks, they found their deposits had been reduced to about 40% of their former value. While most of the upper class had a portion of its savings banked outside of the country, much of the middle class did not. If effect, the Argentine government robbed the middle class.
Later in 2002, Argentina appeared to be coming back. The economy had been growing, and wages were starting to rebound. The middle class was growing, and various forms of debt restructuring appeared to be working.
The problem, though, was that even though things were looking up, the government’s disrespect of private property still stung and the memory of government’s taking the savings of the middle-class was still fresh. At the time our visit, the turmoil was referred to delicately as the “recent unpleasantness,” and anytime it was mentioned, the bankers we were visiting suffered sudden amnesia about how to converse in English.
As a hedge for their lack of trust in the currency, many Argentines saved in dollars or another currency other than their own. It takes years to rebuild trust in a currency, and it becomes very easy to lose all trust in a government when it acts as earlier Argentine administrations had. It’s not surprising, then, that despite the progress that Argentina has made in the last ten years, its recent banking problems are happening quickly. Indeed, the government is having to go to fairly extreme measures to prevent complete economic collapse of the currency as the country is going through another round of economic unpleasantness.
Before you tell yourself that this will never happen in the U.S., remember that President Franklin D. Roosevelt stole 40% of the middle class savings when he devalued the dollar three generations ago. My wife’s grandmother, who had worked hard to accumulate some assets, never forgot or forgave FDR’s theft until the day she died at 99 years of age. In 1971, President Nixon did further damage when he pulled the dollar peg on gold entirely. Just look at how much the dollar devaluation accelerated afterwards. In each case, there was a theft of the savings of citizens. In Nixon’s case it was a slow theft; in Argentina, it simply happened much faster. It’s one reason I value gold and silver over dollars or pesos.
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