Don’t Cry for me….Argentina
by Richard
Now that the government is deeply investing in our financial infrastructure…let’s see what happens when this impulse is carried to extremes.
There are two ways a nation state can repudiate its debt obligations.
The accepted protocol is to tolerate a slow and steady erosion of the host currency. This allows the debtor state to borrow real money, and pay back with play money.
The other method is extreme and radical, but avoids the tedium of a long and protracted process. That is total debt repudiation.
This was the method chosen by the Bolsheviks when they repudiated debts of the Czarist Russian regime….and most recently, in 2001, when Argentina topped the charts with the largest sovereign debt repudiation in history.
The thinking at the time was that a resource rich country like Argentina could market its commodities in the global marketplace in the spot markets, and would have no need for any credit facilities.
No doubt about it, this was bold financial engineering. It does wonders to the balance sheet when you can eliminate your external debt with a simple stroke of the pen.
Like every great catastrophe in history, I’m sure it must have seemed like a good idea at the time.
The problem with severing ties to creditor nations arises when events do not pan out as expected.
Now we have global commodities in free fall, and Argentina has to go the well again.
But no one will lend them money, so that leaves only the native population to plunder.
Such an action has a long and troubled pedigree, from the forced collectivism and subsequent liquidation of the independent Kulaks in Russia, to the maniacal statism of Mao’s China, to the impoverishment of Zimbabwe through runaway inflation.
And now we add to the list Argentina’s attempt to force the nationalization of their population’s private pensions.
The mechanics are simple enough, even if depraved and confiscatory.
The government will harvest real wealth, and in return give out IOUs that will presumptively pay future withdrawals.
In much the same way our country has plundered the Social Security surplus and left in its place a mountain of promissory notes.
Of course we’d like to believe it will never happen here.
But you have to ask yourself some very difficult questions.
If we continue to come to the rescue of every challenged private enterprise and municipality, we will continue to rack up trillion dollar deficits, with no realistic prospect of repayment.
Distortions will crop up in labor markets when both labor and management pass on increases in excess of productivity to the federal government, as ultimate guarantor, greatly fanning the flames of inflation.
Throw into the mix the dismay employees now have with their 401ks, and they may be persuaded to swap assets in return for another entitlement income stream.
I hope I’m proven wrong, and that we find our bearings again in a market based economy.
But our recent election results have reinforced the movement towards statism and government paternalism.
Instead of protesters , we may soon have “descamisados.”
December 2nd, 2008 at 3:43 am
The comparison with Argentina is a firebell in the night. Of course we are headed down the same road, which ends with the inevitable fork of repudiation or calamitous inflation. The former is unthinkable, so the latter is probable.
I don’t think this statement holds up as well, however:
“But our recent election results have reinforced the movement towards statism and government paternalism.”
The issue isn’t nearly so black and white (ahem). Dems aren’t any more in favor of bailouts than the GOP. Only on health care is the divide pronounced, and it is arguably more efficient to provision it collectively, like national defense, than privately, like production of tennis shoes.
April 19th, 2012 at 1:23 am
This is one remarkable blog.Thanks Again.