North America

Why the USA is like Argentina


The USA and Argentina are both big countries – 4th and 8th largest in the world. It’s well known that both have vast expanses of rich farmland. And both are famous for their cattle herders, whether they are “cowboys” or “gauchos”. But what is less understood is that their public finances have some worryingly similar features. This is why the USA is like Argentina.

Argentina is infamous in the history of financial crises. Hyperinflations, devaluations, debt defaults, banking crises. You name it and the Argentines have probably been through it in the past half century. The last meltdown was in 2002. The currency collapsed, dollar bank deposits were “pesified” and rioters were burning tyres in the streets and shooting at the shuttered entrances of the banks.

Argentine politicians are renowned for their populist short-termism, desire to fight market forces, and consistent belief that they can reinvent the laws of economics. And for their apparently short memories…

…the average taxi driver in Buenos Aires understands more about financial mismanagement than the crowd at a conference of nobel prize…

As a result, the average taxi driver in Buenos Aires understands more about financial mismanagement than the crowd at a conference of nobel prize winning economics professors and central bankers.

The USA is still the world’s largest economy and issues the world’s main reserve currency, the US dollar. The capital markets for stocks (shares) and bonds are the biggest and most liquid (easily traded) in the world. The country is seen as being advanced in all things financial. And yet there are surprising similarities with the way that Argentina runs its finances these days. In fact in some ways the US is even worse.

Bloomberg reports that Argentina has reached a record total public debt equivalent to $197.5 billion, ultimately owed by a population of 40.1 million people. By comparison the US has a national debt of $16,746 billion ($16.7 trillion) according to the US National Debt Clock, and a population of 316.2 million. That means debt per capita is about $4,900 in Argentina and $53,000 in the US. That compares with GDP per capita of about $11,600 in Argentina and $50,000 in the USA.

Conclusion #1: Individual Americans owe almost 11 times as much government debt per capita as individual Argentines. But US GDP per capita is only 4.3 times as much.  Now who’s government looks irresponsible?

Bloomberg goes on to report that 58% of the Argentine debt is owned by public institutions, including the central bank (Banco Central de la Republica Argentina, or BCRA), the state pension fund (ANSES), state owned Banco de la Nacion Argentina, amongst others.

…Argentine government owes itself a huge amount of its own debt. It’s just a money go round.

In other words, the Argentine government owes itself a huge amount of its own debt. It’s just a money go round. The typical smoke and mirrors of the modern age. Fiddling the books to keep political vanity projects on the go and buy votes.

This is done by dipping into foreign exchange reserves at the central bank and money held by the state pension fund to cover day-to-day, and rapidly expanding, government spending. Quite rightly this is something to be concerned about, as the money is drained away and wasted on buying votes.

But again, is the USA so different? First of all the USA has been doing something called quantitative easing (“QE”) since 2008. This is the process where the central bank (Federal Reserve, “Fed”) creates brand new money with a computer stroke and uses it to buy government bonds, known as US Treasury bonds in the US, or “treasuries” for short.

This has caused an explosion in the amount of the tradable debt held by the Fed. Added to the smaller amounts held by state and local governments this comes to 21% of the total US federal government debt, or $3.5 trillion.

On top of that there is the “intra-governmental debt”, which is just shy of $4.0 trillion. This is “owned” by public pension and insurance funds such as the Social Security Trust Fund ($2.7 trillion) and pension funds for public employees ($1.3 trillion). Contributors to these funds – which include all private and public sector employees – make cash payments into them each month. The money is then handed over to the federal government and spent, in return for a debt owed to the funds.

Add together all these government holdings and you get a figure of $7.5 trillion. That’s 45% of total US government debt that is owned by public institutions. It’s really not all that different to the 58% equivalent figure in Argentina. It’s certainly not what most people would expect when they compare the public finances of those two countries.

Conclusion #2: both the Argentine and US governments raid their central banks and public pension funds to cover their excessive public spending.

Price inflation probably isn’t that different between the countries either – at least when measured in US dollars. Few people, except perhaps the truly stupid or insane, trust Argentine pesos to preserve their purchasing power. (The populist Argentine president, Cristina Fernandez de Kirchner, claims to keep all her savings in pesos. You can draw your own judgements from that claim…)

The dollar may be imperfect but the peso is positively impure…

Dollars are important in Argentina. In fact US government bodies estimate that Argentines hold one in every 15 of the physical dollars in circulation in the entire world. The dollar may be imperfect but the peso is positively impure…

Official price inflation in Argentina is reported to be around 10% a year. But it is widely known that the government fixes the figure. Independent figures released by opposition members of the congress put the figure at 24% in the year to April, based on estimate by private consultancies.

This high inflation is because the central bank is printing money at a rapid rate – quite literally. Total pesos in circulation, in physical bill form, increased by 32% over the past year. 100 peso bills – the largest denomination, but only worth $18.50 at the official exchange rate – increased in volume by 24%.

The volume of physical notes in Argentina is important, since huge amounts of business are transacted in physical cash (due to its benefit of being anonymous in a country prone to authoritarian governments).

But at the same time the peso is losing value against the dollar. During the past 12 months it fell to being worth just 86% as many dollars (or cents) as at the beginning of that year. That means Argentine prices, when measured in US dollars, rose a much lower 6.6% over the year (1.24 x 86% = 1.066).

Official US consumer price inflation (CPI) was running at 1.4% at the end of May, for the previous year. But just like in Argentina this figure is almost certainly understated. The Billion Prices Project puts the figure at 2.6% for the year to May 2013. Shadowstats reckons it was 4.7% using the previous government methodology used in 1990, and 9% using the methodology from 1980 – before the US government started manipulating the figures so aggressively.

Conclusion #3: It’s a fair bet that dollar price inflation in Argentina and the USA is pretty similar – at around 5% give or take a percentage point or two.

Why the USA is like Argentina

So there you go. There are some surprising similarities between the finances of the USA and Argentina. Both governments owe themselves a huge amount of their debt. Both under report their inflation figures. And in at least one way – the debt per person – the USA looks much worse.

That’s not to say that the USA is likely to have an Argentine financial crisis anytime soon. At least I hope it won’t – not least for the sake of all those Argentines that own dollar bills as protection from their own economic mismanagement.

But it pays to remind ourselves that it’s not just down on the pampas that public finances are being mismanaged. After all, Argentina was one of the richest countries in the world 100 years ago. Will the USA still be in 100 years time?

Until next time OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.