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Cry for ArgentinaLarry LaBorde Earlier this month Puddy and I traveled to Argentina for a business trip. We traveled south a few days early and toured Buenos Aires before our conference. The city was busy since it was the week of the tango festival. Of all the things we learned while we were in country the most important was that they tango differently in Argentina than we do in the US. We found Argentina a delightful tourist destination. The beautiful city of Buenos Aires compares favorably among other cosmopolitan cities that we have visited in our travels. The metropolitan area has a population of 12 million people. We found the people polite, well dressed, prosperous and friendly. The US dollar goes a long way down there. Our stay at a 5 star hotel was less that $100/day. A wonderful dinner of brochee de lomo with appetizers and wine at a first class restaurant was less than $35 USD total for both of us. All this led my partner for life to ask, "Why is everything here such a bargin?" I was not able to give a simple answer. Like all difficult questions a little history is helpful in order to fully understand the situation. The history of Argentina is a bit similar to that of the US. It was established by a major European power (Spain). Cheap land caused many 2nd sons to travel to the new land. A war for independence from Spain was fought and won. Immigration from Europe around the end of the 19th century brought another big influx of Europeans (mainly Italians). Cattle became a huge export. First leather goods and then with the advent of refrigerated ships beef was exported around the world. Around the beginning of the 20th century the per capita income in Argentina was similar to that of France. Around the middle of the 20th century Argentina began to suffer due to military rule and internal conflict. In the late 20th century the government was printing so much money to pay its bills that in the late 1980's the monthly inflation rate was 200%. The government then sold off industries to private concerns, encouraged private enterprise and pegged the peso to the US dollar. The peg to the dollar seemed to inspire confidence in the peso and tamed the terrible inflation problem. But pegging the peso to the US dollar prevented the state from exercising any monetary policy. The government continued to borrow from the IMF to support the dollar peg and to pay for government programs. To make matters worse the government increased the country's economic problems by raising taxes. Medicare/social security taxes were 32%, the vat was 21% and the income tax on high incomes was an additional 35%. This increased tax caused more people to drop out into the underground economy and therefore reduced government income even further. Finally in 2001 the government could no longer pay even the interest on its debt and it defaulted on 93 billion dollars of debt. Citizens began to lose confidence and withdrew cash from the banks causing a run. In December 2001 the government froze all bank accounts. Early in 2002 the peg on the dollar was pulled. The government also transferred all dollar denominated accounts to pesos and limited cash withdrawals. When the citizens could finally get to their money in the banks it had been reduced to about 25% of its former value. While most of the upper class had a portion of its savings banked outside of the country much of the middle class did not. If effect, the Argentine government robbed the middle class. Argentina appears to be coming back. The economy has been growing and wages are starting to catch up. The middle class is even growing larger. A debt restructuring plan was approved. However, the big stigma that remains is the disregard the government once had for private property during the theft of the middle class savings. I visited a couple of major banks while in Buenos Aires but the banking executive I finally spoke with excused himself from comment due to his sudden poor English when the subject arose concerning the "recent unpleasantness". While Argentines have started to use banks again many do not save their nest eggs in banks in Argentina. They either save outside of the country or save in hard US dollars held outside of the banking system. Even though the exchange rate was 3:1 we found most retailers wanted US dollars and would give a 10% discount for payment in cash in US dollars instead of payment in pesos or by credit card. As Richard Maybury says, true
economic freedom only exists where his two laws are observed:
Do all you say you will do (contract law) and Do not encroach
on other people or their property. Clearly rule #2 was broken.
Until the government admits this wrong there will always be a
fear that it will happen again. This will continue to hamper
the recovery of this great country. Only an apology or the passing
of a generation will put this fear to rest. Larry LaBorde 321gold Inc |
