Yes. They are going ahead with draining the Exchange Stabilization Fund of its dollar liquidity for purposes that seem to make more sense. &, since this is TrumpWorld, the odds are heavily in favor...
I don't disagree with the the global analysis, but there are local dynamics and constraints that are worth noting:
* Milei could and did reign in states' expenditures to a large degree. There's a lot more control by the federal government than in countries like the US, and he used it mostly to the hilt. Basically, infrastructure work was stopped across the country, inflation-adjusted pensions were generally speaking deeply slashed, large-scale contractors were stiffed, and so on.
* It sort of worked, in the technical sense that inflation did fall enormously and the government got more or less close to a surplus (one can and I do argue that it was done brutally and without aiming to minimize human damage). And the government got quite large political support! Order of magnitude, a third of the voters are sincere Mileists, and a third aren't but supported him due to the fall in inflation and lack of the deep corruption levels and general mismanagement of the Kirchnerist administrations and their successors.
* The structural problem is that this contained the economic fall but did not lead to growth. Demand for what Argentina can export is bounded (basically agricultural exports), it lacks the human, physical, and institutional capabilities to be immediately competitive in most other markets, and it lacks the capital (and perhaps the meta-capital) to change that. So mood began to sour as the fear of runaway inflation began to recede and the loss of discretional income and growth opportunities began to be salient.
* First thing that didn't help: information about corruption began to appear. Smallish compared to other administrations, but "no corruption" had been part of their core appeal, and that began to disappear.
* Second thing that didn't help: their political strategy with other parties after the national election was "get in line or fuck off" with a heavy dose of "get in line and get fucked anyway" Argentina is an heterogeneous and unstable multi-party system and Milei is really a one-man party without a solid bench of candidates and administrators. He mistreated even would-be allies who supported his policies and even were instrumental during his national victory (e.g. by filling government positions with his own, often hugely inexperienced, people, and by putting -bad- candidates chosen by them to compete with local candidates from governors that would have supported their policies in Congress (in Argentina congresspeople follow mostly themselves or they governors, *not* any national party)), which means they got what they wanted on the way up, but had no reservoir of good will or trust if they ever lost the image of political dominance by Milei.
* Third thing that didn't help, or rather the consequence of the last three things: Milei's candidates did quite badly --worst of all, worse than expected-- in the Buenos Aires local elections, which are important because it's by far the largest state and could (or could not) be indicative for what the US would call midterms later in the year.
* Fourth thing that didn't help: some extremely unpopular and probably not fiscally meaningful measures — slashing expenditure in a hospital that treats, e.g., pediatric cancer patients who can't afford private care and disability support (rather than say optimizing access criteria) — were rejected by Congress by a large enough margin to override his decree (unlike US EOs, the argentinean president *can* legally do a lot of things unilaterally). He's going to sidestep that by just not paying for what the law things the government has to do, but it was still a demonstration of a fundamental political weakness in Congress.
* Those last two things made the image of Milei as politically dominant crash. He's still pretty much the politician with the most support, but there's blood in the water, which means that 1. the strength of his threats to compel other politicians is at least temporarily reduced [unless or until he does really well in the coming midterms], and therefore 2. the likelihood of future reforms, or their permanence, was reduced.
* Hence the pre-run.
* You have to understand the social and psychological logic: after the last 2-3 generations, Argentineans see runwaway currency depreciation as an always likely possibility (it has happened a lot!), a savings reflex (nobody in Argentina has a cultural tendency to save in the local currency - it's dollars and ladrillos (bricks; real state)) makes it self-fueled, and through both import costs and simple business muscle memory this leads to high enough inflation that can easily topple a government or at least make it a lame duck.
I have very little moral or intellectual respect for most everybody in power involved on this, but the situation is tricky. Harsh expenditures *did* happen and did reign in inflation (not to developed world levels but to great-for-Argentina levels) but the economic and social role of the USD/ARG rate is so important that without appreciating the peso artificially inflation might have exploded anyway — sort term in Argentina the first and second derivatives of USD/ARG determine the inflation rate —, overwhelming any positive impact on exports (by far the main cost for agricultural exporters is the export tax (which is on revenue, not profit, and very large), so the depreciated peso wouldn't help them that much anyway, and for the rest of the exports, except some remote IT work that's no longer competitive anyway, Argentina just can't compete say industrially - bad infrastructure, low educational levels, etc).
I'm not saying it wasn't done (broadly, at a large and fundamentally thoughtless human cost - Milei is pretty much a sincere Randian, without leaving around expenditures that would facilitate growth) or that the pushback wasn't more or less as everybody was describing on the net but, as always, the local political and economic dynamics are complex from inside the black box, and Argentina is a multi-generational economic basket case even at the best of times.
My observation --and whether it's true or not, it's definitely what the government and many local analysts believe-- is that regardless of the absolute valuation of the peso, it's very very very hard to depreciate it in a way that doesn't immediately trigger destabilizing levels of inflation partly through higher import costs and partly/mostly through ingrained cultural mechanics and processes.
Most of the political capital of the government is nothing more than a low-for-Argentina inflation rate. Let the peso fall (again, I'm talking about first derivatives regardless of absolute value) and the chances of a self-sustaining inflation speedup are far from trivial, which would tank the political viability of the government. They did and do everything they can to keep the peso moving down as slowly as possible --including raising interest rates with full awareness of the impact on the economy; Milei has said "you lose elections due to the dollar, not the interest rate"-- because that's the main short-term, non-linear input to inflation, and low inflation is the sine qua non of their political survival.
*shrugs* I can't say I know for sure you're right or not. Governments-have-falled-on-that unpopularity aside, double-digit monthly inflation *is* quite economically costly as well (friction costs, no long-term investments, falling real wages (and this is already a country with about a 30% poverty rate even with quite generous government support - part of the budget you can't cut without not just a political cost but literal hunger), etc).
I'm not saying you're wrong either in theory or in practice, but Argentinean society has an almost uniquely direct and ingrained knowledge of the costs of high inflation (which are far higher than anything developed countries are familiar with in recent times; we aren't necessarily talking about the same thing) both recent and multi-generational, and most of Milei's political legitimacy comes from the low inflation. It's not just a matter of popularity; there are large and familiar economic and social risks; think "millions fall into poverty," not "eggs get expensive."
But you could be right as a matter of least-bad policy. I honestly don't have a general policy I'd be confident on (although I do have a huge number of technocratic quibbles with pretty much every past government; grand economic strategy aside, we do have other, separate, serious issues).
> Looks like you can loose elections becasue of too little devaluation, too.
For sure! If anybody knew how to thread that needle and/or cut that knot we wouldn't have had the eventful last few decades we've had. I'm not saying we don't have a very damaging baseline populist political culture, just that close to a century of that has created objective dynamics that are hard to navigate even if you didn't care about popularity.
The reliable route to failure is "austerity" defined as a combination of spending cuts and pro-rich tax cuts. Apart from Milei, the most recent example is Macron. The "impossibility" of forming a government is, in essence, Macron's refusal to accept higher taxes and the political limits to spending cuts.
"The economics of how you handle a situation like Argentina right now, in which fiscal dominance has arrived and taken its place at the table, is well-known."
But does it work? Wasn't the "solution" the "Washington Consensus"? It was used by the Thatcher government in teh early 1980s. Lots of pain for the welfare state beneficiaries, but did it change the economic outcome? It was used again in Britain starting in 2010 for teh next 14 years, albeit worsened by Brexit. I don't see that it worked then. More classically, it was used in Greece after 2008. Did it work there?
I trust that the economics argument will not be some version of "No true Scotsman".
This idea that the trade balance J-curve will "magically" restore growth after a self-induced recession that will cause economic actors to cut spending, including production by the exporting companies, seems more wishful thinking than good policy, perhaps more like the old joke about economists, "Let's assume a can opener".
Bradd as you are a good historian of economics, I am willing to be persuaded the standard formula used to rectify economies like that facing Argentina actually works. Is there good data to demonstrate that, perhaps because successes are not reported, while the failures are?
As far as I understand, the $20 bn is all coming from the ESF, which has limited ammunition. The Fed has unlimited lending capacity, and had traditionally worked in concert with the ESF, back in the days when the Treasury was sane. Will good (Fed) money follow after bad? Will the Fed overtly fight the Trumpazoids in the international sphere?
Or just accept the inflation that fiscal policy outputs, undervalue the peso and keep it undervalued. Didn't Friedman once say that the worst thing about inflation was measure to "control" it? "Inflation wants to be free."
I don't disagree with the the global analysis, but there are local dynamics and constraints that are worth noting:
* Milei could and did reign in states' expenditures to a large degree. There's a lot more control by the federal government than in countries like the US, and he used it mostly to the hilt. Basically, infrastructure work was stopped across the country, inflation-adjusted pensions were generally speaking deeply slashed, large-scale contractors were stiffed, and so on.
* It sort of worked, in the technical sense that inflation did fall enormously and the government got more or less close to a surplus (one can and I do argue that it was done brutally and without aiming to minimize human damage). And the government got quite large political support! Order of magnitude, a third of the voters are sincere Mileists, and a third aren't but supported him due to the fall in inflation and lack of the deep corruption levels and general mismanagement of the Kirchnerist administrations and their successors.
* The structural problem is that this contained the economic fall but did not lead to growth. Demand for what Argentina can export is bounded (basically agricultural exports), it lacks the human, physical, and institutional capabilities to be immediately competitive in most other markets, and it lacks the capital (and perhaps the meta-capital) to change that. So mood began to sour as the fear of runaway inflation began to recede and the loss of discretional income and growth opportunities began to be salient.
* First thing that didn't help: information about corruption began to appear. Smallish compared to other administrations, but "no corruption" had been part of their core appeal, and that began to disappear.
* Second thing that didn't help: their political strategy with other parties after the national election was "get in line or fuck off" with a heavy dose of "get in line and get fucked anyway" Argentina is an heterogeneous and unstable multi-party system and Milei is really a one-man party without a solid bench of candidates and administrators. He mistreated even would-be allies who supported his policies and even were instrumental during his national victory (e.g. by filling government positions with his own, often hugely inexperienced, people, and by putting -bad- candidates chosen by them to compete with local candidates from governors that would have supported their policies in Congress (in Argentina congresspeople follow mostly themselves or they governors, *not* any national party)), which means they got what they wanted on the way up, but had no reservoir of good will or trust if they ever lost the image of political dominance by Milei.
* Third thing that didn't help, or rather the consequence of the last three things: Milei's candidates did quite badly --worst of all, worse than expected-- in the Buenos Aires local elections, which are important because it's by far the largest state and could (or could not) be indicative for what the US would call midterms later in the year.
* Fourth thing that didn't help: some extremely unpopular and probably not fiscally meaningful measures — slashing expenditure in a hospital that treats, e.g., pediatric cancer patients who can't afford private care and disability support (rather than say optimizing access criteria) — were rejected by Congress by a large enough margin to override his decree (unlike US EOs, the argentinean president *can* legally do a lot of things unilaterally). He's going to sidestep that by just not paying for what the law things the government has to do, but it was still a demonstration of a fundamental political weakness in Congress.
* Those last two things made the image of Milei as politically dominant crash. He's still pretty much the politician with the most support, but there's blood in the water, which means that 1. the strength of his threats to compel other politicians is at least temporarily reduced [unless or until he does really well in the coming midterms], and therefore 2. the likelihood of future reforms, or their permanence, was reduced.
* Hence the pre-run.
* You have to understand the social and psychological logic: after the last 2-3 generations, Argentineans see runwaway currency depreciation as an always likely possibility (it has happened a lot!), a savings reflex (nobody in Argentina has a cultural tendency to save in the local currency - it's dollars and ladrillos (bricks; real state)) makes it self-fueled, and through both import costs and simple business muscle memory this leads to high enough inflation that can easily topple a government or at least make it a lame duck.
I have very little moral or intellectual respect for most everybody in power involved on this, but the situation is tricky. Harsh expenditures *did* happen and did reign in inflation (not to developed world levels but to great-for-Argentina levels) but the economic and social role of the USD/ARG rate is so important that without appreciating the peso artificially inflation might have exploded anyway — sort term in Argentina the first and second derivatives of USD/ARG determine the inflation rate —, overwhelming any positive impact on exports (by far the main cost for agricultural exporters is the export tax (which is on revenue, not profit, and very large), so the depreciated peso wouldn't help them that much anyway, and for the rest of the exports, except some remote IT work that's no longer competitive anyway, Argentina just can't compete say industrially - bad infrastructure, low educational levels, etc).
I'm not saying it wasn't done (broadly, at a large and fundamentally thoughtless human cost - Milei is pretty much a sincere Randian, without leaving around expenditures that would facilitate growth) or that the pushback wasn't more or less as everybody was describing on the net but, as always, the local political and economic dynamics are complex from inside the black box, and Argentina is a multi-generational economic basket case even at the best of times.
Possibly true, but it was not export constraints that led to the overvaluation of the peso.
Oh, no, that was deliberate and costly.
My observation --and whether it's true or not, it's definitely what the government and many local analysts believe-- is that regardless of the absolute valuation of the peso, it's very very very hard to depreciate it in a way that doesn't immediately trigger destabilizing levels of inflation partly through higher import costs and partly/mostly through ingrained cultural mechanics and processes.
Most of the political capital of the government is nothing more than a low-for-Argentina inflation rate. Let the peso fall (again, I'm talking about first derivatives regardless of absolute value) and the chances of a self-sustaining inflation speedup are far from trivial, which would tank the political viability of the government. They did and do everything they can to keep the peso moving down as slowly as possible --including raising interest rates with full awareness of the impact on the economy; Milei has said "you lose elections due to the dollar, not the interest rate"-- because that's the main short-term, non-linear input to inflation, and low inflation is the sine qua non of their political survival.
I did not say say it woud be politically popular, just the least economically costly way to deal with the public finance situation.
Looks like you can loose elections becasue of too little devaluation, too.
*shrugs* I can't say I know for sure you're right or not. Governments-have-falled-on-that unpopularity aside, double-digit monthly inflation *is* quite economically costly as well (friction costs, no long-term investments, falling real wages (and this is already a country with about a 30% poverty rate even with quite generous government support - part of the budget you can't cut without not just a political cost but literal hunger), etc).
I'm not saying you're wrong either in theory or in practice, but Argentinean society has an almost uniquely direct and ingrained knowledge of the costs of high inflation (which are far higher than anything developed countries are familiar with in recent times; we aren't necessarily talking about the same thing) both recent and multi-generational, and most of Milei's political legitimacy comes from the low inflation. It's not just a matter of popularity; there are large and familiar economic and social risks; think "millions fall into poverty," not "eggs get expensive."
But you could be right as a matter of least-bad policy. I honestly don't have a general policy I'd be confident on (although I do have a huge number of technocratic quibbles with pretty much every past government; grand economic strategy aside, we do have other, separate, serious issues).
> Looks like you can loose elections becasue of too little devaluation, too.
For sure! If anybody knew how to thread that needle and/or cut that knot we wouldn't have had the eventful last few decades we've had. I'm not saying we don't have a very damaging baseline populist political culture, just that close to a century of that has created objective dynamics that are hard to navigate even if you didn't care about popularity.
You are being more epistemically humble than I, which is a virtue.
The reliable route to failure is "austerity" defined as a combination of spending cuts and pro-rich tax cuts. Apart from Milei, the most recent example is Macron. The "impossibility" of forming a government is, in essence, Macron's refusal to accept higher taxes and the political limits to spending cuts.
"The economics of how you handle a situation like Argentina right now, in which fiscal dominance has arrived and taken its place at the table, is well-known."
But does it work? Wasn't the "solution" the "Washington Consensus"? It was used by the Thatcher government in teh early 1980s. Lots of pain for the welfare state beneficiaries, but did it change the economic outcome? It was used again in Britain starting in 2010 for teh next 14 years, albeit worsened by Brexit. I don't see that it worked then. More classically, it was used in Greece after 2008. Did it work there?
I trust that the economics argument will not be some version of "No true Scotsman".
This idea that the trade balance J-curve will "magically" restore growth after a self-induced recession that will cause economic actors to cut spending, including production by the exporting companies, seems more wishful thinking than good policy, perhaps more like the old joke about economists, "Let's assume a can opener".
Bradd as you are a good historian of economics, I am willing to be persuaded the standard formula used to rectify economies like that facing Argentina actually works. Is there good data to demonstrate that, perhaps because successes are not reported, while the failures are?
As far as I understand, the $20 bn is all coming from the ESF, which has limited ammunition. The Fed has unlimited lending capacity, and had traditionally worked in concert with the ESF, back in the days when the Treasury was sane. Will good (Fed) money follow after bad? Will the Fed overtly fight the Trumpazoids in the international sphere?
> Let me repeat: We do know what to do: (a) budget surplus, (b) devaluation to create a substantially undervalued currency followed by a peg.
Ah yes the ✨austerity fairy✨
Or just accept the inflation that fiscal policy outputs, undervalue the peso and keep it undervalued. Didn't Friedman once say that the worst thing about inflation was measure to "control" it? "Inflation wants to be free."