Milei Or Melee?

Let’s be upfront about one thing: Brash politicians peddling quick fixes to intractable domestic problems, and particularly domestic economic problems, are, almost by definition, charlatans.

The tale of the audacious demagogue who exploits widespread domestic disaffection to hijack a nation’s politics with combative, incendiary rhetoric is as old as the hills. It’s a playbook run again and again by opportunistic firebrands who, more often than not, lead their countries down the road to some kind of ruin.

The good news for Argentina’s newly elected president, Javier Milei, is that it could scarcely get much worse for the country, at least on the economic front. And that’s really (really) saying something. Argentina, as most readers are doubtlessly aware, is the quintessential basket case — a serial defaulter with no peers and the butt of every macro joke that’s not about Venezuela. So, to say things are “especially” bad in Argentina is to paint a very grim picture indeed.

Inflation in October was nearly 143%, a figure high enough to impress even Recep Tayyip Erdogan. The country’s perpetually maligned central bank, which Milei has pledged to dismantle, sees annual price growth exceeding 180% by year-end. The economy contracted by the most since the pandemic in Q2 and the poverty rate is 40%.

Another currency devaluation is a foregone conclusion. The central bank doesn’t have any dollars left to defend the peso and the free-floating rate is double the official exchange rate. It’s a disaster, and a largely unmitigated one at that.

Milei, a libertarian economist, has promised to dollarize the economy. I’ll be polite: That idea faces challenges, not least of which is that Argentina doesn’t have any dollars. Well, they do, but those dollars are either pledged by banks as reserves or else circulating in the real economy. The former aren’t usable, and to access the latter, you’d need to convince Argentines to take a leap of faith: Turn their dollars in for dollar claims when there’s no guarantee the government will succeed in stabilizing the situation and when the country owes billions to creditors whose claims might come ahead of your own.

If Milei were to dollarize all of the state’s domestic financial obligations he’d need to find the dollars to make good on them. The IMF would be crazy to loan him any hard currency, and he’s openly hostile to China. Chinese “are not free,” he (correctly) assessed after winning the primary in August. “They can’t do what they want and when they do, they get killed,” he went on, before suggesting he might freeze trade with China: “Would you trade with an assassin?”

Why is that a problem? Two reasons. First, China is the second-biggest market for Argentina’s exports. Second, the central bank has an $18 billion swap line with the PBoC. Argentina is using that swap line to make payments to the IMF, and although Beijing struck a conciliatory tone in congratulating Milei on Monday, Xi Jinping’s not a man who enjoys being castigated. What happens if China wants its yuan back?

Further, dollarizing the economy is to cede your monetary sovereignty. I’m not convinced that’s a great idea. “As with everything in economics, there is no free lunch and adopting, preserving and benefiting from dollarization could be challenging,” Goldman’s Sergio Armella cautioned, following Milei’s decisive victory.

Milei, who delighted in wielding chainsaws at campaign rallies to symbolize deep cuts to government spending, is apparently willing to chance austerity into the teeth of a recession, a risky gamble. Slashing subsidies (to narrow the fiscal gap) could drive inflation even higher, exacerbating poverty and likely pushing the country even further into recession.

Milei doesn’t have anything like the political support within the legislature he’d need to institute the sort of overnight, sweeping changes he promised voters. That may be a good thing. To the extent his policy platform can be beneficial, the shock treatment needs to come in small doses lest the patient should die.

From a political perspective, Milei has promised an openly hostile approach to socialist countries and relishes comparisons to Donald Trump and Jair Bolsonaro, two far-right, would-be autocrats. Following the election, Trump said he was “proud” of Milei. “You will truly Make Argentina Great Again!” America’s four-times indicted former strongman shrieked, into the digital void.

Milei has, among other things, insisted that climate change is a socialist hoax, equated abortion with murder (during an interview with Tucker Carlson) and downplayed human rights abuses committed under Argentina’s last military dictatorship. He also suggested, without evidence, that the election might be fraudulent. Until he won. At which point his campaign said the vote was legitimate. His running mate, Victoria Villarruel, on Sunday lampooned a mural in honor of the estimated 30,000 people killed during the 1976-1983 dictatorship, calling the work “graffiti” and a cartoon.

In addition to his controversial positions on key issues, Milei also faced questions during the campaign about what The New York Times gently described as “a variety of unusual behaviors,” including, but not limited to, “attacks against the pope, clashes with Taylor Swift fans, claims of being a tantric-sex guru, dressing up as a libertarian superhero” and his “close relationship” with five cloned Mastiffs. As the Times explained in a separate piece, the dogs, which Milei describes as his children, “are genetic copies of [his] former dog, and were created in a laboratory in upstate New York.”

By now, you might be thinking, “Gosh, this sounds crazy.” You might also be thinking, “There’s no way this ends well.” If that’s you, I won’t argue. Milei’s dollarization plan doesn’t appear to be logistically possible and the rest of his economic agenda, whatever the merits, faces high hurdles too. He’ll have to manage Argentina’s relationship with the IMF, and convince a highly skeptical world that despite the campaign bombast, he’s someone who can be trusted and, just as important, someone who can be taken seriously.

Coming full circle, the risks are myriad and it’s self-evidently the case that many Milei votes were protest votes — an expression of complete disillusionment with interminable corruption, mismanagement and Peronism in general, rather than an endorsement of Milei himself. So, he’ll need to deliver tangible results to an impatient populace, and presumably in a hurry. But it seems virtually inevitable that the domestic economic situation will get (much) worse before it gets (any) better, and that’d be true even in the absence of what are sure to be farcical missteps.