“The ultimate purpose of economics, of course, is to understand and promote the enhancement of well-being.”– Ben Bernanke

 What You Should Know About Argentina 

Argentines are sophisticated people. They have always seemed more like Europeans to me than South Americans.

Actually, I can’t pretend to know much about South America. I’ve only spent lengths of time in Uruguay, Brazil, and Colombia. And come to think of it, Uruguayans and Brazilians seem pretty sophisticated too.

But I have spent a lot of time in Argentina. And I like the country. I am a partner in several businesses there, and I’ve bought and sold property with some success. Investing in real estate in Argentina is relatively easy because of the country’s incredible economic swings. Real estate prices rise and fall dramatically. So for an outsider who can pick and choose his timing, it’s not difficult to sit it out when prices are high and buy in when they get cheap.

When I’m in Argentina – a country with such a refined culture – I can’t help but feel bad for the people. In terms of what matters in building wealth – hard work, saving, and learning – they are equal if not superior to Americans.  But because of systemic problems connected to politics, power, and corruption, it’s tough for business builders and entrepreneurs to get any serious traction.

And as anyone that has even a rudimentary understanding of macroeconomics knows, when entrepreneurs can’t grow businesses, nothing else can grow either.

This was true of the Soviet Union. It was true for China until they freed up the private business sector. It was and is true of Cuba. And Venezuela. And Nicaragua. And many more countries that were once prosperous but then laid low by governments that confiscated property, socialized industry, and massively redistributed income.

And that is what happened to Argentina.

In a recent essay, Bill Bonner provided an excellent quick history lesson in the insidious and unintended effects.

“In 1853,” he explained, “the Argentines agreed on a constitution, largely based on the US model. There were the familiar legislative, executive, and judicial branches. There are elected representatives. There are checks and balances. And the president’s office is in a special house, called the Casa Rosada– rose-colored, not white.

“The system worked plausibly well for the first 100 years. By 1914, the Argentines were richer than the French. The expression ‘as rich as an Argentine’ was not followed by laughter, but envy.

“Then, in the 1940s, Juan Perón figured out how to play the urban mob by promising the people more stuff. Over the next decade, he nationalized key industries, began aggressive spending programs, and redistributed wealth on a grand scale.

“Output declined. Inflation increased. It kept increasing until 1980, when prices rose at a rate of 1,000%.

“The inflation (as well as other things, presumably) soured the whole society. Corruption increased. And politics became more of a grotesque entertainment.”

Bill then explained how politics works today in Argentina…

* One political party makes “extravagant and unrealistic promises… gets elected…  [and makes] a mess of the economy.”

* Upset about rising inflation and falling productivity, the populace votes a moderate or conservative into power.

* “The new group tries to correct the errors and oddities of the first group. But this return to reality is shocking and painful to most people.”

* After a few years, the people, frustrated that things haven’t improved as quickly as they had hoped, “re-elect the bamboozlers.”

* “Gradually, it becomes harder and harder to get ahead honestly.” Thieves become rich by making deals with corrupt politicians. Eventually, the first tier of the economy is run by packs of political and private scoundrels.

* And then, in a desperate effort to ward off eventual economic collapse, the government creates fake money. Those on the top benefit from it. The working class suffers.

“It’s great down here,” Bill’s friend in Argentina recently told him. “As long as you have dollars.”

The degradation of Argentina’s money is happening fast. The inflation rate is 55%. A dollar would bring you 30 pesos a year ago. Now, it’s worth 60.

Could this happen to the US if Bernie gets elected? You decide.