Justin’s note: Argentina is teetering on the edge of a full-blown crisis.
Its currency, the peso, is in free fall. Inflation is skyrocketing. And foreign investors are fleeing the country.
In short, it’s starting to feel like 2001 again. So, it’s no surprise that the Mauricio Macri government is doing everything it can to prevent a repeat of that disaster.
It’s already raised the key interest rate to 40%. It’s unloading the foreign reserves. And Argentina is in talks with the International Monetary Fund (IMF) to secure a massive bailout.
No one knows if these emergency measures will work or backfire. But if there’s anyone who might have an answer, it’s Doug Casey.
Doug isn’t just a student of money. He’s also lived in Argentina for years. So, I recently phoned him to see what he thinks about all of this…
Justin: Doug, what do you make of what’s happening in Argentina? Is the government taking the right steps to prevent a crisis?
Doug: Let me start by saying that no government should be in the money business. Money is something that society should determine for itself. In today’s world, it would probably be gold, some type of cryptocurrency, or some combination of the two. Remember that, before about 1933 in most cases, all the world’s currencies—the pound, the mark, the franc, the dollar, all of them—were just national names for a specific amount of gold. Then governments withdrew gold coins from circulation, and would no longer redeem their currencies with anything. But people continued to use them—even though they then started dropping radically in value.
This is especially true about Argentina, which has about the worst track record of any government. They’ve completely destroyed numerous currencies since they went off the gold standard in the 1930s. They’re neck and neck with Brazil for creating tens of trillions of percent of inflation over the last 80 years. Repeatedly wiping out their lower and middle classes in the process.
But back to your question. Argentina’s central bank has just raised its key rate to 40%. And people are saying, “Oh, this is horrible, this is terrible. It’s going to destroy the economy. Nobody’s going to be able to borrow anything. It’ll bankrupt businesses that need to borrow.”
But it’s actually very intelligent—within the context of what a mess the Argentine government has made of everything. They created a high inflation environment by printing up vast amounts of pesos to pay the government’s bills. Government spending is mostly individual and corporate welfare, subsidies, and employees. Similar to the US, but much worse.
That puts them in a bind. The State needs to print money—inflate—to support itself. But it also needs people to save. Saving is how you accumulate capital. It’s how you become wealthy. You produce more than you consume, and save the difference. In a high inflation environment, people will still produce, but they won’t save because they know the money’s going be inflated away from them. So they spend it as soon as they get it. And the economy goes nowhere.
Raising interest rates to 40%, when inflation is probably 25% is very intelligent in that it will encourage people to save. That will help them build capital—you don’t need to do anything.
Raising interest rates will also strengthen the currency because people will get a positive yield. Foreigners even might buy the Argentine peso, if they can get 40%—a real return of 15%.
But there’s no free lunch. The problem is that if the government is offering 40%, how are the banks going to make loans? Who’s going to borrow at, say, 50% when inflation is 25%? This is one of the many reasons governments should have absolutely nothing to do with the money system. Everything they do to solve one problem just creates another problem.
Justin: What about the other things that Argentina’s government has done? Should Argentina’s central bank be unloading its foreign reserves?
Doug: A mistake. They’re selling dollars in an effort to control the exchange rate between the peso and the dollar, propping up the value of the peso.
This is very stupid because it makes the peso artificially expensive. And Argentina is already quite expensive—it used to be about the cheapest country in the world. An overpriced peso discourages people from investing down here. It discourages tourists from coming down here. It encourages Argentines to buy foreign currencies and other foreign assets, taking advantage of the artificially strong peso.
Macri impresses me as an OK guy—probably the most decent head of any major state in the world today. But he’s clearly getting bad advice. All the people around him are educated in Keynesian economics, as are the IMF apparatchiks inundating the country. The government should go to a gold peso, and completely withdraw from the economy. Interest rates and prices will find their own levels. But that’s not going to happen anywhere, until there’s a complete collapse, and there’s no alternative.
To have a strong currency they have to stop printing money. That’s why the Swiss Franc is relatively strong. That’s why the Deutsche Mark used to be strong.
But the Argentine government has done the exact opposite. They’re burning through their reserves to artificially support their worthless currency. It’s very stupid.
So, Macri is doing one relatively smart thing and one quite stupid thing. But that’s much better than the last Argentine government. They would only do stupid things. One out of two ain’t bad when it comes to Latin America.
Justin: Let’s not forget that Argentina also went to the IMF to ask for money. I know a lot of people here aren’t happy about that. What do you think about that?
Doug: Yes, they’re planning on borrowing money from the IMF. They’re doing this to prop up their currency. But they’re just frittering that money away. It’s like borrowing even more money to avoid bankruptcy, when you’re already hopelessly in debt.
The only good thing about this is that it sets up Argentina to again default on the national debt in the future. That would punish the IMF, which has no right to exist. It should be abolished.
Justin: Do you think the IMF will impose austerity measures on Argentina? And if so, should Argentina be cutting spending right now?
Doug: Argentina should fire many, many more government employees. Macri has already gotten rid of about 80,000 of them. But that’s a drop in the bucket.
They should, for instance, sell the national airline. It’s the only major airline in the world, that I know of, that loses money. Every other airline is coining money right now. Aerolineas loses about a billion dollars per year. That’s mainly because of the unions.
Unions basically run Argentina. They’re everywhere. And they treat their members like gods at the expense of the public.
They’ve got to destroy the union movement down here. It’s totally corrupt. They would put the Teamsters in the United States to shame on their worst day. Unions everywhere are basically run by thugs. But, as in the US and Europe, the average guy has been programmed to believe unions are good, and protect the downtrodden worker from employers, who are evil.
Unions don’t have to be abolished. They simply shouldn’t be protected by the State. If unions were voluntary, no problem. But they’re not. Membership is almost always compulsory, everywhere. They put a straightjacket on the working man, and damage society as a whole.
Unions are just part of the problem. They also need to get rid of their price controls, their subsidies, their duties, their taxes, and their regulations. Argentina, however, is probably no worse than France, Italy, or other EU countries. They’re all a nightmare for the entrepreneur.
Justin: So, Macri hasn’t done enough yet?
Doug: Macri has done some good things. But he’s not moving nearly fast enough.
I’ve got to say that the best thing that’s happened to any country in South America in the last 50 years was Augusto Pinochet in Chile. However he’s a good news/bad news situation. The fact that Pinochet was a military dictator. That’s bad news.
But—strange for a general—he had good economic instincts. That’s the good news. Before him, Chile was just a poor, isolated mining province. He took Chile from a backwater with some copper mines to the most successful country in Latin America. Now, everything works there. The average Chilean is, believe it or not, wealthier than the average American. One reason for that is their national Social Security funds are individually owned accounts, invested in their stock market. Argentina needs something like Pinochet.
Everybody says, “Oh, Pinochet, he killed a couple thousand people.” Yeah, he did. And that’s too bad, even though they were mostly communists. But you’ve got to remember that the Argentine generals killed 30,000 or 40,000 people. The Brazilian generals probably killed another 20,000 or 30,000 people. Even the Uruguayan generals killed a couple thousand people. And that’s Uruguay, which used to be called the Switzerland of South America.
Pinochet was mild by South American standards. The only reason that he was pilloried, brought to trial, and hated so much, is because he put economic reforms into effect. It wasn’t because he killed a couple thousand people. It’s because he was pro-capitalist. That’s why he was persecuted.
That’s the direction Argentina should go. The country is still following the model Mussolini set for Italy in the ’20s. Hopefully, they can accomplish this without killing anybody.
Justin: So, are you still optimistic about Argentina? I ask because you recently told me that Argentina was one of the only countries in the world headed in the right direction. Do you still think that, given what’s happened recently?
Doug: Yes. They’re absolutely moving in the right direction. But, like I said, they’re doing one smart thing followed by one stupid thing. Two steps forward, one step back. But that’s better than doing one stupid thing after another. The previous government, under Cristina Kirchner, did something unbelievably stupid every single week—nothing intelligent, ever. If she’d been re-elected, Argentina would have moved in the direction of Venezuela, or at least Bolivia.
But let me say this. The average voter, anywhere in the world, has no philosophical bearing whatsoever. Look at New Zealand. By the mid-1980s, the country had become the shallow end of the gene pool. Anybody with any sense and enough money to buy a ticket to Sydney, London, or LA was getting out.
Then, Roger Douglas, a reformed socialist, started deregulating the economy, cutting taxes, and privatizing. The place boomed. It became an extremely prosperous country in the ’90s, ’00s, and early teens. Everybody started doing well. The currency got strong, it doubled against the US dollar. Real estate prices tripled and quadrupled.
But what did the stupid Kiwi voters do after 30 years of good times? They elect a 37-year-old female, who’s a hardcore communist. Now New Zealand’s going downhill rapidly.
And as corrupted as the average Argentine voter has become over the last 70 years, I don’t know if they can handle four years of a good thing. That may be too much to bear. So, they might elect someone even worse than Cristina after Macri. It’s unpredictable.
But we really shouldn’t be worried about what happens with Argentina. Instead, we should be worried about what comes after Trump. Because the chances are excellent that we’ll be deep in stage two of The Greater Depression by then. Perhaps we’ll also be in something resembling World War III. The next president of the United States is likely to be extremely dangerous.
Justin: So, I don’t take it that you’re buying Argentina’s 100-year bonds.
Doug: Of course. They’re a monument to human stupidity. $2.3 billion of them, 8% coupon, in US dollars. The idea that anyone would lend any government money for 100 years, let alone Argentinian government, is crazy. It’s completely insane. You won’t have to wait 100 years for them to be worth zero. They’re now trading at about 8x.
These bonds were sold as a speculative vehicle. They were a bet on lower interest rates, an improving Argentine economy, and the ability to repay the bonds getting better over the short run.
The fools that bought them will probably consider playing Russian roulette with an automatic pistol in the near future as well.
The fact that these things even exist shows you how loose credit has become. It’s telling us how much funny money has been created. Next thing you know, Zimbabwe will be able to float a 100-year bond…
Justin: You can’t rule it out. Anything is possible these days.
So, what should the average Argentine be doing right now to protect themselves?
Doug: They should be buying precious metals. This used to be very easy to do in Argentina. But the Kirchners shut down the local gold exchange. This made it harder and more expensive to buy gold coins. I don’t know if Macri has plans to allow it to start up again. It would be a good idea.
Argentinians should also buy property, specifically farmland. Commodity prices are still very low. Farmers aren’t making any money—but commodity prices have been perking up. Buying farmland is an excellent bet right now.
You could also speculate in cryptocurrencies. I know a lot of Argentines that have done this. They were early adopters. They got involved in the space because you can’t save pesos, and it was inconvenient to save dollars. So they saved Bitcoins. And they made a lot of money.
Of course, Bitcoin’s up an enormous amount over the last few years. But there are waves of new cryptocurrencies coming out. So, there’s still a lot of profit opportunity.
Those would be my three recommendations for an Argentine.
Justin: Yeah, those are all better ideas than shifting wealth from pesos to currencies like the US dollar and British pound. After all, you and I both know that every paper currency on the planet is losing value. So, you just end up playing a game of hot potato.
Doug: Absolutely. All of them.