Milei´s Ode to Sacrifice

One is used to hearing crowds yelling, “There´s no money” or something to that effect in the public square. It means that people are angry at their government and want the authorities to remedy their troubles by redistributing the wealth back to them (“back” because the rich have gained their wealth at their expense.) One is not used to hearing the masses chant “There’s no money” to express their deafening approval of an incoming president who has just announced that he will unleash on them the most brutal shock therapy in the country’s history to redress an inherited fiscal and monetary catastrophe. This is precisely what happened on Sunday, December 10th, in front of the Congress of Argentina when Javier Milei, the self-proclaimed libertarian leader, gave his inaugural speech and offered years of the equivalent of “blood, toil, tears, and sweat” in terms of government austerity to arguably the most populist-prone country in the Western hemisphere.

We can’t know at this point whether Milei will be successful because the odds against him are monumental—a disastrous economy, broken institutions, a tiny parliamentary minority, record levels of crime, and a Peronist opposition that in the past has managed to either derail or bring down non-Peronist presidents and subsequently get back into power.

But Milei understands the magnitude of what lies ahead and has begun his tenure with the clear intent of dismantling the statist legacy. For that alone, he deserves some credit, and Argentina deserves to be on the radar of all those interested in the fascinating socioeconomic development process. 

The plan, as he spelled it out, is to drastically reduce public spending and get rid of the central bank (once its massive interest-bearing liabilities are taken care of), deregulate large parts of economic and social life, eliminate the obstacles and controls that stifle domestic and foreign trade and investment, and cut the mercantilistic ties between businesses and unions, on the one hand, and the government on the other. If he achieves a significant part of what he laid out in his inaugural speech, his reforms could go down in history as comparable to those undertaken by Roger Douglass and Ruth Richardson in New Zealand in the second half of the 1980s and the early 1990s, respectively, Margaret Thatcher’s transformation of Britain in the 1980s, Ireland’s tax revolution in the early 1990s or Estonia’s free-market sea change that same decade.

The magnitude of what he has inherited is mind-boggling. The fiscal deficit amounts to 15 percent of the gross domestic product—one-third at the hands of the treasury and two-thirds at those of the central bank, which has acted like a parallel treasury under the Peronists. No wonder the government’s debt amounts to more than US$ 400 billion, not to mention another US$ 100 owed by the treasury, the central bank, and the government-owned oil concern in various other forms.

In the last four years, that same central bank printed the equivalent of 20 percent of the country’s GDP. The government orders the central bank to print money to cover its vast unfunded expenses and the central bank, in turn, sells short-term paper to the commercial banks to try to sterilize some of those excess pesos, but to make it worth their while to lend it the money, it offers them surreally high interest rates (they recently reached 133 percent). 

How does the central bank honor the interest on the short-term debt? By printing tons more pesos, of course, thus defeating the entire purpose of monetary sterilization. Periodically, the banks roll over the debt—and so on. (As the date of the transition to a new government approached, they started to exchange it for even more liquid paper.) This is why Milei warned in his speech that, absent drastic fiscal and monetary measures, Argentina, whose inflation is running at 150 percent now but is fast accelerating and will reach an annualized 300 percent by early 2024, would face an inflation of 15,000 in the not-too-distant future. 

In no time, this country, one of the ten richest in the early 20th century, would have a poverty rate of ninety percent. After twelve years of no economic growth, the current figure is already between 40 and 45 percent. Only six million Argentineans (out of a population of just under 46 million) have formal employment.

The last job one ever wants is to be Argentina’s president at this juncture. Best of luck, president Milei.

This piece first appeared on The Beacon, you can find it here.