Excellent analysis. Connections to inflation, and supreme court are terrific. I think austerity and the Paradox of thrift will also be the result of this political change.
Irrespective of how we classify Milei, the economic analysis you offer is, with all due respect, rather superficial. Argentina has a perennial problem with debt, because most of it is used to finance government operating expenses and not capital investments that would support the economy. The tax to GDP ratio is out of whack, Argentina's government debt accounted for 80.3 % of the country's Nominal GDP as of March of 2023 (Canada sits at 68%), import payments were frozen, and there were at least 4 differential exchange rates in an attempt to enforce capital controls.
A pragmatic approach would reduce the debt-to-GDP, shift government spending from a bloated civil service to core services (health, education, food security for citizens below the poverty line), unify the exchange rate, and hopefully stabilize the Peso.
The lawsuit with Singer and others was the product of a giant default, not many countries around the world issue debt in whatever currency and then decide to ask for a deep haircut. While Argentina has a solid track record of disappointing everyone, let's see if Milei can reign in spending and start retiring debt.
It's an analysis based on the historical reality that every single instance of hyperinflation in the world is due to a country holding debts in another currency. Inflation is not caused by fiscal spending, and there were a number of serious currency crises in the 1990s.
Austerity in the slump never works. That is economic history. I recommend you read Mark Blyth's "Austerity: History of a Dangerous Idea".
Milei is a right-wing extremist and ideologue, both socially and economically. If he's a "libertarian," he doesn't care about the freedom of people opposing his reforms, because he has enlisted a ban on protests against his reforms that will be enforced by the army, all for reforms that will certainly impoverish his country and make things worse.
Having lived through the hyperinflation of 1989, I can say with a high degree of confidence that Argentines do not trust their currency, or their banking system, and taxes are simply unsustainable (hence the high level of cheating). Argentinean hold 10% of all the USD cash notes in circulation anywhere (https://www.nytimes.com/2023/11/24/world/americas/argentina-economy-peso-dollar-javier-milei.html), so governments just print more money and the population either buy tangible assets or go to the black market to get more USD bills.
I am not an economist nor I pretend to be one, but I do have some background around politics and policies in Argentina (I was born and raised there). The army will not take on the streets, the Federal Police (=RCMP), the Gendarmería (=CBSA) and local police authorities will and I am very worried about it. Milei's minister of safety and former presidential candidate Patricia Bullrich wants to penalize those protesting both in terms of prison time and losing government subsidies, which will be against Constitutional rights.
As usual for me, I just grab the popcorn and watch in horror as history repeats itself...
The Economist's explanation of hyperinflation touches on the problem, but gets it wrong, because it assumes it is all a public problem, when it is not.
Yes, there is always a shock, but they miss the foreign debt aspect of it (as well as the fact that there are speculators who make money off of it.)
There is a recent paper "Inflation is everywhere a conflict phenomenon."
In the case of Venezuela, it is a an oil-rich country, and oil is purchased in U.S. dollars. While the price of oil was high, there was outside investment, including lending in U.S. dollars to Venezuela. Venezuela had U.S. dollars from oil sales, so servicing the debt could be manageable.
Then, the price of oil plunged by over 50%. So did the Venezuelan currency, while at the same time new investment in oil ceases and a whole bunch of people go broke because the price has dropped.
This affects the whole country, which has to repay foreign debts in a currency that is collapsing. They don't have funds flowing into the country in terms of investment, labour, or revenues for government, and debt payments keep escalating because of the exchange rate keeps collapsing. It has nothing to do with domestic government spending at all - though it is also affected.
Yes reallocating resources to the highest priority is important, but I expect a paradox of thrift effect from the coming austerity. This will not be good for the economy.
I highly recommend this tribute paper to learn a progressive economic vision which Argentina and most developed countries need:
Excellent analysis. Connections to inflation, and supreme court are terrific. I think austerity and the Paradox of thrift will also be the result of this political change.
Hi Dougald,
Irrespective of how we classify Milei, the economic analysis you offer is, with all due respect, rather superficial. Argentina has a perennial problem with debt, because most of it is used to finance government operating expenses and not capital investments that would support the economy. The tax to GDP ratio is out of whack, Argentina's government debt accounted for 80.3 % of the country's Nominal GDP as of March of 2023 (Canada sits at 68%), import payments were frozen, and there were at least 4 differential exchange rates in an attempt to enforce capital controls.
A pragmatic approach would reduce the debt-to-GDP, shift government spending from a bloated civil service to core services (health, education, food security for citizens below the poverty line), unify the exchange rate, and hopefully stabilize the Peso.
The lawsuit with Singer and others was the product of a giant default, not many countries around the world issue debt in whatever currency and then decide to ask for a deep haircut. While Argentina has a solid track record of disappointing everyone, let's see if Milei can reign in spending and start retiring debt.
Have a great Christmas!
It's an analysis based on the historical reality that every single instance of hyperinflation in the world is due to a country holding debts in another currency. Inflation is not caused by fiscal spending, and there were a number of serious currency crises in the 1990s.
Austerity in the slump never works. That is economic history. I recommend you read Mark Blyth's "Austerity: History of a Dangerous Idea".
Milei is a right-wing extremist and ideologue, both socially and economically. If he's a "libertarian," he doesn't care about the freedom of people opposing his reforms, because he has enlisted a ban on protests against his reforms that will be enforced by the army, all for reforms that will certainly impoverish his country and make things worse.
Here is an alternative explanation: https://www.economist.com/the-economist-explains/2018/02/11/the-roots-of-hyperinflation
Having lived through the hyperinflation of 1989, I can say with a high degree of confidence that Argentines do not trust their currency, or their banking system, and taxes are simply unsustainable (hence the high level of cheating). Argentinean hold 10% of all the USD cash notes in circulation anywhere (https://www.nytimes.com/2023/11/24/world/americas/argentina-economy-peso-dollar-javier-milei.html), so governments just print more money and the population either buy tangible assets or go to the black market to get more USD bills.
I am not an economist nor I pretend to be one, but I do have some background around politics and policies in Argentina (I was born and raised there). The army will not take on the streets, the Federal Police (=RCMP), the Gendarmería (=CBSA) and local police authorities will and I am very worried about it. Milei's minister of safety and former presidential candidate Patricia Bullrich wants to penalize those protesting both in terms of prison time and losing government subsidies, which will be against Constitutional rights.
As usual for me, I just grab the popcorn and watch in horror as history repeats itself...
The Economist's explanation of hyperinflation touches on the problem, but gets it wrong, because it assumes it is all a public problem, when it is not.
Yes, there is always a shock, but they miss the foreign debt aspect of it (as well as the fact that there are speculators who make money off of it.)
There is a recent paper "Inflation is everywhere a conflict phenomenon."
In the case of Venezuela, it is a an oil-rich country, and oil is purchased in U.S. dollars. While the price of oil was high, there was outside investment, including lending in U.S. dollars to Venezuela. Venezuela had U.S. dollars from oil sales, so servicing the debt could be manageable.
Then, the price of oil plunged by over 50%. So did the Venezuelan currency, while at the same time new investment in oil ceases and a whole bunch of people go broke because the price has dropped.
This affects the whole country, which has to repay foreign debts in a currency that is collapsing. They don't have funds flowing into the country in terms of investment, labour, or revenues for government, and debt payments keep escalating because of the exchange rate keeps collapsing. It has nothing to do with domestic government spending at all - though it is also affected.
Yes reallocating resources to the highest priority is important, but I expect a paradox of thrift effect from the coming austerity. This will not be good for the economy.
I highly recommend this tribute paper to learn a progressive economic vision which Argentina and most developed countries need:
https://www.tandfonline.com/doi/full/10.1080/09538259.2022.2076349