Has America Caught Argentinean Disease?
By John Mauldin Nov 02, 2009 8:00 am
It depends, in part, on whether the Fed maintains its independence.
This week, we’ll look at the Argentinian experience and ask ourselves whether hyperinflation can happen here.
The Ascent of Money
I’ll be quoting from Niall Ferguson’s recent book, The Ascent of Money. I cannot recommend this book too highly. And if there was one book I could require every member of the Congress to read, it would be this one. As I read it, I’m struck again and again by how fragile and yet resilient our economic systems are: fragile in the sense that governmental policy mistakes, no matter how well-intentioned, can destroy the wealth of a nation; resilient in that it doesn’t happen more often.
As I’ve been writing, the United States in particular and the developed world in general, are faced with a series of very unpleasant, if not downright bad choices. The time for good choices was 10 years ago. Now we face the prospect of painful decisions, no matter what we do. It’s not a matter of pain or no pain, of somehow avoiding the consequences of our bad decisions. It’s simply deciding how much pain we’ll take and when, or allowing the pain to build up to a climactic event. Today we look at what I think would be the worst choice of all.
Catching Argentinean Disease
At the beginning of the twentieth century, Argentina was the seventh richest nation on earth. It’s very name means “silver.” “As rich as an Argentine” was a byword. Even after falling from the heights through a series of bad decisions, the country was still so wealthy that in 1946, when new president Juan Peron first visited the central bank, he could remark that “There was so much gold you could barely walk through the corridors.”
Argentina had actually defaulted on its debt in the late nineteenth century -- not once, but twice! But still they managed to avoid destroying the currency and devastating the country. But in 1989, after years of massive budget deficits that were financed with borrowing from abroad and Argentinean citizens, the country was left with so much debt (and no one was willing to lend it any more money), that the leaders felt compelled to resort to the printing press.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
(4)
Reply
2009-11-02 11:32:23
Fed Independence
Another view which is opposed to that of Mr. Mauldin wisely perceives that Congress is the source of the legislation that created the Federal Reserve (Federal Reserve Act of 1913). As such, it is more than reasonable that Congress - which is itself accountable to the people who elected them - maintain a supervisory/audit role over the actions of the Federal Reserve.
Of course, even as some of the more insightful commentators on this site were warning about the potentially catastrophic consequences of the economic condition of this nation - both public and private - Mr. Mauldin continued to maintain his "muddle through" outlook. He was wrong.
Mr. Mauldin has really had the wool pulled over his eyes if he believes the Fed is "independent of political forces". Surely he jests.
In this Constitutional Republic called the United States of America, the people of this country are assigned the power to hold their elected representatives accountable to the U.S. Constitution (no foreign treaties of any sort like the U.N. charter or the upcoming Copenhagen treaty). If the people are unhappy with the direction of their Government, then they need look no further than themselves as they are the ones who put them there.
The desire of the Federal Reserve is to remain independent...of electoral accountability. As all tyrants (whether individual or institutional in form matters not) are prone - they seek unilateral authority to subvert proper control of their given powers - powers granted by the Congress.
All of this being said, beware of the fact that there are now 2 different pieces of legislation working their way through Congress regarding Federal Reserve accountability - make sure that you are distinguishing the two pieces of legislation when discussing such matters of importance. H.R. 1207 is the piece that is sponsored by Rep. Paul and is the singular bill which patriotic Americans should be supportive. However, please be aware that Rep. Mel Watt of North Carolina (home district of Bank of America) has stripped the important audit and oversight functions of this legislation from H.R. 1207.
Once again, the lobbyists have thrown down the gauntlet - the fight is underway. How long will God-fearing citizens of this nation remain enslaved to the merchant/banking class of this country which works night and day to devise cunning means of perpetual control at every opportunity? Let freedom ring - Audit the Fed.
Of course, even as some of the more insightful commentators on this site were warning about the potentially catastrophic consequences of the economic condition of this nation - both public and private - Mr. Mauldin continued to maintain his "muddle through" outlook. He was wrong.
Mr. Mauldin has really had the wool pulled over his eyes if he believes the Fed is "independent of political forces". Surely he jests.
In this Constitutional Republic called the United States of America, the people of this country are assigned the power to hold their elected representatives accountable to the U.S. Constitution (no foreign treaties of any sort like the U.N. charter or the upcoming Copenhagen treaty). If the people are unhappy with the direction of their Government, then they need look no further than themselves as they are the ones who put them there.
The desire of the Federal Reserve is to remain independent...of electoral accountability. As all tyrants (whether individual or institutional in form matters not) are prone - they seek unilateral authority to subvert proper control of their given powers - powers granted by the Congress.
All of this being said, beware of the fact that there are now 2 different pieces of legislation working their way through Congress regarding Federal Reserve accountability - make sure that you are distinguishing the two pieces of legislation when discussing such matters of importance. H.R. 1207 is the piece that is sponsored by Rep. Paul and is the singular bill which patriotic Americans should be supportive. However, please be aware that Rep. Mel Watt of North Carolina (home district of Bank of America) has stripped the important audit and oversight functions of this legislation from H.R. 1207.
Once again, the lobbyists have thrown down the gauntlet - the fight is underway. How long will God-fearing citizens of this nation remain enslaved to the merchant/banking class of this country which works night and day to devise cunning means of perpetual control at every opportunity? Let freedom ring - Audit the Fed.
2009-11-02 17:33:56
US compared to Argentina?
I live in Buenos Aires. Unfortunately when my fellow countrymen hear about "currency devaluation", "growing deficits", and "hyperinflation" in the US, they tend to make comparisons and look for similarities with what has happened here in Argentina. Please, do not make the same mistake in reverse. Social, political, and economic processes taking place in a third world country like mine are not comparable to those in the States or Europe.
I agree with Mr Ferguson on the fact that Argentina's economic decline was more than a monetary phenomenon although it cannot be put simply. Rather than saying that "there was no significant group with an interest in price stability" I believe there are specific groups (the political class for instance) with very clear interests and goals. Those have to do with gaining power (becoming elected) and holding on to it enough time so as to participate in all sorts of illegal activities that generate multi-million dollar gains (the actual president, Ms Kirschner declared 4 M U$S in 2006 and 12 M U$S in 2008, and nobody believes her personal worth is only 12 Million)
In Third World countries there's no such thing as Development Programs nor the functioning institutions and leaders to implement them.
From Bush and Wolfowitz to Sean Penn, Michael Moore and Sting, they got it all wrong. I'm convinced they should spend at least a few years in situ to understand what's going on in places like mine (analysts too, by the way):
Click on the link to see Sting and Hebe de Bonafini (a leading argentinian "human rights activist", and head of the Mothers for the Disappeared) in a warm hug.
http://www.madres.org/asp/contenido.asp?clave=2588
Click on this other link to get to an article in La Nacion (one of Argentina's leading newspapers, Spanish only,sorry ) commenting on Ms de Bonafini's profile and behavior, including her overjoyed public declarations on 9/11 (when she let everybody know she un-corcked a bottle of champagne for the ocassion)
http://www.lanacion.com.ar/nota.asp?nota_id=590380 (See 3rd paragraph in relationship to 9/11)
I believe Sting's actions are in good faith plus he's a great musician, but he doesn't have a clue as to what goes on here.
To be fair there's some clear exceptions like Chile or Uruguay when it comes to this particular region, but most Third World or "Emerging Market" societies (including mine) are deeply fractured, our social fabric is ill.
So, what's my point?
If investors loose their faith in the US economy and the Dollar, who are they going to start to believe in?
I agree with Mr Ferguson on the fact that Argentina's economic decline was more than a monetary phenomenon although it cannot be put simply. Rather than saying that "there was no significant group with an interest in price stability" I believe there are specific groups (the political class for instance) with very clear interests and goals. Those have to do with gaining power (becoming elected) and holding on to it enough time so as to participate in all sorts of illegal activities that generate multi-million dollar gains (the actual president, Ms Kirschner declared 4 M U$S in 2006 and 12 M U$S in 2008, and nobody believes her personal worth is only 12 Million)
In Third World countries there's no such thing as Development Programs nor the functioning institutions and leaders to implement them.
From Bush and Wolfowitz to Sean Penn, Michael Moore and Sting, they got it all wrong. I'm convinced they should spend at least a few years in situ to understand what's going on in places like mine (analysts too, by the way):
Click on the link to see Sting and Hebe de Bonafini (a leading argentinian "human rights activist", and head of the Mothers for the Disappeared) in a warm hug.
http://www.madres.org/asp/contenido.asp?clave=2588
Click on this other link to get to an article in La Nacion (one of Argentina's leading newspapers, Spanish only,sorry ) commenting on Ms de Bonafini's profile and behavior, including her overjoyed public declarations on 9/11 (when she let everybody know she un-corcked a bottle of champagne for the ocassion)
http://www.lanacion.com.ar/nota.asp?nota_id=590380 (See 3rd paragraph in relationship to 9/11)
I believe Sting's actions are in good faith plus he's a great musician, but he doesn't have a clue as to what goes on here.
To be fair there's some clear exceptions like Chile or Uruguay when it comes to this particular region, but most Third World or "Emerging Market" societies (including mine) are deeply fractured, our social fabric is ill.
So, what's my point?
If investors loose their faith in the US economy and the Dollar, who are they going to start to believe in?
2009-11-02 22:27:59
The "Berries" Don't Understand, "It's The Debt Stupid"
John,
Great article, on a very important topic.
In my opinion, the consumer is now forever changed as ones with the most money are the baby boomers. And they need to now save, as they have had their 401Ks become 301Ks.
Now the question for me will be how much the government wants to increase gov. debt to offset the private debt which will decrease for years.
Japan is a great example of how the government has swapped private/corporate debt for gov. debt. Recent blogs (including yours) suggest this may be a path to ruin. They still have too much debt. Soon they may have political revolt, as the issue of too much total debt/GDP was never resolved. Japan is the ultimate example of a political solution to an economic problem. It is the 20+ year "kick the can down the road".
I don't see hyper-inflation until there is a mechanism for wages to rise and keep pace. If you hyper-inflate and wages don't rise, you will cause rampant poverty and political instability.
I'm still betting on asset and debt deflation, with possible purposeful dollar devaluation at some point like in the 1930s . This is the fastest way to get rid of a debt bubble.
It's time our leaders realize it's a debt crisis, and begin to figure out ways to restructure it. There should be some optimum between adding federal debt, and restructuring other debt., without a total collapse. Also a reduction in the amount of leverage and debt still in the financial system would greatly reduce total debt if it was addressed.
In the 1930s, there was no real recovery till the early 1940s when the debt/GDP ratio fell to around 1.0. I don't buy the argument that the stimulus was withdrawn too early in 1937, other than the fact that the debt/GDP ratio was still around 1.5, and the economy still needed to further delever. So one removed the drugs, but the patient was still sick.
We might as well start now, and start working on the debt/GDP ratio.
All opinion.
Great article, on a very important topic.
In my opinion, the consumer is now forever changed as ones with the most money are the baby boomers. And they need to now save, as they have had their 401Ks become 301Ks.
Now the question for me will be how much the government wants to increase gov. debt to offset the private debt which will decrease for years.
Japan is a great example of how the government has swapped private/corporate debt for gov. debt. Recent blogs (including yours) suggest this may be a path to ruin. They still have too much debt. Soon they may have political revolt, as the issue of too much total debt/GDP was never resolved. Japan is the ultimate example of a political solution to an economic problem. It is the 20+ year "kick the can down the road".
I don't see hyper-inflation until there is a mechanism for wages to rise and keep pace. If you hyper-inflate and wages don't rise, you will cause rampant poverty and political instability.
I'm still betting on asset and debt deflation, with possible purposeful dollar devaluation at some point like in the 1930s . This is the fastest way to get rid of a debt bubble.
It's time our leaders realize it's a debt crisis, and begin to figure out ways to restructure it. There should be some optimum between adding federal debt, and restructuring other debt., without a total collapse. Also a reduction in the amount of leverage and debt still in the financial system would greatly reduce total debt if it was addressed.
In the 1930s, there was no real recovery till the early 1940s when the debt/GDP ratio fell to around 1.0. I don't buy the argument that the stimulus was withdrawn too early in 1937, other than the fact that the debt/GDP ratio was still around 1.5, and the economy still needed to further delever. So one removed the drugs, but the patient was still sick.
We might as well start now, and start working on the debt/GDP ratio.
All opinion.
2009-11-09 14:54:24
The 1rst World and the world of Magical Realism
Dear Mr Mauldin,
I just finished reading the interview you gave to La Nación (one of the leading newspaper publications in Argentina)
As you realized during your stay in Buenos Aires people here (investors, savers, big and small) are very concerned about the fate of the US Dollar.
I keep going back to my thesis that the US and its currency will prevail over the rest, at least on a relative basis, that is if the world goes to hell, most
countries outside of the States will end up deeper-in. In places like mine I'm more concerned about the social rather than the economic implications of this
global crisis. I fear poverty could become such an issue here that we could end up having events similar to what happened in Germany in the 1930s
(including a local version of a "KristallNacht")
I tried to exemplify in my previous post how most in the 1rst world have a narrow understanding of what a 3rd world, emerging market is. Except for a very few countries and
in spite of how expensive natural resources have become, most of Latin America is always on the brink of a political, social, and economic explosion.
After living in the States for several years I came back in '05. Since then, a bottle of Coke or Mineral Water more than doubled in price, my kid's schooling has gone up 80%,
our health care bill 70%, phone bill, 100%, some every day consumables have tripled. Yet the president and the Statistics Department keep telling us we have between 6 and 8 %annual inflation. This is llike me telling you: "look at me, I'm George Bush!" and you answering back "No way, you aren't". And me saying, "I'm serious, look at me again, I am G Bush!" and so on.
At the height of the crisis when Argentina defaulted, Mr Duhalde, one of the 5 interim presidents we had during those couple of months, came out on national TV, looked at people in the eye and said emphatically: "Dollar deposits in the banks WILL NOT be "pesified". A few months later for every 100 Dollars in their bank accounts, people got back 100 Pesos (equivalent to a third in value)
Over here we live in a world of "Magical Realism" where Yes is No, No is Yes or Maybe at the most, Green is Red, Red is Green, Yellow is irrelevant, and so on (the term is used to describe Nobel Price Winner Gabriel Garcia Marquez' style of writing)
Could China, Russia, India, and Brazil be, in part or all, cases of Magical Realism too?
One thing they have in common (particularly China and Russia) is there's many constraints to personal freedoms. Freedom is a key ingredient to nurture creativity, innovation, and economic development of the type we have seen in Europe and the States for many, many generations, not just a few decades.
I just finished reading the interview you gave to La Nación (one of the leading newspaper publications in Argentina)
As you realized during your stay in Buenos Aires people here (investors, savers, big and small) are very concerned about the fate of the US Dollar.
I keep going back to my thesis that the US and its currency will prevail over the rest, at least on a relative basis, that is if the world goes to hell, most
countries outside of the States will end up deeper-in. In places like mine I'm more concerned about the social rather than the economic implications of this
global crisis. I fear poverty could become such an issue here that we could end up having events similar to what happened in Germany in the 1930s
(including a local version of a "KristallNacht")
I tried to exemplify in my previous post how most in the 1rst world have a narrow understanding of what a 3rd world, emerging market is. Except for a very few countries and
in spite of how expensive natural resources have become, most of Latin America is always on the brink of a political, social, and economic explosion.
After living in the States for several years I came back in '05. Since then, a bottle of Coke or Mineral Water more than doubled in price, my kid's schooling has gone up 80%,
our health care bill 70%, phone bill, 100%, some every day consumables have tripled. Yet the president and the Statistics Department keep telling us we have between 6 and 8 %annual inflation. This is llike me telling you: "look at me, I'm George Bush!" and you answering back "No way, you aren't". And me saying, "I'm serious, look at me again, I am G Bush!" and so on.
At the height of the crisis when Argentina defaulted, Mr Duhalde, one of the 5 interim presidents we had during those couple of months, came out on national TV, looked at people in the eye and said emphatically: "Dollar deposits in the banks WILL NOT be "pesified". A few months later for every 100 Dollars in their bank accounts, people got back 100 Pesos (equivalent to a third in value)
Over here we live in a world of "Magical Realism" where Yes is No, No is Yes or Maybe at the most, Green is Red, Red is Green, Yellow is irrelevant, and so on (the term is used to describe Nobel Price Winner Gabriel Garcia Marquez' style of writing)
Could China, Russia, India, and Brazil be, in part or all, cases of Magical Realism too?
One thing they have in common (particularly China and Russia) is there's many constraints to personal freedoms. Freedom is a key ingredient to nurture creativity, innovation, and economic development of the type we have seen in Europe and the States for many, many generations, not just a few decades.
Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved
