Javier Milei first appeared on my radar screen 3-4 years ago. At the time I thought he would be the perfect person to rescue Argentina from economic oblivion, because he sees things the same way I do. But then I realized that was almost impossible. How could he, a virtual unknown, ever overcome generations of Peronist rule and endemic corruption? Well, he did, and now he has a shot at pulling off one of the world's greatest turnarounds. Milei has beaten long odds to become Argentina's next president starting December 10.
For a person like me (libertarian, classic liberal, conservative, free marketer, monetarist), Milei is just about ideal. He knows exactly what ails Argentina and what is needed to turn things around. But it won't be easy, since Argentina's Deep State (much more entrenched and corrupt than our own Deep State) won't surrender without a fight. So of course the world's capital markets will be slow to revise upwards their projections for the Argentine economy.
But here's the thing: Argentina has fallen about as far and as fast as any country in history. It's a total mess. Raging inflation, a collapsing currency, rampant poverty, endemic and generational corruption—it couldn't be much worse. So much bad news has trashed Argentina's currency (see this post). As a result, the country can be bought for fire sale prices.
Investors will justifiably worry about the odds against Milei's success. So many things can go wrong. So many hurdles to clear. Where will he get all the dollars needed to dollarize the economy? How can he slash government spending and subsidy payments without sending millions to the poorhouse? How can he possibly dislodge legions of Peronist bureaucrats who don't even bother to show up for work until it is time to collect their monthly check?
Nevertheless, if Milei manages to get some traction with the monumental changes he is proposing, the upside potential for the Argentine economy is very difficult to overestimate. In my fantasies, I see Argentina inundated by a tsunami of foreign capital in the years to come. When the cheapest economy in the world suddenly becomes the one with the most upside potential .... Well, you fill in the blanks. It could be exciting, to say the least.
Scott, thank you for highlighting Argentina’s economic ills and now the potential upside by electing a new leader. Keep us informed. It will be very interesting to watch how this plays out. I’m 100% cheering for Javier Mileil’s success and the people of Argentina.
ReplyDeleteIt is an exciting outcome. Argentina's coming success from following free market principles should serve as a roadmap for other poor economies. Like you, my concern is around the entrenched government officials who want to keep their power.
ReplyDeleteIt is an exciting time. Going to love to see what happens to the leftists and how they resist the call for common sense.
ReplyDeleteScott, what are three changes he could make on Day 1 with the stroke of a pen? Eliminate tariffs? Reduce gov't headcount?
ReplyDeleteInteresting thread by Brad Setser.
ReplyDeletehttps://twitter.com/Brad_Setser/status/1726819992308748496
"if Milei solves this dilemma by unifying the exchange rate (good) and allowing private settlement in dollars, he avoids the immediate problem -- but he also hasn't really dollarized.
Otherwise, the only possible way out is for Milei to seek external financing -- and Argentina already has too much external debt relative to its reserves and export base. Today's bond rally thus seems misplaced to me -- Argentina's payment problems become worse not better."
This is fabulous news, indeed. But he doesn't have anything close to a majority in the legislature, and passing anything like his policy prescription is far from a sure thing.
ReplyDeletePlus, there is the stark fact that all politicians always disappoint.
I'm not convinced that liberty can ever be installed through an election.
Milei is a one-of-a-kind. He knows and deeply understands all the best ideas of free market economics; he knows exactly what's needed to correct Argentina's problems. He is passionate and driven to succeed. He has massive support within the youth generation. He has broken the back of peronism. He is not a politician. There is a desperate enthusiasm for change in the country. The fact that he lacks a coalition is a premature concern. Implementing his policies is the major challenge, of course.
ReplyDeleteAs for dollarization, the country has effectively been dollarized for a long time. All important transactions occur in dollars (e.g., real estate). There has been a free market for dollars for years (e.g., the "blue" rate). Anyone who wants to dump pesos in favor of dollars has been able to do so. Banks have lots of dollars. Exporters were forced to exchange their forex earnings at a mix of the official and blue rate. Soon they can retain all their earnings in dollars. Exports will boom. Foreign capital inflows will surge, as the world attempts to buy Argentine assets which are manifestly cheap. Dollars will emerge from under mattresses. Dollar inflows will exceed expectations.
ReplyDeleteThank you Scott!
I'm taking from this that dollar inflows are the key here (FDI?).
It does make far more sense for Americans to invest in South America than in China.
Dear Scott, your comment yesterday about Argentina being dollarized is spot on. And you put it really well. We've been long Argentine equities since 2019, after testing the BCS mechanism. It works well, and we've done well. Even before the weekend. Stocks are still inexpensive despite good price appreciation (in USD terms). Inshallah, it will continue. It'll be good to have a unified, open rate so that the managers of our listed companies can concentrate on their business rather than playing financial gamesmanship.
ReplyDeleteRe Argentine equities. ARGT (Argentina equities ETF) has outperformed the S&P 500 for the past 1, 2, 3, 4, and 5 years! Not bad for an economy in total shambles. And yes, once the country's fully dollarized there is plenty of upside room left.
ReplyDeleteThe potential for dollar inflows (both domestic and foreign) to Argentina is huge.
ReplyDeleteIt is going to be a very tough fight. Entrenched bureaucracies are tough to break down. I think the only way it will happen is if the population continues to support him and if Milei can continue to help Argentinians understand the nature of the fight as the economy lurches over the next few years.
ReplyDeleteAs another commentator pointed out recently, Melei calls himself a Liberterian, but that's a very Argentinian type of Liberterian because he is clearly socially very conservative. The dollarization of the economy has already begun in unofficial circles, maybe moving the official exchange rate to the blue rate would be a first step. Clearly, if he uses the US dollar, the central bank is effectively redundant for most of its tasks.
ReplyDeleteHis most important challenge will be convincing parliament to go with him in his policies. Not entirely sure that will work, the Peronists have had no problem in seeing the economy tank, with the hope that their guy would eventually win!
He stands a better chance with foreign policy but he cannot stand Lula and hates the Chinese (his largest trading partner). The road to success is long, but as you pointed out the implosion has been spectacular, although I am not sure it's worse than Zimbabwe or South Africa...