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The Daily Reckoning PRESENTS
Investing
in any country is a gamble. Not only have you know idea what cards might
turn up, explains Bill Bonner, you also have a sneaking suspicion that
the dealer may have one or two up his sleeve. Read on…
As unlikely as it
seems, we were once called upon to advise a foreign government.
Out
on the vast plains of Eastern Europe lies a miserable nation called
Belarus. After the break-up of the Soviet Union, the party hacks who ran
the place saw the need to do things differently. But that is where their
ideas began to piddle out. All they could think of was to bring in
“experts” from the West to tell them how to “reform” their
economy. It is a measure of the sloppiness of their approach that your
editor was rounded up to offer his opinion. It is a measure of your
editor’s persuasiveness that, to this day, Belarus remains the most
forlorn and backward nation in Eastern Europe.
But
today’s Daily Reckoning essay is not about Belarus, nor Eastern
Europe. It is about a place in which we have recently developed a keen
interest…not the steppe, but the pampas. Investing in any country is a
gamble. Not only have you know idea what cards might turn up, you also
have a sneaking suspicion that the dealer may have one or two up his
sleeve. But the burden of this little reflection is that Argentina may
be worth a bet.
We
only mention our Belarus experience because it illuminated us. We
realized that we might as well be giving culinary advice to cannibals.
“Well…you
would probably rather have some canard a l’orange,” we might
suggest. “Pity you don’t have any canard…or any oranges.”
An
economy is a natural thing. Each one has to follow its own course. All
public officials can do, generally, is make sure private property is
protected by the courts, and otherwise get out of the way - eliminating
all the many restrictions, taxes, permits, prohibitions, pay-offs, and
emoluments that inhibit commerce. This, of course, is the last thing
public officials want to do, and it could only have been done in Belarus
over the dead bodies of the people we were advising.
Which would have been fine with us, but we had no means of laying
them out or preventing their friends from returning the favor. So, the
whole trip was a preposterous farce.
Before
WWII, Argentina was one of the world’s richest countries. “As rich
as an Argentine,” was a common expression in England. Between the
wars, the English gentry, down on their luck but up on their manners,
hoped to marry off its daughters to prosperous Argentine planters. Some
did.
But
then, Argentina slipped into a puddle of socialist do-goodism from which
it never was able to climb out. Economic growth was spotty. Inflation
was chronic. Rules were imposed to prevent this…stop that…and
inhibit something else. Labor restrictions made it hard to employ people
even during boom periods. But in 1989, the country seemed to hit bottom.
Inflation hit 3000% that year. Soon
after, the Argentines were told to get to work and stop complaining.
By
1997, the country was growing at a 9% rate, but there were problems. The
country was consuming and investing more than it produced. And the
curious system of international finance tempted Argentina to borrow even
more. Fund managers bought emerging economy debt based on an index of
borrowers. This had the perverse consequence of increasing the
availability of credit to the nation that borrowed the most. That is, as
Argentina borrowed more and more, it became a bigger part of the index
of emerging market debt. Why people pay fund managers to follow the
indices, we don’t know, but that’s what they did. The more Argentina
owed, the more the fund managers wanted to buy its bonds.
It
was no easier for Argentina to resist the lure of easy credit in the
‘90s than it has been for America in the 2000s. By the end of the
period, Argentina’s foreign indebtedness approached $150 billion. That
would be peanuts for the United States, but it was a lot of money for a
country like Argentina. A few smart fund managers saw the disaster
coming (Asian central banks, take notice.) They sold off Argentina’s
bonds. Pretty soon, the country was in crisis again, unable to make its
debt payments. In December 2001, riots and looting broke out. President
De la Rua decided that it would be better to stiff the foreign creditors
than to further annoy the locals with austerity measures. Before the
month was up, Argentina made history with the biggest debt default ever.
There
are a lot of ways to ruin an economy. Argentina has experimented with
most of them. It has devalued its currency, and revalued it. It has
pegged it, and then knocked down the peg. It has regulated, controlled,
inspected, taxed and confiscated. Following the 2001 crisis, earnings
fell by 30% - with half the nation slipping below the official poverty
line. What is remarkable is that the Argentine economy has survived at
all.
We
have been favored with a letter from a Daily Reckoning reader, resident
in Argentina, who puts the country’s financial history into
perspective for us:
“I
am 72 years of age and am writing you from Argentina. It is well
worthwhile to study what happened in Argentina over the years. This
country goes crazy about every five years or so. It has been my painful
experience that it is better to be a debtor than a creditor when this
time comes around. When the crunch comes somehow, debtors who are in the
majority always seem to be protected by politicians who need their
votes. I don't see why this will not also be true in America.”
Nor
do we.
In
September, the Argentine economy reported its 37th consecutive month of
GDP growth. It is growing about 7.3% this year, 5.6% projected for next
year.
“The
government has been incredibly lucky,” says Luis Secco, a Buenos Aires
consultant.
And
here we find the big difference between the United Sates and Argentina.
If a country such as Argentina does well, it has luck to thank. North of
the Rio Grande, people thank neither the stars nor the fates. Instead,
they salute their Fed chief and pat themselves on the back.
Argentine
economists have even tried to quantify their good fortune with a “luck
index” - said to measure the impact of global economic conditions. The
index hit a high of 9.8 (on a 10-point scale), last year. This year, it
is expected to be around eight.
Meanwhile,
the government budget is in surplus (before interest payments). Foreign
currency reserves are increasing. Foreign debt, as a proposition of GDP,
has fallen below 40%. Inflation is below 10%. The trade balance is
positive. And the economy is growing twice as fast as America’s.
But
what America has in most abundance - confidence and credit - Argentina
lacks. Just try to buy a house in Buenos Aires or a ranch out in the
country. No one will offer you credit. While Alan Greenspan comments on
the solidity of the U.S. economy, Argentine officials speak about their
economy’s fragility. While American economists look ahead and see only
progress, Argentine economists look ahead and see hesitation and
backsliding. They warn of inflation. They warn of social upheaval.
While
Americans see a glass half full, Argentines see one that is bone dry.
We
do not know how to cure Argentina’s economic problems. But we have
evidence that confidence is not permanent, but cyclical. Having been so
low for so long, we expect to see it turn up on the pampas. In America,
on the other hand, confidence and asset prices are likely to go in the
other direction.
Bill
Bonner
The Daily Reckoning
© 2005 Bill Bonner
The
Daily Reckoning FSO Archives
 www.dailyreckoning.com
 Bill Bonner is the founder and president of Agora
Publishing, one of the world's most successful consumer newsletter
publishing companies, and the author of the free daily e-mail The
Daily Reckoning. He
is also the author, with Addison Wiggin, of “Financial
Reckoning Day: Surviving The Soft Depression of The 21st
Century” (John Wiley & Sons).
You
can sign up for a free subscription to the Daily Reckoning here: http://www.dailyreckoning.com.
This
essay was originally published in The Daily Reckoning.
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