It was difficult for me to find much of substance within this blizzard of words. More like a comedy piece than the solid stuff we get from you, Noah.
Not saying Argentinian economic policy hasn't been a mess for many decades. But somehow, the Argentinians are still there and food is still on the table. How do they do it? A deeper dive would have been more enlightening. How does Argentina's vast underground economy really work?
It's cheap and easy to make fun of someplace using chance encounters so you can produce a little writing on the side while vacationing with your girlfriend. Hope the author didn't spill too much Malbec on the keyboard.
Agreed. This was hugely disappointing. I lived in Argentina for a year after I graduated college to teach English (2005 to 2006; I paid 600 pesos, roughly equivalent to 200 USD at the time, for a big bedroom in an apartment in Buenos Aires's Palermo Hollywood neighborhood), and I looked forward to devouring an article on the place written under Noah's aegis. Alas, it wasn't to be. With all respect to the author, truly, who is no doubt a very talented and smart guy, I think this could have benefitted from a massive amount of editing. This was nearly impossible to follow, IMHO.
For those interested in Argentina and its, uh, *colorful* economic history, check out Paul Blustein's amazing 2006 book And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina. Its main focus is the 2001 financial crisis and the misdeeds of the IMF but it provides a lot of historical context.
The author argues that Argentina's true exchange rate, and practical experience with currency has been much disputed with anecdata. He argued that his on-the-ground experience doesn't even support that anecdata. And finished with some actual economics to back it up.
All true. But 1) it felt very disorganized, alternating so rapidly between exposition and personal story, and hard data and anecdotes, that the narrative thread felt buried. 2) Also, and I guess this is a more minor point, but the author's voice was occasionally so overwhelming it almost felt like another character in the story, getting in the way of things. 3) Most important, the piece never answered (for me) the essential question: *why*? Why has Argentina suffered so? At the very beginning, the author teases that this will indeed be the piece's focus, with his line "Argentina is a strange place that breeds and exports excellent economic minds while operating a domestic insane asylum for blunder-grade economic policy ideas." Clever line (and true). But what're these ideas, and why did they come about?
I will say the taxonony of Western Union was pretty brilliant. And, again, the author is obviously funny and smart. I just wish there was better flow and more context!
Not sure what you and the other commenter are looking for here - another dry economics piece? Although it would be even more interesting IF he had talked to more locals about how they survive day to day...
In the early 1930s, my GGM and my GF's sisters left Istria (then part of fascist Italy where Slavs were discriminated against...) for NYC to join my GGF while her youngest brother or nephew (not clear how he was related BUT he was close to the family...) went to Argentina (he could not get into the USA in the 1930s - my GGF and his brother were already in the USA) - around the time of the first Argentine military coup when the long decline more or less began...
I managed to track down his English speaking granddaughter in Argentina on Facebook as we lost contact with them after her GF died (and nobody could write Italian any more...)... When I mentioned about getting Croatian citizen by descent, she commented that she already had Spanish citizenship - I guess from her father's side plus she seems to be surprisingly well travelled (e.g. going to Spain regularly)... I can only guess that IF she has Spanish citizenship, she has Spanish bank accounts and Euros out of reach from the govt of Argentina who basically robs its citizens via multiple exchange rates...
It would be interesting for me to go down there and meet them to find out how they live and survive a country in collapse e.g. what if my ancestors had not gotten to America and ended up farming in Argentina instead of California?
Spent time in BA and Ushuaia early this year (blue mkt was around 400 vs official nearer 200). People are very relaxed and are living their lives. They have seen this all before- multiple times in recent decades. Tierra del Fuego is the one place where the government makes it hard to get good rates on pesos (ex Western union). The tourism there is part of their hard currency lifeline. I was impressed with Aerolineas, too- much better than Alitalia ever was. I pass for Argentinian (until I open my mouth and use the wrong tu form) but had lots of good conversations with people on the street and those working in hotels and restaurants.
There doesn’t seem to be a groundswell of support for less statist, more prudent policies. Excluding some business owners, they’d rather keep living on borrowed time even if default and devaluation every 5-10 years continues and high inflation is part of life. Plus they won the World Cup. Part of this is the very rich have property and dollars offshore (or holdings in Uruguay). Dollarization won’t help without a change in the economic system - the dollarized system will merely fall apart like the peg did. People are worried about the peso but don’t seem to tie its worries to socialism, cronyism, protectionism and profligacy. They seem to think the peso problem can be solved in isolation.
I worked with a lot of Brazilians in the 1980s during their repeated periods of hyperinflation and devaluation. They were happy, too. Spend cruzerios asap and save dollars is the mantra. Gresham’s law in action.
Funny enough- if you count how many zeros have been lopped off the cruzerio, cruzado, new cruzado, reais, reals, etc over the past 40 years you’d think that anyone dealing in hard currency products (like a soybean farmer) would be a billionaire and the average Brazilian wage earner would never to be able to afford any imported products. The reality is that wage inflation keeps up with devaluation so the wage earner retains some of their international purchasing power (and the soybean farmer pays inflated costs as well).
That sort of inflationary system depletes economic potential and kills investment but it takes many years of high real rates and relative austerity to change behavior and “normalize” so living with inflation on borrowed time can be an attractive alternative….until reality is forced on you.
Selling out wholesale to the Chinese might be an intermediate step
Although I have not been in Argentina for two decades, I'm Latin American and share your views.
I'm currently reading a book on Chile's economic transformation (by Sebastian Edwards), which describes the "cultural inertia" you mention and suggests that only a dictatorship was able to make the profound economic changes that were needed to get the Chilean economy headed in a productive direction.
Well written article. The author is very effective at conveying substance and color together without missing the nuance of either. Argentina is a fascinating country with an equally fascinating history. Personally, I would like to see them find their way out of this self-made mess...
I've heard other people say that the airline industry is subsidized by lenient bankruptcy rules, but I don't understand how that works.
Are the bondholders too stupid to take default risk into account? Do they consistently lend at a risk-adjusted rate of return that's below other sectors?
This is a good question. My best guess (which, is purely spitballing, would love for more-informed parties to weigh in, this is 100% not my area) is that in the event that you find yourself dealing with an insolvent debtor's estate as an unsecured creditor, *you've already lost.* That is: the transaction costs of bankruptcy (especially if you're a smaller creditor) combined with the combined with the fact of insolvency, the superior claims of secured creditors, the time value of litigation, and the demands of employees and others with protected claims, all mean that if you're pricing "recoverability of assets in partial payment of unsecured debt" in bankruptcy, that price should be at or near zero.
But this actually creates a potential "free lunch" for an insolvent company's estate: in the event that there's enough cash on hand to result in a non-trivial unsecured estate, in theory this should go the unsecured creditors -- but if courts are especially sympathetic to the need to keep an airline as a going concern under Ch. 11, maybe the thumb goes on the scale of a bigger cash cushion to pay employees and suppliers rather than a partial payment of the unsecured creditors -- who in some sense are getting screwed by not getting more of the estate, but in a more practical sense would have been making a strategic error to place much if any value on the value of the unsecured debt in bankruptcy when making initial loan pricing.
The TL;DR version of this is something like a class action settlement: if a company screwed ten million consumers out of $10, allowing that $100 million total to stay with the company is a huge subsidy (thanks, AT&T v. Conception! /s), but between transaction costs and the low value of recoverability, those consumers would be insane to place a nontrivial value on the theoretical possibility of recovering $10 from the company, whether ex ante or ex post.
As someone who completely flopped his Economics "A Level" (British 18 yr old tests) and has been playing catch up since, I loved this article in presenting macroeconomic issues with a human face.
Best of all, however, was the picture of a right hand drive Routemaster bus, painted blue, behind a sign for the Falkland Islands.
If the Argentinian government will sell its citizens $200 worth of USD every month for an amount of pesos that is worth approximately $100 in the black market, shouldn't every citizen in the country be lining up monthly to take that deal? Do they?
Yes, we did. But as the government ran out of dollars, it applied progressively harder restrictions to access those 200 USD. Now very few people can do it. They also added a 65% tax to foreign currency purchases (still convenient, because the spread with the free-market value is over 100%).
During some months in 2020, the added tax to foreign currency purchases was only 30%, but the spread between the official and the free-market exchange rates was already 80%. You could buy only 200 USD of cash per month, but there was no limit on credit card purchases from foreign vendors. Those purchases were also done at the official rate +30% tax. So I bought a ton of hardware from American online stores and paid less in real dollars than an American buyer would have, even after adding shipping and import taxes. Some of it I later resold at a huge gain when the government added a further 35% tax.
About a year ago, hardware in Argentina was still at about the same price as in the USA in real dollars. But the provincial government bank here allowed you to buy almost everything in 24 fixed monthly installments in pesos with no additional cost. The financial cost was entirely subsidized. We already had an expected annual inflation of around 80%, so the actual discounted cost of the products was like 50% of that in the USA. Again, I bought as much stuff as I could. Most I didn't really need at the moment, but hey, if you're giving away money I'll take it. Then inflation rose even higher (last month was 12.4%; ~300% annualized), so now my monthly installments are peanuts.
Under a currency exchange control regime, everything turns into a game of finding ways to buy at the official rate and sell at the free-market rate for instant gain. No wonder we're doing so bad.
That's hardcore. It's also a crazy subsidy that ends up taking thoughtful, enterprising people like you and encouraging them to play these silly non-productive (for anyone but you) transaction games.
One interpretation of Argentine economic history is one of the original "Dutch Disease" countries, one sector so productive of internationally traded goods that no other traded good could compete. But rather than reinvest that wealth productively and eventually develop other competitive sectors, it chose unproductive investments. And the mechanisms that it used, over and over, were import controls/multiple exchange rates, public sector spending and deficits.
Manaus in the middle of the Amazon in Brazil where they built a giant opera house on rubber profits comes to mind... The they started planting rubber in Malaya and the market collapsed...
A fun read, but I could not figure out what I learned from it. Fixed exchange rate and inflation don't mix? Some fiscal deficits are so large that monetary policy cannot and should not offset them and just let prices rise? Sure, but is that news?
OK this is a side-note, but the word for "better" in standard Spanish is "mejor", not "major". Is Argentinian Spanish using some kind of variant of the word, or has the author simply been careless in transcription?
"I eagerly await the forefauxcasted wave of good Afghan restaurants in the early 2050s"
Dude. Afghan food has been trendy in the Bay Area since the wave of emigrants driven by the Soviet invasion, decades ago. As I recall, the stat was that Fremont had more Afghan residents than any other city outside Afghanistan.
Remember the Afghanistan economic miracle after we invaded and splooged dollars all over the country?? The population doubled in size while a war was waging…wtf???
Fantastic rundown Karl! Reading it, I was struck by parallels with what I saw earlier this year on a trip to Lebanon, where government & popular insouciance also seem to conflict eerily with deteriorating public services, bloated national champions, and a complex thicket of exchange rates. Maybe nostalgia and good gastronomy really do dull reformist proactivity, but some urgency desperately needed in both countries.
In any case, would love to have similar guest posts about other economies in the future.
It was difficult for me to find much of substance within this blizzard of words. More like a comedy piece than the solid stuff we get from you, Noah.
Not saying Argentinian economic policy hasn't been a mess for many decades. But somehow, the Argentinians are still there and food is still on the table. How do they do it? A deeper dive would have been more enlightening. How does Argentina's vast underground economy really work?
It's cheap and easy to make fun of someplace using chance encounters so you can produce a little writing on the side while vacationing with your girlfriend. Hope the author didn't spill too much Malbec on the keyboard.
Agreed. This was hugely disappointing. I lived in Argentina for a year after I graduated college to teach English (2005 to 2006; I paid 600 pesos, roughly equivalent to 200 USD at the time, for a big bedroom in an apartment in Buenos Aires's Palermo Hollywood neighborhood), and I looked forward to devouring an article on the place written under Noah's aegis. Alas, it wasn't to be. With all respect to the author, truly, who is no doubt a very talented and smart guy, I think this could have benefitted from a massive amount of editing. This was nearly impossible to follow, IMHO.
For those interested in Argentina and its, uh, *colorful* economic history, check out Paul Blustein's amazing 2006 book And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina. Its main focus is the 2001 financial crisis and the misdeeds of the IMF but it provides a lot of historical context.
This is a guest post.
The author argues that Argentina's true exchange rate, and practical experience with currency has been much disputed with anecdata. He argued that his on-the-ground experience doesn't even support that anecdata. And finished with some actual economics to back it up.
All true. But 1) it felt very disorganized, alternating so rapidly between exposition and personal story, and hard data and anecdotes, that the narrative thread felt buried. 2) Also, and I guess this is a more minor point, but the author's voice was occasionally so overwhelming it almost felt like another character in the story, getting in the way of things. 3) Most important, the piece never answered (for me) the essential question: *why*? Why has Argentina suffered so? At the very beginning, the author teases that this will indeed be the piece's focus, with his line "Argentina is a strange place that breeds and exports excellent economic minds while operating a domestic insane asylum for blunder-grade economic policy ideas." Clever line (and true). But what're these ideas, and why did they come about?
A government falsely reporting its economic data is nothing new, and Argentina's been at the game a long time. (See this 2011 Reuters article with the headline "Argentina fines economists over price data - report" [https://www.reuters.com/article/argentina-economy-inflation/argentina-fines-economists-over-price-data-report-idUSN1111777720110311]). What made, and makes, Argentina so uniquely dysfunctional?
I will say the taxonony of Western Union was pretty brilliant. And, again, the author is obviously funny and smart. I just wish there was better flow and more context!
Not sure what you and the other commenter are looking for here - another dry economics piece? Although it would be even more interesting IF he had talked to more locals about how they survive day to day...
In the early 1930s, my GGM and my GF's sisters left Istria (then part of fascist Italy where Slavs were discriminated against...) for NYC to join my GGF while her youngest brother or nephew (not clear how he was related BUT he was close to the family...) went to Argentina (he could not get into the USA in the 1930s - my GGF and his brother were already in the USA) - around the time of the first Argentine military coup when the long decline more or less began...
I managed to track down his English speaking granddaughter in Argentina on Facebook as we lost contact with them after her GF died (and nobody could write Italian any more...)... When I mentioned about getting Croatian citizen by descent, she commented that she already had Spanish citizenship - I guess from her father's side plus she seems to be surprisingly well travelled (e.g. going to Spain regularly)... I can only guess that IF she has Spanish citizenship, she has Spanish bank accounts and Euros out of reach from the govt of Argentina who basically robs its citizens via multiple exchange rates...
It would be interesting for me to go down there and meet them to find out how they live and survive a country in collapse e.g. what if my ancestors had not gotten to America and ended up farming in Argentina instead of California?
Noah, this is yet another fantastic article that would benefit a lot of people in Latin America. How do we go about translating it to Spanish?
Cut and paste into google translate or GPT and then edit/correct?
Google Translate
DeepL
Spent time in BA and Ushuaia early this year (blue mkt was around 400 vs official nearer 200). People are very relaxed and are living their lives. They have seen this all before- multiple times in recent decades. Tierra del Fuego is the one place where the government makes it hard to get good rates on pesos (ex Western union). The tourism there is part of their hard currency lifeline. I was impressed with Aerolineas, too- much better than Alitalia ever was. I pass for Argentinian (until I open my mouth and use the wrong tu form) but had lots of good conversations with people on the street and those working in hotels and restaurants.
There doesn’t seem to be a groundswell of support for less statist, more prudent policies. Excluding some business owners, they’d rather keep living on borrowed time even if default and devaluation every 5-10 years continues and high inflation is part of life. Plus they won the World Cup. Part of this is the very rich have property and dollars offshore (or holdings in Uruguay). Dollarization won’t help without a change in the economic system - the dollarized system will merely fall apart like the peg did. People are worried about the peso but don’t seem to tie its worries to socialism, cronyism, protectionism and profligacy. They seem to think the peso problem can be solved in isolation.
I worked with a lot of Brazilians in the 1980s during their repeated periods of hyperinflation and devaluation. They were happy, too. Spend cruzerios asap and save dollars is the mantra. Gresham’s law in action.
Funny enough- if you count how many zeros have been lopped off the cruzerio, cruzado, new cruzado, reais, reals, etc over the past 40 years you’d think that anyone dealing in hard currency products (like a soybean farmer) would be a billionaire and the average Brazilian wage earner would never to be able to afford any imported products. The reality is that wage inflation keeps up with devaluation so the wage earner retains some of their international purchasing power (and the soybean farmer pays inflated costs as well).
That sort of inflationary system depletes economic potential and kills investment but it takes many years of high real rates and relative austerity to change behavior and “normalize” so living with inflation on borrowed time can be an attractive alternative….until reality is forced on you.
Selling out wholesale to the Chinese might be an intermediate step
Although I have not been in Argentina for two decades, I'm Latin American and share your views.
I'm currently reading a book on Chile's economic transformation (by Sebastian Edwards), which describes the "cultural inertia" you mention and suggests that only a dictatorship was able to make the profound economic changes that were needed to get the Chilean economy headed in a productive direction.
What’s the name of the book?
"The Chile Project" by Sebastian Edwards
Well written article. The author is very effective at conveying substance and color together without missing the nuance of either. Argentina is a fascinating country with an equally fascinating history. Personally, I would like to see them find their way out of this self-made mess...
I've heard other people say that the airline industry is subsidized by lenient bankruptcy rules, but I don't understand how that works.
Are the bondholders too stupid to take default risk into account? Do they consistently lend at a risk-adjusted rate of return that's below other sectors?
This is a good question. My best guess (which, is purely spitballing, would love for more-informed parties to weigh in, this is 100% not my area) is that in the event that you find yourself dealing with an insolvent debtor's estate as an unsecured creditor, *you've already lost.* That is: the transaction costs of bankruptcy (especially if you're a smaller creditor) combined with the combined with the fact of insolvency, the superior claims of secured creditors, the time value of litigation, and the demands of employees and others with protected claims, all mean that if you're pricing "recoverability of assets in partial payment of unsecured debt" in bankruptcy, that price should be at or near zero.
But this actually creates a potential "free lunch" for an insolvent company's estate: in the event that there's enough cash on hand to result in a non-trivial unsecured estate, in theory this should go the unsecured creditors -- but if courts are especially sympathetic to the need to keep an airline as a going concern under Ch. 11, maybe the thumb goes on the scale of a bigger cash cushion to pay employees and suppliers rather than a partial payment of the unsecured creditors -- who in some sense are getting screwed by not getting more of the estate, but in a more practical sense would have been making a strategic error to place much if any value on the value of the unsecured debt in bankruptcy when making initial loan pricing.
The TL;DR version of this is something like a class action settlement: if a company screwed ten million consumers out of $10, allowing that $100 million total to stay with the company is a huge subsidy (thanks, AT&T v. Conception! /s), but between transaction costs and the low value of recoverability, those consumers would be insane to place a nontrivial value on the theoretical possibility of recovering $10 from the company, whether ex ante or ex post.
So the people being screwed are non-investor creditors, basically. That makes sense
Just fabulous Karl!
Have you considered updating James Fitzpatrick's fabulous 1930s TravelTalks?
You and Noah could do these as something like EconoWorldTravel short documentaries!
Chile - Land of Charm 1937
https://youtu.be/K5rBiv8w8jY?feature=shared
Floral Japan 1937
https://youtu.be/myd3-ferwDI?feature=shared
Hong Kong - Hub of the Orient - 1937
https://youtu.be/xVVhErxzCIY?feature=shared
Is Argentina the only country in modern history that has undeveloped itself?
Venezuela comes to mind.
You make a good point!
The UK will get there. I believe in them.
Haha as a British person I fear you’re right 😂😂
Also, South Africa is undergoing "state collapse" BUT so are most American cities and entire states for that matter...
Rhodesia when it became Zimbabwe...
I feel like I’ve been hearing about Argintina’s problems for the past 25 years
As someone who completely flopped his Economics "A Level" (British 18 yr old tests) and has been playing catch up since, I loved this article in presenting macroeconomic issues with a human face.
Best of all, however, was the picture of a right hand drive Routemaster bus, painted blue, behind a sign for the Falkland Islands.
If the Argentinian government will sell its citizens $200 worth of USD every month for an amount of pesos that is worth approximately $100 in the black market, shouldn't every citizen in the country be lining up monthly to take that deal? Do they?
Yes, we did. But as the government ran out of dollars, it applied progressively harder restrictions to access those 200 USD. Now very few people can do it. They also added a 65% tax to foreign currency purchases (still convenient, because the spread with the free-market value is over 100%).
Thank you - that's amazing. As someone who has only lived in the USA some of these peculiarities of the Argentinian economy are mind-bending.
Here's more to bend your mind:
During some months in 2020, the added tax to foreign currency purchases was only 30%, but the spread between the official and the free-market exchange rates was already 80%. You could buy only 200 USD of cash per month, but there was no limit on credit card purchases from foreign vendors. Those purchases were also done at the official rate +30% tax. So I bought a ton of hardware from American online stores and paid less in real dollars than an American buyer would have, even after adding shipping and import taxes. Some of it I later resold at a huge gain when the government added a further 35% tax.
About a year ago, hardware in Argentina was still at about the same price as in the USA in real dollars. But the provincial government bank here allowed you to buy almost everything in 24 fixed monthly installments in pesos with no additional cost. The financial cost was entirely subsidized. We already had an expected annual inflation of around 80%, so the actual discounted cost of the products was like 50% of that in the USA. Again, I bought as much stuff as I could. Most I didn't really need at the moment, but hey, if you're giving away money I'll take it. Then inflation rose even higher (last month was 12.4%; ~300% annualized), so now my monthly installments are peanuts.
Under a currency exchange control regime, everything turns into a game of finding ways to buy at the official rate and sell at the free-market rate for instant gain. No wonder we're doing so bad.
That's hardcore. It's also a crazy subsidy that ends up taking thoughtful, enterprising people like you and encouraging them to play these silly non-productive (for anyone but you) transaction games.
Might be the best thing on this Substack (and most things on this Substack are good), thank you for commissioning this Noah!
Thank you. I recognize kindness, even for an old shit poster.
One interpretation of Argentine economic history is one of the original "Dutch Disease" countries, one sector so productive of internationally traded goods that no other traded good could compete. But rather than reinvest that wealth productively and eventually develop other competitive sectors, it chose unproductive investments. And the mechanisms that it used, over and over, were import controls/multiple exchange rates, public sector spending and deficits.
Manaus in the middle of the Amazon in Brazil where they built a giant opera house on rubber profits comes to mind... The they started planting rubber in Malaya and the market collapsed...
A fun read, but I could not figure out what I learned from it. Fixed exchange rate and inflation don't mix? Some fiscal deficits are so large that monetary policy cannot and should not offset them and just let prices rise? Sure, but is that news?
OK this is a side-note, but the word for "better" in standard Spanish is "mejor", not "major". Is Argentinian Spanish using some kind of variant of the word, or has the author simply been careless in transcription?
Also, uh,
"I eagerly await the forefauxcasted wave of good Afghan restaurants in the early 2050s"
Dude. Afghan food has been trendy in the Bay Area since the wave of emigrants driven by the Soviet invasion, decades ago. As I recall, the stat was that Fremont had more Afghan residents than any other city outside Afghanistan.
https://www.nytimes.com/2011/06/05/us/05intel.html
Some family members of Hamid Karzai had a (quite good) restaurant in SF, for years, although I think it closed.
There's one of the Karzai restaurants still open in Baltimore.
Yep, The Helmand. Highly recommended!
Didn’t Ghani and Khalizad go to Johns Hopkins?? Probably paid for in Rolex Presidentials. ;)
If only we let more people immigrate after the war ended, like we did historically there would be a lot of Afghani restaurants.
Remember the Afghanistan economic miracle after we invaded and splooged dollars all over the country?? The population doubled in size while a war was waging…wtf???
Fantastic rundown Karl! Reading it, I was struck by parallels with what I saw earlier this year on a trip to Lebanon, where government & popular insouciance also seem to conflict eerily with deteriorating public services, bloated national champions, and a complex thicket of exchange rates. Maybe nostalgia and good gastronomy really do dull reformist proactivity, but some urgency desperately needed in both countries.
In any case, would love to have similar guest posts about other economies in the future.