Cry for Argentina and its flawed fiscal policies

Don’t cry for Steve, Argentina.  He survived the little experiment with your economy just fine.  You, however, continue to bleed.

Steve Hanke and his pal Kurt Schuler decided to try out their right-wing theories in a real live setting.  Hanke, an economist at Johns Hopkins University, told his story to the U.S. House of Representatives (March 5, 2002).

“I  first became seriously interested in economic reform in Argentina shortly after meeting Argentina’s newly elected President, Carlos Menem, in 1989.   I developed a blueprint for monetary stability during 1990 with a fellow economist, Kurt Schuler. In 1991, our proposal for an orthodox currency board was published.”

An orthodox currency board is like an emasculated bank.  It can’t set interest rates or control currency.   The one thing the board did turned out to be a big mistake – – it pegged Argentina’s peso to the U.S. Dollar.

Argentina president, Carlos Menem bought Steve and Kurt’s radical right-wing scheme.  The president abolished exchange controls, privatized large chunks of Argentina’s state-owned firms and banks,  and opened up the country to the full blast of foreign competition.

At first it worked.  With the peso pegged to the U.S. dollar, Argentina couldn’t fall into old habits of printing money when times got tough.  Things looked rosy when inflation fell from 5,000% a year in the late 1980s to virtually zero in the early 90s.

The plan worked as long as the U.S. dollar was falling in world markets.   As the peso fell with it, Argentina had a trading advantage because exports were relatively cheap.  But when the U.S. dollar began to strengthen in the late 1990s, Argentina lost its export advantage.

Then the Asian crisis of 1997 caused the rapid flight of investment from countries around the world to the safe haven of the U.S.   Suddenly, lenders were calling in the massive loans to Argentina that they couldn’t repay.

The International Money Fund insisted that Argentina come up with the money by  privatizing public services such as water distribution, and reducing workers’ wages.   Argentina was forced to withhold spending that would have stimulated the economy.

“Even the half-baked economists at the IMF should have know that holding back government spending in a contracting economy is like turning off the engines on an airplane in stall,”  says Guardian newspaper journalist Greg Palast.

Meanwhile Steve Hanke, as president of Toronto Trust Argentina, bought up Argentinean bonds.  He was essentially gambling that the IMF plan would fail – – that Argentina couldn’t come up with the money.  The bonds ended up being very valuable.   Caught in a squeeze for American dollars, Argentina borrowed dollars at exorbitant rates.

Argentina was in free fall.  Loans to the country became very risky and interest rates matched the risk, up to 90 per cent for the cash-strapped country.  Toronto Trust Argentina posted earnings of 79 per cent in 1995.

Argentina’s industry collapsed and mass layoffs occurred.  The IMF stepped in to help Argentina with loans but all the money went to pay U.S. banks and speculators, not Argentineans.

Argentina has to hope that they don’t get more help like this.  After selling its public utilities, giving away its monetary control, freezing bank accounts,  reducing the wages and pensions of worker to pay debt; Argentina is drowning in good will -IMF style.

“IMF officials–like medieval doctors who insisted on bleeding their patients, and repeated the procedure when the bleeding made them sicker -prescribed austerity and still more austerity, right to the end,” wrote economist Paul Krugman in the New York Times.

Foreign-owned banks transferred billions dollars belonging to middle-class Argentineans out of the country.  This amounted to the overnight loss of savings accounts and pensions.

Hundreds of thousands of impoverished middle-class, pensioners and the unemployed demonstrated in the streets by banging pots and pans.

Unemployment is 25%, the economy is contracting at a rate of 15% a year, the central bank is running out of money to defend the currency.   One-half of all infants are suffering from anemia, and a quarter of children are suffering from malnutrition in a country so rich in farmland that it produces enough to feed 10 times its own population.

In 2002, capitalists “helped” Argentina by removing $19 billion U.S. from the economy when they needed it most.

Steve’s misadventure went a little astray, but don’t worry, he’s OK.