Argentina is a straw in the wind

Argentina's new President, Javier Milei, calls himself an anarcho-capitalist. After he takes office on 10 December the country's central bank may not have long to live and the national currency may shift from the Peso to the US Dollar. He has pledged a process of wide-ranging privatization - "everything which can be in private sector hands will be in private sector hands" he says. He favors looser gun laws, the sale of human organs, and tougher abortion regulations. He has floated the idea of eliminating 11 government ministries, including Education, Health, Labor and Social Development and absorbing them all within a single 'Human Capital' department. He has also questioned Argentina's relations with Brazil and China - the country's two biggest trading partners by far.

Milei says there's no room for "half measures", but getting a full measure won't be easy; his political bloc can only muster seven seats out of 72 in the country's Congressional Senate and just 38 out of 257 in the lower Chamber of Deputies. For most legislative changes he will need at least 50% of Congressional backing. Milei's 'chainsaw' in his shock therapy may run out of gas before it even starts. Even though Milei's proposals have been roundly condemned by all kinds of 'experts' we need to understand how such a character has been elected; Argentina, a highly literate nation , has a sophisticated and proud electorate. What created a man like Milei? How have his ideas have become so popular?

Social breakdown

Milei owes his electoral success fundamentally to the collapse in Argentines' confidence in their fiat currency, the Peso. There are many reasons why the Peso has collapsed - ranging from a bloated, inefficient and corrupt state sector to a chunky $46 billion loan from the International Monetary Fund (IMF) which needs restructuring - and there is no confidence in conventional policies and politicians being able to stop the rot. Argentina has defaulted on its sovereign debt nine times - three times in the last two decades. The official exchange rate, held by tight capital controls, is around 356 Pesos/$1 but the almost universally used black market rate is now more than 1,000 Pesos/$1. Inflation is now 143%/year and will soon whiz past 150%. Argentina's economy is already dollarized - Argentines hold an estimated $200 billion outside the country. Without access to Dollars it's impossible to do many things we take for granted, including getting a mortgage. Unsurprisingly Milei is a fan of digitized assets; earlier this year he said that Bitcoin represents "the return of money to its original creator, the private sector."

Argentines are thoroughly disenchanted with their politicians, who have overseen breathtaking economic decline which has now pushed 40% of the country into poverty. Like the character in Ernest Hemingway's novel The Sun Also Rises, who when asked how he went bankrupt, replied "gradually and then suddenly", Argentina's decline has been slow but speeded up in recent years. In 1913 it was one of the world's ten richest countries. A country with immense natural resources, the wealth from those resources has been systematically squandered since 1946, when Juan Peron first became President. Peron expanded social welfare; he also created a climate of financial corruption from which the state and its employees have never really deviated.

Will Milei be able to stick to his guns? He is being depicted in mainstream media as Argentina's version of Donald Trump, Italy's Georgia Meloni, Hungary's Victor Orban and other political leaders regarded as right-wing, unpredictable mavericks. For him to really stand out he needs to use his chainsaw against corruption. Whether or not he will achieve all his pledges, his presence alone on the world stage is already upsetting conventional views. It's now unlikely that Argentina will join the BRICS (Brazil, Russia, India, China, South Africa) bloc, as it was scheduled to do from 1 January 2024. If he does push through the Dollarization of the economy Argentina will join Ecuador, which in 2000 amid hyperinflation (its currency, the Sucre, shifted from 4,000/$1 at the start of 1999 to 28,000/$1 by the end of 1999) dollarized its economy.

Views are mixed about the success of Ecuador's Dollarization experiment; perhaps it's too soon to tell. Argentina currently has almost no Dollar reserves; it would have trouble borrowing sufficient Dollars to keep its economy working, although if the economy stabilized then obviously all those Dollars held outside the country would return, and borrowing on international markets would become easier. Milei's policies, if they are implemented, are a high-wire act which imply more pain (any Dollarization will require substantial prior devaluation of the Peso, pushing inflation higher and risking serious social unrest) before any gain might be seen.

Whichever way the latest Argentine experiment goes, there are lessons for us all - not the least of which is to hold at least some of our assets in a form of money that's beyond government errors or madness.