Argentina, I'm Crying For You (how things got so bad)

over 100% inflation, a president who listens to his dogs for economic advice, and the largest debt holder to the IMF

Debts and Promises

The Nobel Prize winning economist, Simon Kuznets, once said that there are four types of countries, the developed, the underdeveloped, Japan, and Argentina.

This is the story of Argentina. A story comprised of aggressive debt and broken promises. A country that far too often, in the aftermath of bad decision after bad decision, has taken out more debt than they could handle, and made more promises than they could keep. Promises that policies, corruption, and fiscal responsibility would be remedied in the long term with the short term stability and help that the debt would provide. Unfortunately for the Argentinian people, time and time again the country would find itself in a situation where the debt would come due without any material realization of the promises that were made toward a better future.

The cycle would repeat itself — the country would take out more debt in an often unsuccessful attempt to avoid default or cover certain payments; and the country would make more promises regarding the future policies to reduce spending, inflation, and corruption. This would lead to the country defaulting a total of nine times, three of which occurred in the last two decades.

This rocky economic history has led to runaway inflation, astounding amounts of poverty, political instability, and a distrust in everyone and everything that has to do with the government.

The Bigger Problem

In October of 2023, Argentina’s inflation rate hit 142%. It’s nearly impossible to find a single month in the last five years that didn’t see at least a 40% inflation print year-over-year.

Chart: Argentina Monthly Inflation Print

With inflation this high, no one wants to hold pesos. The citizens want to either immediately spend the money on goods, because they know that prices will be higher tomorrow, or purchase dollars or euros, as those will better hold their value. The first option is very reasonable from a consumer perspective, but can also lead to exacerbated inflation. When everyone is spending every cent they are being paid, prices are likely to rise. At the same time, one would not want to hold a currency that is being devalued daily. The second option is also reasonable, but more difficult to accomplish, as the government had often placed currency exchange restrictions on its population. This has led to an underground dollar market forming, where people are willing to pay a higher-than-market price for dollars.

The country has had a long history of inflation, but the past year specifically has been exceptionally bad. I want to discuss how a country that used to be so prosperous long ago ended up in such a bad spot, and what the future implications are. For the sake of brevity, I’ll recap the past decade of the economic history, how it landed the country where it is today, and what the current conditions are for those most affected by this — the Argentinian citizens.

The 2010’s and The IMF

Mauricio Macri was elected president of Argentina in 2015. He inherited an incredibly tumultuous Argentine economy from Kristina Fernandez de Kirchner. Inflation at the time was already at an unpleasant 30% and the Central Bank of Argentina had depleted its foreign exchange reserves by over 50% between the years of 2008 and 2015. The prior Kirchner government had also imposed currency controls from 2011 onward, restricting the purchase of foreign currency within Argentina. Any individual or business that wanted to buy dollars had to request government permission. Argentinians couldn’t freely sell their own currency, which inevitably created an artificial market price for the Peso. This artificial price was propped up by the Argentine Central Bank, which is yet another reason why reserves had been depleted so drastically — they needed to hold up their own currency. See below Central Bank reserves:

Chart: Argentina Central Bank Foreign Exchange Reserves

They needed to prevent the Peso from collapsing.

They were unsuccessful. When Macri came into office in 2015, his first big policy change was ending the currency control. This, very unsurprisingly, led to an extreme devaluation of a currency that was already rapidly losing value. The Peso saw a 30% drop overnight after Macri removed the currency control.

See below the currency in free fall shortly after Macri took office in late 2015:

Chart: Argentinian Peso vs U.S Dollar

In 2018, the trade deficit widened due to a severe drought that drastically cut the supply of Argentina’s exports. At this time the United States raised their own interest rates, putting even more pressure on the peso, as investors were looking to buy dollars. Argentina fell into an even deeper recession. Macri turned to one of Argentina’s greatest enemies, the IMF. Argentina and the IMF have a long history. Argentina has been indebted to them for a while, and the Argentinian people hate the institution.

Macri took out a $50 billion loan from the fund in an attempt to hold the economy together. As of 2019, almost half of all the IMF’s loans were owed by Argentina.

Chart: Argentinian Debt to IMF Relative to Other Countries

The government promised to curtail spending, and that following year in 2019, they actually eliminated their deficit through austerity measures (the least they could do after taking a $50B loan).

In 2019, Macri lost reelection to the same party he won against in 2015. Alberto Fernandez took office with Kirchner as his vice president. He imposed more currency controls, preventing citizens from exchanging any more than $200 a month of their pesos into dollars. To further the dissuasion of buying dollars and euros, he set a 35% tax on foreign currency exchanges. The Peso continued to lose value.

Then COVID hit, worsening the already poor economy. In May of 2020, Argentina defaulted when it failed to make a $500 million payment on its $66 billion of restructured foreign debt. The situation has progressively grown worse since then.

The Future of the Country - Milei

As the country stands, inflation is at the highest its been in decades, the Peso continues to fall, and poverty rates continue to rise. Money is horribly mismanaged; one third of the employees in the country were employed by the government as of 2020. See below for the values of private employees on the left versus public employees on the right.

The state employs one third of the workforce, and then those employees pay taxes to the state, who then pays the workforce’s salary. The government spent 49% of their budget on employee salaries in 2019. There is tremendous distrust in the government and their responsibility to the people.

Argentina just held their presidential election this past November, and a man by the name of Javier Milei won by a landslide — a 12% lead! His whole pitch was essentially that the government is dumb and broken, and what largely won him the election was how horribly inflation had been trending. The irony is that Milei’s economic plan is also very dumb and broken. His primary goal is to move the Argentinian economy away from the peso in order to adopt the dollar — dollarization as it’s called.

The reason this is dumb is because Argentina has absolutely no control over the United States Federal Reserve, and thus wouldn’t be able to influence much of their own monetary policy. Not running your own currency tends to be worse than running your own currency. But it goes deeper than that. The entire reason Milei is pushing for dollarization is to signal some sort of fiscal restraint. Dollarization, in fact, would be a massive train wreck if the government wasn’t incredibly disciplined in how they spend their money. But if the government could promise to be disciplined to begin with, then dollarization isn’t at all necessary. It goes back to the cycle of debt and promises. The promises are being made under the assumption that they would be kept, but if they were kept, then the debt — or dollarization — wouldn’t really be needed in the first place.

It’ll be interesting to see the outcomes of such drastic promises by Milei, but it sucks that the stakes are so high. There’s an entire country riding on someone with almost no legislative backing and little political experience. As a final point, Milei has five dogs — Milton, Robert, Lucas, and Murray — they’re all genetic clones of his original dog Conan, and they all serve a purpose, advising him on politics, the economy, and more. And that’s crazy.

Hope you’re doing well, thanks for reading.