Dope

Gretchen the light of my eyes -- as a biz journalist you have no peer, but... but I must confess that my heart is straying. Yes, Limited Inc just became acquainted with the Guardian's Gregory Palast. We were looking for earlier articles on Argentina, once hailed, in the carefree days when The Lexis and The Olive Tree was supposedly the law and the prophets, as this amazing success story. The South American way (sing it to a Carmen Miranda beat) went via Chile on to the wondrous policies of the USA, where free enterprise made everything (the water, the roads, the women) so much better. That mythical USA, which today is heading resolutely towards budget deficits, still lives in the advice proferred by American officials like Condoleeza Rice, who had the affrontery to suggest that Argentina repair its budget the other day. Condoleeza doesn't seem to have noticed that, with the American economy taking a serious dive, nobody is so silly as to worry about deficits in the Heimat. But in Argentina, where the economy hasn't taken a dive -- it is the unconscious victim sitting in a burning automobile that just skidded off the road and plummeted down a cliff -- in Argentina, the IMF, in its glorious wisdom, advised a major cut in government spending. The advice came with dope, of course, some 15 billion bailout that went not to the wretched of the earth or the unemployed truckdrivers but to such argentinian stalwarts as Emerging Markets man Steve Hanke:
As Palast points out:
"Now do the arithmetic. On Argentina's $128bn of debt, normal interest plus the 16 per cent surcharge by lenders comes to about $27bn a year. In other words, Argentina's people probably won't net one penny from the $26bn loan package. Little of the bail-out money escapes New York, where it lingers to pay interest to US creditors holding the debt, big fish such as Citibank and little biters such as Steve Hanke. Hanke is president of Toronto Trust Argentina, an 'emerging market fund' that loaded up 100 per cent on Argentine bonds during the last currency panic, in 1995.

Cry not for Steve, Argentina. His annual return that year of 79.25 per cent put the Toronto trust at the top of the speculation league table. This year he'll do it again."

Turn the page with me, children, for the next episode of our exciting story! Oh, I forgot to tell you the title of the book? Let's see, let me get my glasses. Here it is! "How to impoverish a country and influence people!" Recommended, it says, for MBAs. What's that? You want a fairy tale? !! This is a fairy tale, a tale of how an enchanting American prince helped screw up a whole kingdom, and feels like maximum macho unapologetic about it! Like any good capitalist. For here he is, Steve with his 79.25 per cent, in the pages of Forbes magazine, which is always generously opening its double column to the true friends of working people.

Read this enchanting piece, where Steve claims credit for having started Argentina on the road to recovery:

"When I first met Carlos Menem in 1989, he had just been elected president of Argentina and was promoting a program to liberalize its sick economy. Menem's problem was hyperinflation. Until it was killed, his reforms would remain on hold.

What to do? Argentina had already tried almost every hyperinflation antidote in the book, and all had failed. By mid-1990, Kurt Schuler and I had produced a sound money blueprint, Banco Central o Caja de Conversi�n. It called for an orthodox currency board regime that would put Argentina's central bank in a straitjacket."

The straitjacket is, you will remember, one of Tom Friedman's favorite metaphors too. Hanke wasn't totally wrong in his prescriptions, even if the intersection between Menem's reforms and Hanke's currency board strongly favored the investment class. Also (time and time again we have to say this at Limited Inc because monetarists are strangely averse to thinking of capitalism as a creative system) there are other influences on inflation, including the competition that comes with imports. And if inflation goes down, as it did in Argentina, it is a mistake to attribute it to any one cause. But that said, the restraint inherent in pegging the peso to the dollar made sense in that context. It makes no sense now. Instead of a straitjacket, it has become a noose. But Steve can't let go of his creation. His latest column on Argentina is a pathetic defense of a policy that has pretty much ruined the country. We won't take our scissors to this seriously screwed up article, but we must quote one marvelous bit. Steve, like some quack doctor, touts his one size fits all currency solution like this:

"Countries that exited from flawed soft regimes and adopted currency boards or "dollarized" in the 1990s have all seen dramatic improvements in their macroeconomic indicators. Examples include Argentina, Estonia, Lithuania, Bulgaria, Bosnia and Ecuador. Indeed, a shift from a soft regime to a hard one has always ended a currency crisis." Wow, get on board that train, boys. The prosperity of Bosnia awaits you!

There is a more general lesson to be learned from the Argentine crisis, though it won't be. When the class that profits from speculation makes the public policy of a country, the country will eventually suffer. In an essay on Adam Smith, Walter Bagehot explained why nations in the 18th century made a mistake in chosing merchants and factory owners as their favored advisors on economic policy: "Seemingly the most obvious person to consult on matters of trade is the trader; the person who, on first sight, seems likely to know most about a thing, is the person who makes it; and accordingly, the European governments had taken counsel with the producer. But, unhappily, the producer was just the wrong person to consult. What he wanted was a high price for his article, and a monopoly of the market in which to sell it; and the laws he recommended were inevitably framed, more or less, to obtain his wishes; whereas, the interest of the nations which the governments were trustees for, and which they were sincerely desirous to serve, was a "low price", unrestricted commerce from abroad, and a freedom for every one to buy or sell everything at home."

Self interest dictates, to the 79.25 percenter, an economic policy in which the debt the government owes the garbageman for picking up the garbage is secondary to the debt the government owes the emerging markets man for picking up the government's bonds. In reality, a government, unlike a retail store, benefits more from the garbageman. In fact, the bonds are only useful insofar as the garbageman is paid. The world is turned upside down by the New Economy. As always when it is a question of some doubtful utopia, we are told that upside down is its natural disposition. This is the immemorial prejudice of the ideologue; the ultimate critique of the Hanke's of the world is in Gullivers Travels -- book three, the island of Laputa.

And for a more personal side of the Argentine crisis, see this article in the Miami Herald