The US Follows Argentina

At the turn of the century Argentina was one of the world’s richest nations, leading to popular use of the phrase “Rich as an Argentine”. The country was blessed with abundant natural resources, an educated population, and an apparently boundless future as a great power. Yet today Argentina is in ruin, one of the world’s true basket cases, with a massive debt default in its recent past and the lowest credit ratings afforded by rating services such as Standard and Poors. The pretty Buenos Aires streets that once housed such proud mansions, and even prouder citizens, are now home to armies of beggars and trash diggers, the capital now so unsafe that its wealthier residents must live with the constant fear of kidnapping. How did Argentina arrive at this point? It is clearly a long story, but a general theme of governmental corruption and incompetence arises, with the recent past providing clear insights into the policies that led to such destruction of wealth. And the most striking feature of a review Argentina’s slide into chaos and financial ruin is that by most measures the United States is on a very similar path today.

The Argentine boom of the 1990’s, overseen by President Carlos Menem, was ushered in largely due to the confidence inspired by a strong currency. The Argentine peso was fixed to the dollar under the convertibility proclamation of 1992, which provided foreign investors with a sense of security that their investments would not be destroyed by currency debasement. Foreign capital then poured into the Argentine stock and bond markets. Gross domestic product increased at healthy rates, and Argentina became the pride of South America for its perceived stability. The government embarked on a spending spree only partly financed by a systematic liquidation of state assets. Government budget deficits soared and the attendant national debt rose as well, yet investor confidence was temporarily maintained because of the absolute dedication professed towards convertibility. The government would pay, it assured, and it would pay by virtue of a sound currency.

The problem was that the governmental deficit was complemented by a “twin deficit” in the current account, which meant that the economy had to attract foreign capital not only to finance its profligate government, but also to balance the strains of an import demand that was greatly in excess of national exports. By the year 2000, strains were clearly present in a financial system that before had been viewed as sound, and with growing capital flight in 2000 and 2001 the fate of Argentina was sealed. By the end of 2001, the country, beset by national riots over the last ditch effort at capital controls, defaulted on over $100 billion in debt. At the start of 2002 it was forced to allow for a 75% depreciation of its currency after a controlled devaluation failed. The economy then contracted by over 10% in 2002, bringing the cumulative contraction during the crisis years on par to the magnitude experienced by the United States economy during the Great Depression. In the present Argentina is a sad nation, with many of its residents having fled to other countries in South America and Europe, and rather than holding the position as South America’s richest economy it has now fallen to the ranks of the poorest, with GDP per capita below neighbors such as Chile and Uruguay.

Though the United States economy is the largest in the world, many times larger than Argentina’s, it is not immune to the economic laws that in the end all nations must adhere to. The three most salient comparisons between the two countries relate to governmental budget deficits, current account deficits, and confidence in the currency. The striking feature of this comparison is that by most measures the United States is in a more advanced stage of deterioration than Argentina reached in the four years before the onset of crisis. In the charts that follow, the four years preceding crisis in Argentina (1998-2001) are compared to the past four years in the United States (2000-2003).

As can be seen in the first chart, the US governmental budget deficit has grown to levels in excess of those demonstrated by Argentina before its collapse.

The current account, likewise, has deteriorated in the US to a level far worse than that exhibited by Argentina.

These two measures, when combined as a percentage of GDP, give an aggregate view of the nation’s primary sources of dependence on raising capital, both from foreign and domestic sources. The “Twin Deficits” measure is equivalent to governmental deficit as a percentage of GDP plus current account deficit as a percentage of GDP, providing a combined view of national dependence.

The net effect of these policies is a gradual impoverishment of the nation. Just as Argentina sold off its state assets and incurred massive debts that would hobble the population for the future, the Bush administration has allowed for fiscal and trade deficits that effectively amount to mortgaging America to the rest of the world. The position of debt to foreign creditors shows the net effect of such policies.

That the outcome of the policies described above was a disaster for Argentina cannot be debated. Though it has not yet reached its crisis, the United States continues on the same reckless course, with the twin deficits projected to worsen in 2004 to a level greater than 10% of national GDP.

The final card for Argentina was the chaos caused by a lack of faith in the national currency. Just as convertibility was the panacea that lulled investors in Argentina into a false sense of security for so many years, perhaps too the US dollar’s longtime role as the world’s reserve currency will be the shaky pillar that eventually dooms the US to a similar collapse.