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.


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11 thoughts on “Milei Or Melee?

  1. We’ve seen this movie before. It plays on a loop. Back when I was on a bank credit committee, I had a international finance textbook with league tables for most sovereign defaults and number of years in default that I used to enjoy bringing to sovereign reviews. Google tells me that Venezuela has now passed Ecuador for number of defaults (11), but that Argentina is working hard to catch up (9, but 3 in this century!). The amazing thing is not that it happens, but that there is occasionally someone who voluntarily gives them new money .

  2. Isn’t the dollar pretty close to being the de facto currency there anyway. Protecting monetary sovereignty is a good idea in principle ….but what monetary sovereignty do they actually have that’s worth protecting ?? Argentina has so many natural and agricultural resources without a large population nor entrenched cultural/relegious conflicts. Whatever socialism they have hasn’t worked. Uleashing the private sector may be worth a try.

    1. Yeah, but you can’t “just dollarize.” There’s an actual process you have to go through to get it done. You can’t just walk out onto the balcony one morning and declare the economy dollarized. Assuming you actually implement it (not easy depending on your circumstances) then you have to deal with it. If your economy and fiscal policy isn’t well suited for it, it’s a recipe for problems. Here:

    2. Apart from the dollarisation difficulties, I wouldn’t think “unleashing the private sector” (probably a good idea in Argentina though I am hardly an expert) really requires dollarisation… so why bother vs. “not monetizing government debt/budget deficits”.

  3. +1 on Bill W. point about new money.

    But also – that’s a new one, a libertarian against abortion… I can tell philosophical coherence is going to be a low priority for that guy and that doesn’t bode well for his economic program…

    1. There’s precedent for it. It all depends on when the “libertarian” thinks life begins (often with religion-based reasons). Ron Paul was pro-life, for instance. He tried to split the difference though, saying that while he was personally pro-life, abortion policy should be left up to the individual states.

      1. That’s not what libertarian means, though… “abortion policy should be left to the individual” is the correct libertarian position.

  4. The Milei presidency can lead to disastrous results, I will acknowledge that for the reasons you highlight and for many others more specific to life in Argentina. I’m still glad he won, if nothing else for the entertainment value and because it will be an experiment of sorts. And honestly, what choice did Argentinians have? Massa was the economic minister that presided over economic calamity, at some point you need to gamble a Hail Mary pass, it will probably lead to defeat and disappointment but it is what you do in desperate times. I will root for Milei’s success, not just for the benefit of Argentina but also because if he does well it will infuriate Petro in Colombia and Maduro in Venezuela and will counterbalance the recent move to the left in Latin America, which has resulted in more misery than progress since the days of Hugo Chavez, particularly in Venezuela. That alone is enough reason to cheer for the chainsaw mad man in my book…

  5. Argentina ETF jumped 12% today and has greatly outperformed LatAm ETF over the past few years, even while Argentina’s economy has gone from bad to worse to worser than worse. And that’s in USD no less. I don’t know enough about Argentina to understand that, and am not sure it’s not intrinsically beyond me, but it’s a curious thing.

  6. Obvious to me that Argentinians are fed up with previous political elite. Quite right. Maybe you need someone who thinks differently. Having said that, Milei comes across as unhinged – so I hope there is someone near him that ‘guides’ him a la Antony Blinken. What are the chances that Argentina converts any hard assets – i.e. gold, land – to bitcoin? Michael Saylor has tested this idea with Turkey.

  7. I see that Milei is already appointing ex-Wall Streeters and holdovers from the prior administration to his government, and backing away from his campaign bombast.

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