Club Med needs to take a long hard look at Buenos Aires.

Argentina Continues The Descent

By Walter Russell

Argentina’s President did something so amazing today that it made the world news: she announced that she’s converting her last dollar bank account into pesos.

But don’t worry; this isn’t a story about the decline of the dollar.

Argentina wasted the 20th century lurching from one ill-considered economic experiment to the next. Many worked temporarily; the country’s vast natural resources are always there to help out. But in the end, one by one they failed, sending the country into alternating bouts of hyperinflation and business depression.

Unfortunately the country is starting the 21st century in the same way; the Kirchner-Fernandez period like the Menem period before it began with high hopes but it is now slowly descending to earth. So far the government has resorted to the traditional techniques: cooking the books, hounding whistle blowers, nationalizing assets and confiscating foreign investment.

In the most recent stage along Argentina’s current trail of tears, President Cristina Fernandez is trying to rebuild the rapidly eroding faith in the country’s unsustainable currency by publicly announcing that she is putting her own personal savings in Argentine pesos. This is meant to persuade other Argentines to do likewise; it will likely have the opposite effect.

As always in Argentina, it begins with the lies. Inflation, says the government, is running at about nine percent. It is an estimate that few people not on the government’s payroll or otherwise under its (sometimes quite heavy) thumb take seriously. 25 percent per year is the more common estimate — and it is heading upward.

To protect their money from the chaos and losses to come, smart Argentines and foreigners are staging what amounts to a run on both the peso and the country. Something like $21 billion has left the country in the last year; more would go but the government is doing everything in its power to make it harder to get money out of Argentina.

The result? If you can’t get your money out of the country, at least you can get it out of the peso. Over the last 100 years, Argentines familiar with their country’s cyclical failure pattern have learned how to smell trouble coming, and once a cycle has passed its peak and begun to descend, they traditionally take money out of pesos and put it into dollars. Equally traditionally, Argentine governments try to crack down on this practice in an increasingly frantic effort to prevent badly needed foreign exchange from leaking out of the Central Bank’s dwindling reserves. And as part of the same traditionally choreographed financial minuet, Argentines move en masse from official, paper-trail government-sanctioned money exchange to the black market. The government tries to clamp down on the black market; every clampdown gives the public more reason to mistrust the government and its currency. In the end comes hyperinflation, domestic and foreign defaults, bank failures, economic collapse and the end of one failed experiment and the start of the next.

The current Kirchner-Fernandez cycle is, by historical standards, well advanced on the traditional road to ruin. Already Buenos Aires is back to the kind of organized black currency market that appears in times of distress. Those who visited the country in the failing days of some of the Alfonsin and Menem administrations will recognize the all-too familiar symptoms.  President Fernandez is doing her best to stop the kind of currency meltdown that has felled many of her predecessors but appears at this point to be sinking ever deeper in the mire of inflation and decline.

We keep returning to the Argentine story at Via Meadia because it is such a useful (and sad) example of how democratic countries with plenty of resources can shoot themselves in the foot. Objectively, there is no reason why Argentina shouldn’t be one of the world’s most progressive and rich countries. Yet for more than 100 years it has been losing rather than gaining ground, falling behind many countries with fewer resources but better politics.

This kind of agony used to be familiar all over Latin America, but more and more countries — led by Chile and Brazil — are climbing out of the false populism/bad money/inflation trap. Someday, Argentina will join their ranks, but apparently President Fernandez and the forces around her aren’t ready for that kind of change.

The story’s implications sweep far beyond South America. Latin Europe and Greece stand at an important historical turning point. They can conclude from the recent crisis that liberal capitalism doesn’t work and can never work, and go the Argentine route of populism, controls and cyclical failure. There are many in those countries, including some advisers to France’s new president, who believe that this is the way to go. We can only hope that cooler heads and calm reason will prevail. Those who won’t learn from Argentina are condemned to recreate it; as governments and thinkers in Italy, Spain, Portugal, France and Greece ponder the fork in the road that lies before them, Club Med needs to take a long hard look at Buenos Aires.