“Argentina’s Javier Milei has made a horrible mistake”, says Ambrose Evans-Pritchard in the Telegraph. The article can also be read here.
A year after his landslide victory, Milei is still not letting market forces set the peso exchange rate, and it now looks as if his crawling dollar peg will continue into the middle of next year. He has jammed the process of macroeconomic cleansing.
Argentina is now among the most expensive countries in the world, close to Norway on the Big Mac index. It costs almost twice as much to buy a hamburger in Buenos Aires as it does in Tokyo, even though the pampas are full of cattle, while the rice terraces of Japan are not.
The peso is as overvalued today as it has ever been in Argentine history, or very close. This has suppressed inflation temporarily to a monthly rate of 2.4pc – so has economic contraction – but has in the process strangled the traded sectors of the textile, shoe and toy industries. Car parts, electronics, metallurgy, and heavy manufacturing are the next dominoes.
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He should have taken his chainsaw to currency and capital controls on his first day in office. He is now trapped. Either he claws back lost competitiveness by means of deflationary wage cuts for year after year – nigh impossible in any democracy – or he lets the peso find its level and unleashes a fresh inflation, shattering his reputation at home and abroad as the Friedmanite purist who tamed prices.
A commenter called Krassi Stoyanova says, “Well, Ambrose, having listened to Milei and his plans for the Argentine economy, I have far more confidence in him than I do you.”
I want to agree. But, truth to tell, I do not have a good understanding of this branch of economics. Some of you guys do. What do you think?
I don’t know enough to answer the question… but neither does anybody else.
AEP may be right, but he is all in for net zero, so his judgment cannot be relied on.
Discovered Joys – not so, as this is a matter the old economics dealt with.
Pinochet’s government made the fixed exchange rate with a fiat currency mistake in its early years – trying to “fix” the exchange rate to the Dollar.
Exchange rates can be stable IF (as the old economists knew well) nations are using the same commodity as money – and “Pesos, Pounds, Dollars” (and so on) are just names for a certain weight of that commodity – be it gold, silver or whatever.
But fiat currencies can not have stable exchange rates – not unless the same fiat currency is used.
President Milei talked of adopting the U.S. Dollar as the currency of Argentina – but he has been forced to keep the Peso, the Dollar is a terrible currency it is utterly fiat (whim – order) and is based on nothing that people value before-and-apart-from its use as money – BUT the Peso is the same, indeed historically worse (much worse).
President Milei is trapped in a situation where he can not, under the current laws, adopt real money (such as gold or silver) – so he is not so much “making a horrible mistake” as “caught in a horrible situation”.
By the way there is nothing “undemocratic” about falling wage rates – the United States responded, successfully responded, to each Credit Money bust from 1819 to 1921 by temporary cuts to wage rates so that the labour market could clear – unemployment be removed.
It was only in 1929 that cutting real wage rates was suddenly declared impossible – by President Herbert “The Forgotten Progressive” Hoover, and his decision (which he pushed on business) led to Mass Unemployment year-after-year.
Was America “undemocratic” before 1929?
Money and banking.
Money should be a commodity that is valued before-and-apart-from its use as money – money should NOT be the plaything of governments and bankers.
Banking – honest money lending is lending out Real Savings, the actual sacrifice of consumption. “Banking” is, mostly, the lending out of “money” that did not exist before it was lent out (blowing a Credit Bubble of “Broad Money” which must burst unless the government bails it out).
“Free trade in banking is free trade in swindling” as the old 19th century saying had it – because a “banker” is really a crook (a con artist running a shell game), whose fraud has been legalized by a “banking license” or some such, rather like a Privateer is a Pirate who has a government license.
And, no, the solution is not to legalise piracy.
It is astonishing that people call honest money lenders nasty names “Loan Sharks” or “Shylocks” when there is nothing wrong in what they are doing (they do NOT create Boom-Busts – they do not create Crashes and Great Depressions) – whereas Credit Bubble blowers are “bankers” which is treated as a respectable profession.
Morality, in this area, has become inverted.
Remember the “Loan Shark” or “Shylock” does not create money – they are lending out money (cash) that already exists, Real Savings – the actual sacrifice of consumption, that is why they are so keen to get the money back with the agreed interest.
The “banker” is playing with “money” that, mostly, did not exist before he (or she) started to pay with it – they create this Credit (“Broad”) Money from nothing, which is why, for example, bankers have lent money to Argentina over and over again – even though Argentina regularly defaults on its loans – it has a record of doing so going back into the 19th century, but bankers always rush to lend it more “money”.
People who were actually lending out their Real Savings, who had actually sacrificed their own consumption to make the loan, would be much less keen to lend money to a place that often defaults.
“I am in loans not debt collection – my bonus depends on the loan deals I make, not whether the money is ever repaid” is not how a honest money lender thinks.
President Milei did not create this monetary or this financial system = like the rest of us he is trapped in this madhouse.
AEP has predicted about 137 of the last 10 economic crises, so not exactly the most reliable prognosticator out there. He’s definitely drunk the eco cool-aid as well, so if he turns out to be right about Milei and Argentina it’ll be by accident more than design.
This isn’t a yes/no option. He can choose to step it down a bit each year until it gets to the point that it can be allowed to float.
Getting Argentina’s internal inflation under control is a massive, massive achievement. He won’t blow that on being a purist.
I am a bit confused: inflation in Argentina has been massively reduced, and the result is…
I can see that happening if the nominal Big Mac price does not increase, but pesos increase in value against dollars. But did that happen?
Perhaps Paul Marks can set me straight. His comments above make sense. I don’t know whether Paul is correct, but a theory that makes sense, even if wrong, is better than no theory at all (or, worst of all, a theory that makes no sense).
JohnK put it succinctly: AEP is all in for Net Zero. He’s also a Keynesian and in my view is often wrong on all manner of issues. He’s averse to ideas such as hard money and is a fan of floating exchange rates and central bank powers.
A strong currency in this context says a lot about how far Argentina has travelled under Milei and in a short period of time. The country is attracting inward flows of capital for the first time in decades; sectors are being deregulated and there’s a palpable air of confidence.
I suspect that Milei has scrambled the brains of many commentators. Here you have a political leader who is a genuine classical liberal. He quotes Mises and understands capitalism. This is a direct assault on the forms of statism that have arisen in recent times.
Milei is even winning admirers in places such as the US and Europe. 42 years since the Falklands conflict, Argentina is going down a broadly Thatcherite path, and the U.K. down a sort of Peronist one. Although hopefully the U.K. will turn things around sooner than it took Argentina.,
Let the chainsaw be a symbol of reform.
A quick history of money:
1. Barter (but this was inconvenient.)
2. Gold or silver (but you weren’t quite sure about the purity.)
3. Coins. (Markings and shapes being a guarantee of purity.)
4. Government coins. (They got in the act. Nice little earner.)
5. Government debasement. (One way of paying your debts.)
6. Notes. (Carrying all these coins is inconvenient. Drop them off at the goldsmith’s and get a receipt)
7. Government notes. (Another nice little earner. But having to exchange those notes for gold can be a pain. c.1690)
8. Break the link with gold. (Britain 1931. US 1971.)
So, from an economic perspective the answer is to get the government out of the money production business. But what do you do with all the pieces of paper that are currently being used as money? That makes my head hurt.
Also, the state’s involvement with money goes back a long way. In England’s case before there was even an England. Do we really think we can get them out of the business for long?
So, given the messiness of the situation, what should Milei be doing?
1. Get the government out of money.
2. If he can’t do that restore the link with gold.
3. If he can’t do that keep interest rates high enough to control money growth and inflation.
Whether that is done directly or indirectly (via a fixed exchange rate) is not something I can answer. Britain tried fixed rates informally in the late 1980s and formally in the early 1990s. The former created inflation and the latter a depression.
Snorri.
Stable exchange rates are a good thing – but one can not really have stable exchange rates with fiat (whim – command) money. Different fiat (whim) currencies are independent of each other – and increased at the whims of different governments and bankers – fiat money is, inherently, chaotic. Just as Credit Bubble banking (as opposed to honest money lending) is chaotic – it always goes into boom-busts, and having a Central Bank makes it even more (more – not less) chaotic and destructive.
President Milei, quite rightly, wants stable exchange rates – but he is forced (by law) to have fiat money.
So he is trying to have a stable exchange rate between the fiat U.S. Dollar and the fiat Argentine Peso. Rather than just adopt the U.S. (fiat) Dollar as the currency of Argentina – he would find that very legally (and economically) difficult as well.
As Brendon Westbridge has pointed out – it is problematic to try and have stable exchange rates between fiat currencies (such as the Pound and the D.Mark in the past).
As for a balanced budget, low taxes and low government spending meaning that a crazy monetary and financial system does not matter – the United States had all these things in 1929, it did not turn out well. The crazy monetary system (masked by lies about a “gold standard” – a very different thing from gold-as-money) and the crazy financial system (the banks) did for the United States and the world.
Ambrose Evans-Prichard is wrong about a vast number of things – but a stopped clock is correct twice a day.
“How do we get back to a commodity money and to a sane financial system as well?”
That is a rather difficult question – and one, I admit, I have no answer to – this side of The Collapse (TM).
Still President Milei has already achieved “the impossible” by dramatically reducing government spending – perhaps he will, somehow, produce a stable monetary and financial system as well.
Several countries with fiat currency still sell gold coin and allow purchase and holding of precious metals. There is nothing to stop people from taking value out of fiat currency (or some other property) and putting it in gold.
Gold is currently 85 dollars per ounce… so nobody is going to be buying groceries with commodity money any time soon. The value of gold is more stable, but not absolute: to use the value stored in commodity money, I have to convert it to more fungible fiat currency. There are markets in everything.
So commodity money is not a panacea.
Also – talk about “the money supply” becomes increasingly abstruse in the electronic age… my salary is pegged and transferred into my bank account with no real connection to how many bills the central bank of my country has printed. Electronic exchange long ago made actual circulation of bills a moot point. Central banks now try to wield power through completely artificial manipulation of interest rates.
Fiat currency is neither false nor evil.
Fiat currency makes a lot of things possible/easier.
Fiat currency reflects the deep, deep connection between confidence and any evaluation of a commodity.
I have thought before that Ambrose Evans-Pritchard has some of the best and worst takes within the Telegraph.I think his take here has plausibility. As others have stated, Britain’s experiments tying the pound to the dollar or DM in the past were not successful. The latter with the ERM destroyed the credibility of the Tory government at the time. Millei may have good relations with the US, but at the end of the day I doubt the US will ever put Argentina’s interests on par with it’s own. Just as Germany in the 90s put it’s own interests ahead of other European states.
Paul: Thank you for your answer… although it is not an answer to my question. It seems to be the answer to some question(s) that i did not ask.
A bit like in The Hitchhiker’s Guide: now that we have the answer, we must find the right question for it.
Indeed Snorri – but be careful of having the answer and the question in the same universe.
Ben David – “gold is 85 Dollars per ounce” – no it is not Sir, it is rather more than that.
Commodity money can not be used for paying for groceries (or words to that effect) – yes it can, even if one is using gold one does not have to pay an ounce and ask for change, electronic means to transfer ownership without the gold having to physically move (rather than the old idea of a spec of gold in a transparent plastic coin) means that one does not need silver and copper coins (which is what my father used to pain for groceries in his youth) to pay for groceries.
“Fiat Currency is neither false or evil” – yes it is, it is both false and evil – check the name “fiat” (command-order-whim).
“Fiat Currency makes a lot of things possible/easier” – only true if you mean wild spending government and wild spending corporations and individuals all getting their resources from “Cantillon Effect” fraud. It makes BAD things easier.
“Fiat Currency reflects the deep, deep connection between confidence and any evaluation of a commodity” – no it does not. Fiat Currency reflects nothing of the sort – what it is based on is Professor Krugman’s “men with guns”.
Americans did not give up their gold in 1933 because of “confidence” – they gave up their gold because of the threat of violence from the government. And the same is true with the violation of all contracts – public and private.
“But Paul – by confidence I meant confidence that the government would shoot you if you resisted their fiats orders” – well true enough.
As long as one remembers that the massive force and fraud is not just for the benefit of governments – it is also for the benefit of Corporations (especially the shell-game Credit Bubble banks and the rest of the crooked “financial industry”) and certain individuals.
If someone supports fiat money and (a separate – but related – matter) Credit Bubble banking (rather than honest money lending)…. – well they should not, but these things may well soon cease to be, the end will be terrible – but at least it will be the end.
Turing to government spending and other aspects of economic policy, I recently (as an act of self torture) reread the Platforms of the Democratic and Republican Parties for 1932 – I was trying to work out which Platform was more ignorant and absurd.
The Democrats called for a reduction of government spending of some 25% – jolly good, but they proposed no real way of doing this (other than vague talk about reducing bureaucracy) whilst, at the same time, actually proposing, seemingly without knowing it, MORE government spending – such as aid for farmers and (astonishingly) bailing out State governments who wished to give the unemployed money for not working (although they did NOT propose Federal unemployment pay or old age pensions – they still understood in 1932 that such schemes would be unconstitutional).
Both political parties supported “Collective Bargaining”, the primary reason why there was mass unemployment in 1932 (why there had been no real recovery after the Credit Bubble bust of 1929 – the bust of the Credit “Boom” created by Benjamin Strong of the New York Federal Reserve and his financial industry friends).
Both parties claimed to be upset about unemployment – but praised the thing, Collective Bargaining (see W.H. Hutt about the government supported “Strike Threat System”) that creates it. I am reminded of the “New Liberals” in the early 1900s who denied that the British Trade Union Act of 1906 would increase unemployment (even more than Disraeli’s Act of 1875 had) – and then created “Labour Exchanges” to pretend to be doing something about the increase in unemployment they knew would result from their Act of 1906.
But the Republicans of 1932 went further – they praised President Hoover for personally intervening to prevent the reduction of Real Wage Rates.
The very thing that had been done in every Credit Money bubble bust from 1819 to 1921 – and in every case Real Wage rates had temporarily been cut and the mass unemployment had been cleared. In 1929 the opposite policy was tried – government intervention to keep up Real Wage rates – the result was that mass unemployment did NOT clear.
Even with no knowledge of the laws of economics at all, the Republicans should have been able to work out that a policy of keeping up wage rates in the face of a Credit Money (“Broad Money”) bust, had been a terrible blunder – but no, they praise the policy.
In the end I gave up – I could not decide which party platform in 1932 was more absurd.
Although what Franklin Roosevelt actually did in and after 1933 was beyond both platforms – his degree of criminality (and criminality is the correct word – let us not pretend it was an “economic policy”) was off the chart.
And he was reelected with 60% of the vote in 1936.
Time to turn away from the world.
OK, I thought about my own question and i think that i now have an answer.
The question was: how is it possible that, with low inflation and a fixed exchange rate, a Big Mac in Argentina has become much more expensive in dollars?
The answer is that year-on-year inflation in Argentina was 166% in November.
Combined with a fixed exchange rate, the cost of a Big Mac would be expected to almost triple in dollar terms, compared to when Milei became President.
In other words: the dollar exchange rate has been fixed immediately, but inflation has taken one year to go down.
I suppose that this also happened in the early 1990s in the UK.
Black Wednesday must have hurt a lot of people, but after that, the economy recovered while inflation remained low. So, there is hope for Argentina.
Just don’t take a dollar-denominated loan if you live in Argentina.
AEP is not wrong, but not right either. More market, rather than less, is a usually a good thing, but so is less inflation and more fiscal and monetary discipline. Millei’s crawling currency peg is a less extreme version of a full currency peg, aka a currency board. Bulgaria introduced one in 1997 after a bout of hyperinflation and a major banking crisis (you can see IMF’s write-up on it from 1999 here), and has it to this day. Here is how the economy has done since.
Of course, there are other factors at play – for example, Bulgaria introduced a flat 10% profit tax rate in 2007, and a flat 10% income tax in 2008. But AEP’s claim that Millei is trapped is falsifiably wrong.
Snorri – I assumed you were asking a rhetorical question, I apologize for my error.
A country that has an artificially high (rigged) exchange rate, is, of course, more “expensive” in terms of the currency its own currency is “fixed” to.
So to say that Argentina is an “expensive” country in terms of Dollars is true – but it is also almost a tautological statement, it has an artificially high exchange between the Peso and the Dollar, fixed by the government of Argentina, so of-course it is “expensive” in terms of Dollars for visitors.
The effect on export industries was noted in the British context after 1924 when the British government decided to pretend that the First World War had not happened – and declared that the Pound was worth as many Dollars as it had been in 1914 (even though a vast number of Pounds had been created during the First World War – there had been far more inflation in Britain than in the United States because Britain was doing this for four years and the United States only for one year).
This was called “going back on the gold standard” – but it was not about gold, it was about declaring that the paper Pound was worth X number of paper Dollars when it clearly was not (thus undermining British exports by making them relatively expensive). In theory the government also said it would give physical gold if presented with Pounds for payment (“I promise to pay…”) – but even in 1914 (indeed long before 1914) it did not have nearly enough gold to cover its paper Pounds at-that-exchange-rate. In 1924 the position was vastly worse – although this was not admitted till 1931.
The logical thing to have done, whether for Britain in 1924 or Argentina now, would have been to admit that the currency was worth very little in terms of gold – and to say that the government would only give a tiny amount of gold for each Pound presented for payment (i.e. how much gold the Pound was really worth – dividing the actual government gold reserves by the number of Pounds).
But it was thought that it would be a national humiliation for Britain to admit that the Pound was worth very little gold – although in 1931 the position was admitted (indeed more than admitted – the government stopped giving any gold at all for the Pounds).
In the case of the United States foreign governments were told right till 1971 that the Dollar was worth a set amount of gold – this was a LIE as the American government did not have this gold.
So all President Nixon did in 1971 was admit that the system was a vast fraud – he did not, as some people still think, create the fraud.
In Switzerland the link with gold was broken in the 1990s – and that (contra to Ben David) was when the last shred of sanity in the international monetary and financial system was destroyed.
As for Argentina now – I do not know how much gold the government there has, or how much gold the Argentina Peso would be worth if one divided those government gold reserves by the number of Pesos.
But I suspect it is very little gold indeed.
By 1913 the Civil War “Greenbacks” had (almost totally) gone out of circulation in the United States and the various forms of notes issued by commercial banks were widely (and correctly – given such things as the crises of 1907) distrusted – in spite of the (unconstitutional) privileges given to the New York banks by the (unconstitutional) National Banking Acts of the 1860s.
So America had the most “primitive” monetary system of all major countries at the start of 1913 – it also had the largest economy and the highest living standards.
The government (and the bankers) decided to “fix” this situation – by creating the abomination that is the Federal Reserve system, which does not (as is often claimed) restrain the antics of the Credit Bubble bankers – on the contrary the Federal Reserve allowed these vicious antics by the Credit Bubble (fraudster) bankers to be on a scale that is almost beyond the power of language to describe.
Credit Bubble bankers are crooks – their antics are legalized fraud (the “money” they lend out, mostly, does not exist before they lend it out – thus they create Boom-Busts such as the Great Depression), but Central Banks do not solve this problem – they make the problem vastly worse, and (no) it does not matter if the Central Bank is privately owned or government owned – it is still an utterly terrible idea.
“Are you, you madman, saying that even the creation of the Bank of England in 1694 was a mistake?” – yes, although I would use a stronger word than “mistake”.
President Martin Van Buren, himself an ex banker, had some understanding of these matters – far more than most modern economists and politicians do. Sadly his master, President Andrew Jackson, just replaced the National Bank with State Banks – which were also Credit Bubble banks (failing to see that it is the principle itself that causes harm) – the gold and silver taken in taxes should not have been put in banks at all (not National or State level) – it should, Martin Van Buren argued, be kept in an Independent Treasury and paid out to finance government spending – not “deposited” with banks so they could pyramid Credit Bubbles (“broad money”) on it.
Nor should Credit Bubble banking be confused with honest money lending (the lending out of Real Savings – Cash Money, the actual sacrifice of consumption) – the much attacked “loan sharks” or “Shylocks” do NOT create Credit Bubble boom-busts – they are entirely innocent in relation to such things as the Great Depression.
I believe the economist Walter Block has made this point.
The 19th century American economic thinker Charles Holt Carroll identified the practice of using special NAMES for money – “Dollars”, “Pounds”, “Pesos” or whatever as at the root of the problem – these names had once meant set weights of gold or silver – but had taken on a bizarre life-of-their-own, and this caused terrible harm.
Whether people choose gold or silver, or some other commodity, as money (i.e. store of value as well as a medium of exchange) it should, Carroll argued, not involve special names (such as “Pound” or “Dollar”) – only the weight and purity of the commodity as described in the contact, contracts can be informal as well as formal.
And if a “banker” wished to lend out gold or silver (or some other commodity) as a loan for interest – that was fine, as long as they actually-did-that.
“I am lending you X amount of gold” – good, WHERE IS IT?
“Here is the loan agreement, I have credited-to-your-account….” – NO – where is the gold you say you are lending me, produce it and give it to me, otherwise you are “lending” me the contents of an empty bag, and there is no reason I should pay interest on that.
Mr Carroll is said to have been a rather hard nosed merchant in Boston.
Paul: thank you again. You write:
Agreed, but i start from the assumption that Milei is not stupid, and therefore he did not set an artificially high exchange rate **to start with**.
What remains to be explained, therefore, is how the exchange rate **became** artificially high. And i believe that i explained it brilliantly, if i can say so myself 🙂
— I note that, when the Eurozone came into being, national currencies were not converted into euros at artificially high rates. In addition, there was a condition that countries would be admitted only if the local inflation was similar in all countries admitted, or something like that.
It is also of interest that Milei’s opinion of Trump is that he is a Viking.
(Start at 4:41)
Very good Snorri.
Yes indeed.
Although President Milei did not create the policy of rigging (“fixing”) the exchange rate – he inherited it.
Donald John Trump the Viking – well better a Norse trader, but even the most peacefully intentioned trader does indeed have to defend themselves and others.
President Milei is correct – President Trump does have the correct instincts on culture war matters and he has COURAGE – without courage even the best intellects are useless.
Part of it is the support network – President Trump knows he has a family and friends who will stand by him, even be sent to prison (on false charges) and be abused – without betraying him.
But it is also himself – as he showed when he was shot, and responded by punching the air and calling out “fight, fight, fight”.
It was indeed a Viking thing to do.
And now recession is over in Argentina!
Jolly good Snorri! Thank you for reporting this Sir.