Monday, April 26, 2010

Could the U.S. become Argentina?

I swear I'm not writing under a fake pen name :-). Read, understand the similariteis and prepare for it as best as you can folks.
Take care.



Wednesday, April 21, 2010

RAHN: Could the U.S. become Argentina?

Obama policies have put the nation on a similar downhill slide

A century ago, if you had told typical citizens of Argentina (which at that time was enjoying the fourth-highest per capita income in the world) that it would decline to become just the 76th richest nation on a per capita basis in 2010, they probably would not have found it believable. They might have responded, "This could not happen; we are a nation rich in natural resources, with a great climate for agriculture. Our people are well educated and largely descended from European stock. We have property rights, the rule of law and an open free-market economy."

But the fact is, Argentina has been going downhill for eight decades, and it has the second-worst credit ranking in the entire world - only Venezuela has a lower ranking. Argentina, despite its natural resources and human capital, has managed to throw it all away. Argentina did not become relatively poor because of having been involved in destructive conflicts. It became poor because it has had a series of both democratically elected leaders and non-elected dictators who never missed an opportunity to make the wrong economic decisions. It is, once again, trying to renege on paying the
principal and interest on Argentine government bonds  to foreign bondholders, and hence New York state (where many of the bonds are serviced) may take further action against Argentina, including fines and asset seizures.

In the 1930s, the Argentine government increased its interventions in the private economy. Juan Peron took over in 1946 and ended up nationalizing the railroads, the merchant marine, public utilities, public transport and other parts of the private economy. For much of the past half-century, Argentina has engaged in a series of erratic monetary policies, often resulting in periods of very high inflation and economic stagnation. Because of their political power, the unions have been coddled, resulting in unsustainable wage-and-benefit programs. Excessive government spending has caused recurrent fiscal meltdowns, where both foreign and domestic debt-holders have lost many of their investments.

According to the Economic Freedom of the World Annual Report (published by the Fraser Institute in cooperation with the Cato Institute and others), Argentina ranks 105 out of 141 countries surveyed. Similarly, the 2010 Index of Economic Freedom (published by the Heritage Foundation and the Wall Street Journal) ranks Argentina 135 out of the 179 countries surveyed. (The U.S. is No. 8 and falling.)
The U.S. has a per capita income of about $47,000 per year, while Argentina's is just $14,000 on a purchasing-power parity (PPP) basis. A hundred years ago, Argentina's per capita income was about 80 percent of that in the U.S. If Argentina had done as well relatively as the United States, it would have a per capita income of about $38,000 today. Countries can become wealthy in a few decades, as have South Korea, Taiwan, Hong Kong, Singapore and Finland, by following the correct economic policies. They also can become relatively poor, as have Argentina, Cuba and Venezuela, by doing the wrong things.
Argentina has extensive import bans and controls. The Obama administration has been advocating protectionist trade policies and has opposed the ratification of previously negotiated trade agreements.
Argentina has income tax rates roughly equivalent to those in the United States but also has a value-added tax (VAT) and a wealth tax. Officials of the Obama administration and some members of the U.S. Congress are flirting with a VAT.

Argentina has continued to run inflationary monetary policies while at the same time attempting to treat the symptoms through price controls. The U.S. Federal Reserve has greatly increased the money supply, which is likely to produce future inflation. Officials of the Obama administration, at times, have advocated price controls of insurance companies, medical suppliers, financial institutions and even fees for carry-on luggage on airplanes.
Argentina's largest bank is state-owned, as are a number of its other banks. The Obama administration forced a number of large American banks to become partially government-owned. The two largest mortgage institutions in the United States - Fannie Mae and Freddie Mac - are now largely government-owned-and-controlled.

Argentine courts are slow and corrupt. Property rights are not secure, and the government has willfully understated inflation statistics, causing foreign and domestic bondholders to lose much of their investments. The Obama administration unilaterally took away bondholders' rights in the GM and Chrysler cases and, in essence, took their assets and turned them over to the unions that had supported Mr. Obama.
Argentina has extensive labor regulations to favor unions, which greatly increase the cost of hiring. The Obama administration has supported costly labor regulations that the unions favor, which eventually will drive up the cost of hiring workers and result in higher unemployment.

Argentina has a long history of deficit spending, which, in turn, has made government debt burdens so high that the government refuses to pay the debt to the private domestic and international debt holders. Over the next 30 years, economists associated with the Bank for International Settlements in Basel, Switzerland, estimate (as have many U.S. economists) that the U.S. public debt will rise to between 200 percent and 500 percent of GDP. (It is now about 60 percent.) Debt levels of 200 percent to 500 percent cannot be supported; hence, the debt holders will face erosion of their capital through either inflation or nonpayment.
The U.S. is not yet Argentina, but, if many of the policies of the Obama administration are not reversed, America will only get poorer and, in as little as 30 years, become a middle-income country, while dozens of other countries will enjoy a higher standard of living.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.


Anonymous said...

People write about socialism, corruption, left wing government in power. BUT, who voted for all of the politicians in power now?
People wake up and understand that the unseen hand-elites, King makers- behind he scenes are the ones who have the money, power and influence over all politicians-Republicans or Democrats. And it is thus all over the world, no exceptions. Your anger is focused on the wrong person, you are being duped. Educate yourselves or you will always be led/duped like sheeple that you currently are.

russell1200 said...

A small primary producing country with an expanding population put Argentina in a very poor place to ride out the turbulence of the 20th century.


Of course the expanding population could have been used to build up an internal market for goods, but that is probably were the ineptitude in governance comes in.

Unknown said...

Slightly off topic, but only sorta: The mindset of some people was demonstrated to me when a passenger in my car pointed out to me that I shouldn't switch lanes within 70 feet of an intersection. Legally, he is correct, however my act of switching lanes avoided a wreck because an oncoming driver turned in front of me when he should not have. So, because I avoided a wreck, I was scolded for violating the law. I do not think I will ever understand that mindset. I assume it is the same mindset that allows for the pillaging of a country by a few individuals.

dc.sunsets said...

Two questions occur:
1) Do rulers foist economic destruction onto their citizens, or do the masses of citizens virtually ask for it in their perpetual ignorance?
2) Can the masses of citizens EVER be informed well enough to embrace long-term thinking and the resulting wise policies, or is the future pretty much determined by larger forces that are not subject to management by wise people?

To me, 2500 years of written history clearly reveal the answers to these questions. The tides of human society are no more subject to "management" by the "wise" than are ocean tides. All these things are cyclical and obey rules we but dimly grasp and clearly can't manipulate.

All we as individuals can do is align our personal actions with the larger social environment. We aren't apt to change what's around us, but we can surely try to surf the peaks of the waves and avoid the troughs.

For more on this line of reasoning see http://www.socionomics.net

Anonymous said...

Fear you might be right, which is why I am studying the failures of your country, in hopes to be prepared as possible for it. Also to recognize it when it comes.

Patrick said...

You gotta love how Cato, with it's typical pure Right perspective, bashes the hell out of Argentina. I mean, lay off a little, I mostly agree with the sentiment but just living here makes me patriotic enough to want to tell this guy to cool it and go get a drink or something. Bunch of overpaid think tanks nerds in DC getting self-righteous about interest payments. A real conservative would understand that interest payments are part and parcel of the grand scam.

Maybe Argentina will take it back one day, lots of smart young people who just need the resources and the sense of self-responsibility to get moving, consistent rule of law would be nice as well.

The USA on the other hand is so far gone, there's no saving the patient. Because what's happening there is more than just mass lazyness and fiscal irresponsibility, it's an accelerating slide into techno-fascism. I keep hearing stories and I keep thinking "getting out of there was the best decision I ever made".

Fernando, I'm with you about having a plan B outside Argentina, I like Uruguay for its tranquility and non-entity-ness, in the age of the internet you're not losing so much by living away from a cosmopolitan center. But if you move to the US you're jumping out of the frying pan and into the fire.

Loquisimo said...

Fernando, is it true that in rural Argentina most people still drive cars from the 1930s and 1940s, like in Cuba, because they can not afford to replace them due to Argentina's precipitous slide into the abyss? Noted Ford collector Ed Towe bought two 1935 Ford V8 Phaetons in Argentina in the 1980s and actually drove them back via the Pan American Highway. More recently, a one of a kind 1930 Essex was found in rural Argentina. The family that owned it had used it to get from their farm to town and back for over 70 years. Obama has pursued auto industry policies that at least one commentator said may lead to cars that exist now still being driven in 50 years.

falcon_01 said...

I've been pushing this blog to as many people as I can, and been mentioning in conversations how we are going the way of Argentina for some time, and I imagine others have been as well. It seems word is getting out and people are starting to see the writing on the wall. I just hope it's not too late as some seem to think. If we could get enough Constitutionalists to oust the incumbents, we'll have a chance.

dc.sunsets said...

I do not share your view. The ruin is already baked into the cake by 70+ years of fractional reserve banking credit inflation, 70+ years of asset price inflation, and 7 decades of people entering occupations fertilized by that credit inflation.

It is a Krakatoa-sized amount of malinvestment that has to be sorted out, and doing so will inspire Krakatoa-sized eruptions of political strife and economic misery.

BTW, the U.S. constitution of 1787 was a coup-de-tat against the actual revolution, which was reflected by the Declaration of Independence and the Articles of Confederation. The Constitution isn't worth the paper it's printed on, evidenced by the near universal disdain for the limits it supposedly placed on our rulers.

Anonymous said...

If we think and act local, buy local, vote and work with and for the community, the nation can be rebuilt, yet it will take decades. Let's hope that our experience will be no worse than Argentina's.


Loquisimo said...

David, you just said that ALL new occupations created over the last 70-80 years are the result of credit inflation and are unsustainable. Do you really mean that half the country should go back to tilling the land using the methods of the 1920s, that transistor and microchip technology will vanish leaving us with tubes, and most of all that we will go back down to 100 million people or so in the US? If so, we're in for a really NASTY ride that will leave piles of bodies.

Anonymous said...

Two quotes come to mind:
-"The price of freedom is eternal vigilance" (Thomas jefferson)

-"A republic, if you can keep it" (Ben Franklin, when asked if we had a republic or a monarchy)

The masses almost by definition are always stupid, trite, lazy and self-destructive. Even more so today. Whatever freedoms we (Americans) were given, the masses have allowed to be stripped away. This crushing tide of socialism that we're experiencing is the result of decades of lethargy and stupidity. Only revolution will change it.

Anonymous said...

"Buy local, act local" etc... sounds nice but I've heard that since the 1970's, maybe that does not change anything except drive away competition, causing the locals to pay higher prices?

That comment about the cars was funny, if the U.S. people were to attempt to drive the same cars for the next fifty years the cars would probably be barely working wrecks and death-traps for the most part and only the wealthy would continue to drive, or is that the plan?

Between the road salt caused rust and the large amounts of plastic used to make up the parts of a modern car, most modern cars could be scrap heaps in fifty years while the Argentinians and Cubans will still be driving the same well built 1950's cars, plus a few in CA. and TX of course.

Who knows though, maybe they'll start using the same plastic in the cars as they use in making GLOCKS? Such a feat probably couldn't happen in the U.S. (or Argentina?) due to red tape. Perhaps in China?

D^2 said...


It must be difficult for an outsider trying to judge what is happening in the USA, but please know that the Washington Post is far from a reliable source, as is the Cato Institute.

It's an election year, so the sharp elbows are being jabbed. In the end, these people, both on the left and right, have no idea of what's to come. Both predict Armageddon if you don't side with their cause. That's politics.

The world isn't going to end tomorrow. Or next year. Or five years from now. Things will change, that's a certainty. So hope for the best, but be prepared for the worst. But be realistic. Having a job, having plans for the future, figuring out how to feed, cloth and educate your children is far more important than railing against the status quo.

Get on with it people! This is your life, not an argument on the internet. Go forward and make the best of it.

gaga said...

"The Obama administration forced a number of large American banks to become partially government-owned. "

Oh really? Bush was in power at the nationalisation of Fannie Mae and Freddie Mac. TARP, was a Bush era 750billion dollar debt. The US national debt started increasing in 2001, when Bush came to power.

But what the heck, US politicians are all the same and they are all conspiring to wreck the US while blaming each other.
The US is not in the 'top ten most successful' of any significant importance except military and financial power. Without money, the military will die and the US is destroying its financial capability , while its citizens engage in trivial partisan politics.

Stephen Grey said...

I wonder where Mr. Rahn was while George W. Bush was looting the US Treasury and getting us involved in two wars of aggression against countries that didn't attack us.

In my estimation much of the economic trouble in Argentina stems from decades of corporatism.

dc.sunsets said...

Not all new occupations created in the past 70 years owe their existence to credit inflation. The effect of credit inflation is to empower high-time-preference consumers in the marketplace as opposed to low-time-preference savers. The Saver saves $10, deposits it, and the bank loans $100. The "I want it NOW" consumer thus enjoys 10X the market power of the Saver, so occupations serving this Excess Consumption were amplified tremendously. It's like growing flowers in a greenhouse in Fargo, ND in January. They may be beautiful and fragrant but put them in the real environment and most die quickly.

Imagine how many jobs depend on US military spending? Weapons systems jobs are spread in every congressional district as a means of political patronage. When the banking system is exposed as insolvent and the U.S. stops spending a TRILLION on "defense," how many tens of millions of jobs will be pushed from the greenhouse into the snow? How will people react to that?

Resident Author said...

Look at the Commies logging in here trying to defend the path to destruction!

Listen folks, if you can't see past your historically proven flawed ideology, you are destined to fail. The rest of us simply won't go down with you. Right now you have control of the US gov. But what you fail to realize is that it's all spinning out of control. All of your social programs will fail. Big gov will fail. The only thing left will be you--FerFal has tried to help you prepare.

There is a lot to be learned from Agentina's collapse and anyone who states it can't happen is the USA is naive.

russell1200 said...

Sorry, it took me a while to find this again:

Contract enforcement, capital accumulation, and Argentina’s long-run decline

Leandro Prados de la Escosura Æ
Isabel Sanz-Villarroya


It is essentially tracks the "rule of law" problems that were one, if not the main drivers toward bringing Argentina down.

It also shows that much of the decline occurred much later then many of the pundits with an axe to grind would lead you to believe. One of the really strong points of the paper is that it does its best to use a measurable metric rather than opinion.

Unknown said...

This article is Cato Institute propaganda, with no mention of the extensive looting by Western capital. Watch this video: