Power & Market
A Statement on Javier Milei from Spanish Libertarians
Senior Fellow Jesús Huerta de Soto and Fellow Philipp Bagus write:
In our own name and in the name of the rest of the Spanish libertarians and anarcho-capitalists we want to send Javier Milei our most enthusiastic congratulations. Today is a historic day for liberty only comparable to the fall of the Berlin Wall and communism. For the first time in history an anarcho-capitalist has won the Presidency of a country as important as Argentina. This shows that in the end the ideas of liberty against statism, left or right, end up prevailing. Mises, Hayek, Rothbard and the great thinkers and theoreticians of liberty planted the ideas that Milei have had the enormous merit of making attractive to the broadest layers of the population and, especially, to the most vulnerable who are always the main victims of the manipulations of socialists and interventionists of all stripes. We are now advising him closely especially on the necessity to establish a 100 per cent reserve ratio on his dollarization process to avoid any new "corralitos." Viva la libertad carajo.
APEC and the "Transformation" of San Francisco
Anyone who has spent time in San Francisco can attest to the choking rush hour traffic, the ubiquitous presence of homeless people, and hordes of tourists on the Embarcadero. But thanks to the Asia-Pacific Economic Cooperation Conference this week, things have changed a bit.
The APEC gathering has turned much of San Francisco into an armed camp, complete with hordes of cops, everywhere, blocked off roads, temporary fencing and credential checks, and, of course, the presence of The Black SUVs that transport Very Important People. When my son and I picked this day to visit the city, it happened to be when President Joe Biden was in town.
The police presence changed traffic patterns and, more often than not, we crossed the streets facing very little traffic. Likewise, at the usual shopping venues, there were no lines because there were few tourists, something the city’s business owners had feared would happen.
Not that they didn’t try to make the city attractive. We saw a number of workers pressure washing the sidewalks, something I had not seen in my numerous trips to this place. More importantly, authorities have moved the allegedly immovable homeless camps, leading residents to ask why nothing had been done before.
All this is necessary, one supposes, in order to sterilize the city so that all of the police cars and the Black SUVs driven by men dressed like the Blues Brothers and carrying around the Very Important People can move without being forced to see something resembling the real world. Given that America’s Left Coast cities (other than San Diego and Carmel) are pretty much ungovernable and have vast numbers of homeless camps, at least is it somewhat possible to turn San Francisco into a Potemkin Village, unlike L.A., Portland, and Seattle.
Had APEC chosen the latter two cities, the attendees would have been forced to deal with the sheer ferocity of the Antifa protesters, who surely would have managed to disrupt the proceedings and send all of the dignitaries being shuttled about in Black SUVs to run for cover. Furthermore, Biden then might have been compelled to acknowledge that the Antifa folk actually exist.
The larger question to me is why they have these meetings in the first place, given that those present are impediments to trade and economic cooperation. The Asian countries represented didn’t move from poverty to wealth because their political bosses were shuttled around places like San Francisco in Black SUVs. No, their economic lot improved because their countries pivoted from earlier policies of prohibiting importing of capital to encouraging capital development. They liberalized trade, protected private property, and allowed more economic freedom.
While I was (thank goodness) not invited to the conference (thus depriving me of the opportunity to be ferried about in Black SUVs driven by men dressed like the Blues Brothers), nonetheless, had I been there, I doubt I would have heard anyone speak of how best to promote both freedom and wealth creation. Instead, it turns into the usual who-met-with-whom intrigue that promotes the false idea that the world economy is “administered” by Very Important People driven about in Black SUVs and piloted by men dressed like the Blues Brothers.
Of course, what conference would be without the president (Joe Biden this time) meeting with another head of state (Xi of China this time). Too bad Xi didn’t ask Biden why his administration was engaged in such destructive behavior with its massive and unsustainable borrowing and money creation, its protectionism and Biden’s unwavering support of the wealth-destroying Jones Act.
(Given Biden’s very real cognitive issues, one doubts that the two had any kind of meaningful discussion at all, even with the help of interpreters. At least one hopes that Biden didn’t wander off during their staged walk together in a garden outside the city.)
As for my son and me, we went to a very uncrowded Fisherman’s Wharf, ate clam chowder and sourdough bread (as one is supposed to do in that neighborhood), and took a boat to Alcatraz Island, home of what was one of the most notorious prisons in history. Perhaps that ride across the San Francisco Bay to one of the federal government’s former prisons was a fitting analogy, given the way that the plans the ruling elites being driven about in Black SUVs with men dressed like the Blues Brothers behind the wheel have for the rest of us with their Great Reset.
For all the “common man” and “equity” rhetoric that “Lunch Bucket” Joe Biden uses on the stump, the world of Biden and his fellow elites is one in which everything is sterilized. Everyone not in their circle needs to stand behind the barriers, watch the parade of Black SUVs driven by men dressed like the Blues Brothers, and happily accept whatever calamities they impose upon us.
As the CPI Eases, Economists Declare "No Recession" Because This Time Is Different
The federal government’s Bureau of Labor Statistics released new price inflation data on Tuesday, and according to the report, year-over year inflation continued to climb—although at the slowest pace since July of this year. According to the BLS, Consumer Price Index (CPI) inflation rose 3.2 percent year over year during October, before seasonal adjustment. That’s the thirty-second month in a row of price inflation above the Fed’s arbitrary two-percent inflation target. Month-over-month inflation was flat with the CPI rising 0.04 percent (essentially zero percent) from September to October.
The continued growth in the CPI was driven largely by "food away from home" (up year over year by 5.4 percent) and shelter, which was up year over year, by 6.7 percent. Moderation in the rate of increase, on the other hand, relied largely on year-over-year declines in the price indices for gasoline (down 5.3 percent) and used cars and trucks, which were down 7.1 percent.
It will grieve many ordinary people to note, however, that while food prices have somewhat moderated, the other most essential category within the CPI overall index—shelter—remains near a 35-year high when measured year-over-year. The shelter index rose 6.7 percent from October 2022 to October 2023. That is a similar annual increase to what we saw in mid-1977 and mid-1982. Meanwhile, the month-to-month increase from September to October was 0.3 percent. That's for all types of shelter. The situation is more grim when we looks just at renters. The index for "rent of primary residence" has been up for three months in a row and may be reaccelerating toward the 27-year high in monthly rent growth reached in September 2022.
One noticeable oddity in the CPI report was a purported 34-percent drop in the index for health insurance, year-over-year. Those who actually pay premiums will find this rather hard to believe. The CPI report also showed a very suspect two-percent decline in the index for "medical care services," year over year. As explained by Wolf Richter at Wolf Street, the index for medical services has been problematic for some time, understating month to month changes while overstating year-over-year growth. The new method has further created bizarre swings in the index, turning it into, as Richter says "chickenshit."
Any ordinary person knows that medical care services are hardly falling, yet the index for medical care—which is a not-insignificant 6.3 percent of the full index—tells us prices are going down. On Monday, Bloomberg noted how the CPI index has become detached from reality on health services: "The health insurance index ... is currently at its lowest reading in nearly six years. But what Americans actually pay for coverage is a different story." Healthcare prices in the real world are rising rapidly, but you wouldn't know that from reading about the CPI, however.
Moreover, in spite of claims that price inflation is now "falling" or moderating, real average earnings continue to go nowhere. Thanks to a 20-percent increase in the CPI over the past three years, the real average wage has increased a mere 23 cents since the eve of the Covid lockdowns. That, of course, is an average and understates the substantial losses (in real terms) felt by households at the lower end of the income scale—who have not seen as much income growth overall during the past decade.
The news of some moderation in the CPI—which remains nearly 19 percent above the index as measured in January 2020— was interpreted by both Wall Street and much of the financial media as a great victory over price inflation and as evidence of the imagined "soft landing."
The Wall Street Journal, for example, reported on Wednesday:
The U.S. economy is approaching what most economists had thought either unlikely or impossible: inflation returning to its prepandemic norm without a recession or even much economic weakness, a so-called soft landing. ... “What we are expecting now is a soft landing,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics. “We expect the economy to weaken quite a bit but it does look like we’ll avoid an outright contraction” in gross domestic product. ... Six months ago, the consensus among economists surveyed by The Wall Street Journal was that the economy would enter a recession over the next 12 months. In October’s survey, the average forecast of economists was for no recession.
The argument offered by most of these economists, however, amounts to little more than "it's different this time." Even the Journal concedes "If they’re right, it would be highly unusual. In the past 80 years, the Federal Reserve has never managed to bring inflation down substantially without sparking a recession."
By the BLS's own measure, CPI inflation remains well above the Fed's two-percent target even as numerous economic indicators point toward recession. Tax revenue, the yield curve, temp jobs, manufacturing activity, and the leading indicators index all point toward recession.
What really matters in terms of stock prices and Wall Street frenzies, however, is the prospect for a return to easy money. Any decline in CPI inflation is interpreted as a sign that the Federal Reserve will once again turn very dovish and force interest rates lower. With price inflation now moderating, it is assumed cuts to the target policy interest rate will soon be in the cards, and Wall Street is getting excited. Unfortunately, the investment game is no longer about underlying fundamentals, but is about making money off the bubbles created by Fed-induced monetary expansion.
And Then They Came for Bart Simpson
In 1994, Murray Rothbard released what was, in my opinion, one of his best articles of all time: Tobacco Smokers: America’s Most Persecuted Minority. A serious read of it shows that his concern is not just regarding the loss of tobacco smoking – for that matter, he was not even a smoker - but rather a rise of left wing neo-puritanism.
Rothbard wrote showing that the neo-puritans of today are twisting theology and twisting science and marrying the two in order to justify controlling regulations. For the sake of his article, he showed how they did just that with tobacco smoking, but he also goes on to point out:
If today they come for the smoker, tomorrow they will come for you. If today they grab your cigarette, tomorrow they will seize your junk food, your carbohydrates, your yummy but “empty” calories. And don’t think your liquor is safe either; neo-Prohibitionism has been long on the march, what with “sin taxes” (revealing term, isn’t it?), outlawing of advertising, higher drinking ages, and the neo-Puritan harpies of MADD. Are you ready for the Left Nutritional Kingdom, with everyone forced to confine his food to yogurt and tofu and bean sprouts? Are you ready to be confined in a cage, to make sure that your diet is perfect, and that you get the prescribed Compulsory Exercise? All to be governed by a Hillary Clinton National Health Board?
Almost thirty years later, we see this continuing to snowball. Most recently, the long running sitcom The Simpsons is adjusting their style of comedy in the face of the neo-puritans of today. For almost as long as it’s been since Rothbard wrote this piece, Homer Simpson has been comedically strangling his son Bart for a quick cheap laugh. However, most recently, it’s been removed from the show. Why was it removed? Because “Times have changed.”
This seems innocent enough. After all, we do all agree that strangling children is not good. However, right wing parody artist, Seamus Coughlin very well pointed out the flaw with this stance that “Times have changed” as he quipped, “I love the implication that strangling a 10 year old was considered normal in the 90s,” continuing “‘Back in those days, stranglin’ was the way you dealt with an unruly child!’” and ‘Times have changed-attempted murder is no longer considered an appropriate response to a child quipping about your donut intake.”
Have the times really changed in such a way that we are just now noticing parents cannot strangle their children? Of course not! Any parent watching the very first time Homer choked Bart would obviously acknowledge that was just for comedy and to actively strangle a child for a mild joke would be unacceptable.
This is the same situation as smoking or junk food. No one is enjoying a slice of cake or a cigarette with the claim that there is absolutely no possibility that it is bad for them, yet when the neo puritans’ sights were set on these activities, the merger of twisted theology and twisted scientist acted as if it was brand new information that these things could possibly be bad. Now, this cartoon is the latest in a long line of attempts to bring about the “grisly land of Left Puritanism, of a Left Kingdom which proposes to bring about a perfect world free of tobacco, inequality, greed, and hate thoughts… in short, in the land of The Enemy.”
As silly as it sounds to whine about a cartoon no longer being able to strangle his cartoon son, these little steps are how the culture shifts entirely to that Left Kingdom that Rothbard described. Every show having to repent for its secular sins is how political candidates are crippled - as they have also committed such secular sins one way or another. Or how those who resisted the COVID regime were also perpetrators of such secular sins. Indulging the neo puritans in the little things sets the framework they need in the big things.
Are Hydrocarbon Sanctions Against Russia Squeezing Its War Effort? It’s Doubtful
The European Union (EU), Canada and United States (trio) governments placed sanctions on the sale of exported crude oil (oil), natural gas, liquefied natural gas (LNG), some refined petroleum products and coal originating in Russia starting in March 2022 to article publication date. The sanctions resulted from Russia's invasion of Ukraine on February 24, 2022. Oil and natural gas are defined as hydrocarbons. The governments of Brazil, China, India, Saudi Arabia and United Arab Emirates did not participate in any trio sanctions on Russian hydrocarbon exports.
EU sanctions on Russian hydrocarbon exports were implemented in phases to soften the blow on EU countries industries when replacement hydrocarbon suppliers are simultaneously pursued. Russian natural gas is mostly exported by high pressure pipeline to EU nations. Russian oil is exported by pipeline and cargo ship. Sanctions also banned shipping insurance companies from insuring cargo ships transporting Russian oil and LNG. Russian hydrocarbon payments were limited by sanctions through nonuse of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system. Trio sanctions implemented an oil price cap where exported Russian oil cannot sell at greater than $60 per barrel on the open market starting December 5, 2022.
The trio thinking is apply sanctions to the bad actions/choices of a sovereign nation with the purpose of disciplining/punishing this nation. Sanctions would crimp the money Russia needs to finance the Ukraine war. History shows the everyday people in the sanctioned nation are economically hurt by these externally placed economic/trade sanctions. The top governing people in the bad nation find ways around sanction impacts.
One can apply Ohm's Law defined as the current through a conductor between two points is directly proportional to the voltage across the two points. The equation is voltage equals current times resistance (V = I * R). Electricity naturally moves in the path of least resistance in a metal wire. Circumventing externally imposed sanctions applies this law of least resistance.
BBC news reported in January 2023, China and India increased Russian oil imports when Russia reduced its export oil sale price below the global benchmark Brent oil. Russia supplies approximately l.40 million barrels per day to India as of January 2023, where it is on course to become its largest single supplier. China's imports of Russian oil have fluctuated and risen over 2022 as seen in the chart below.
A recent historical Russian oil dollar per barrel chart shows it sold above the trio sanctioned $60 per barrel price cap for several months after it started on December 5, 2022. The last closing price is on October 16, 2023. China and India benefit from buying Russian oil with Russia receiving revenue outside the trio sanctioned oil price cap and SWIFT payment system. Payments are made to Russia in the Chinese or Indian currency and not the U.S dollar. This payment method further undermines the global reserve currency status of the dollar.
In 2021, Russia supplied EU countries with 40% of their natural gas, with Germany the largest importer, followed by Italy and the Netherlands. This had dropped to around 17% by August 2022, according to EU figures. The EU plan in March 2022, was to cut reliance on Russian natural gas imports by two thirds by March 2023.
The EU's phased in shutdown of Russian natural gas imports from sanctions was one of the most important and costly sanctions for the EU. Pipelines are the most economical way to ship natural gas and are difficult to quickly replace. Russia responded to these preparations and sanctions by repeatedly slowing and sometimes stopping natural gas pipeline exports to the EU.
The Federal Reservc Bank's St. Louis District issued a report on February 16, 2023, entitled, “Reviewing the Impact of Energy Sanctions on Russia.” The opening line states, “This blog post reviews the recent costs and success of energy sanctions imposed on Russia.“ The report is very helpful to understand some unintended consequences of these sanctions. The blog post provides a brief history of EU dependence on Russian hydrocarbons and coal since 1990 and a helpful graph is below.
The Federal Reserve Bank report conclusions found:
- The trio sanctions on Russian hydocarbon exports have reduced Russian revenues but have also created costs for the sanctioning nations.
- The recently imposed price cap on Russian seaborne oil exports was initially successful. It is likely Russia will continue to find ways to evade the oil price cap over the long term, thereby reducing the effectiveness of that sanction. Buyers and sellers will collude to evade the oil price controls.
The physical evidence shows trio sanctions on Russian hydocarbon exports since March 2022 are not working. The path of least resistance to circumvent externally imposed sanctions continues to this day by a sovereign nation.
A Pro-Liberty Speaker
Louisiana Republican Mike Johnson has been chosen as the new Speaker of the House of Representatives, ending the three-week drama. Representative Johnson has a reputation as a fiscal and social conservative. He has at times opposed funding the Ukraine war, suggesting he may be open to non-interventionist arguments or at least unwilling to give the military-industrial complex a blank check. However, he also supports giving Israel “whatever it needs” to defeat Hamas.
Speaker Johnson has suggested that another short-term continuing resolution to avoid a government shutdown may be necessary to ensure the House is not pressured into passing an omnibus spending bill at the end of the year. He has said he wants to pass individual spending bills through the House. This could help restrain spending.
However, Speaker Johnson should not trade away the leverage a potential shutdown gives fiscal conservatives. A Speaker who is truly committed to individual liberty and who understands the urgent need to cut government spending would be willing to shut down the government if that is what it takes to get Congress to make real spending cuts. This hypothetical pro-liberty Speaker would refuse to bring any bill increasing any spending in any area to the House floor unless it offsets the spending increases with equal or greater spending cuts.
A pro-liberty Speaker would work to repeal unconstitutional federal programs, agencies, and departments. Instead of replacing Obamacare with Obamacare Light, a pro-liberty Speaker would work to repeal all federal intervention in healthcare and restore patient control via tax credits and expanded Health Savings Accounts (HSAs). Instead of No Child Left Behind 2.0, a pro-liberty Speaker would work to shut down the unconstitutional Department of Education.
A pro-liberty Speaker would form coalitions with antiwar progressives to defund all unconstitutional military operations, bring the troops home, dramatically cut spending on militarism, and forbid funding for wars not declared by Congress. There could also be a left-right populist coalition formed to end corporate welfare and all other federal regulatory and spending legislation that benefits large financial institutions, pharmaceutical companies, and other big businesses. The savings from those cuts could be used to support those dependent on government programs while Congress phases out the welfare state. Also, young people should be allowed to opt out of Social Security and Medicare in exchange for a payroll tax exemption.
A pro-liberty Speaker would only bring legislation to the floor of the House that protects liberty and is constitutional. A pro-liberty Speaker would work to protect the entire Bill of Rights. That means no more PATRIOT Acts, drug wars, civil asset forfeiture, airport harassment, or government-sponsored online censorship. Instead of responding to mass shootings with thoughts, prayers, and authoritarianism, a pro-liberty Speaker would work to repeal unconstitutional gun control laws that leave innocent Americans defenseless.
Last, but certainly not least, a pro-liberty Speaker would seek to audit and end the Federal Reserve. He should also seek to protect the people’s right to use alternative currencies such as precious metals and cryptocurrency.
The election of a pro-liberty Speaker of the House will not happen until the liberty movement is able to gain more influence in the political climate. This is why all of us who know the truth must continue to spread the ideas of liberty.
A Book You Need To Read
The heroic Dr. Naomi Wolf’s new book Facing the Beast: Courage, Faith, and Resistance in a New Dark Age exposes the plot to depopulate the world though the so-called Covid “vaccines.” And the book does much more than this. It encourages and inspires those who are fighting to preserve freedom by putting the struggle in a spiritual dimension that involves the whole universe.
The plot didn’t reveal itself right away. The first stage was the imposition of quarantines and lockdowns, which Dr. Wolf compares to the early years of Nazism:
“I am asking how they can be suppressing the respiration of children intentionally; how they can be consigning friends and colleagues to eat in the street like outcasts, or sending cops to arrest a woman and terrify a nine-year-old child, whose crimes were that they tried to visit the Museum of Natural History in New York without “papers”?
How could “nice” people in the humane West, can have be put on the agenda in Washington State just two weeks ago, plans to detain those exposed to a “contagious disease” in forcible quarantine, without charge or trial, and dependent on a court order and good behavior to get out?
All of this happened in America – -in the land of people who, since the Civil Rights Act of 1964, have had the principle of equality governing human relations as a matter of law; a nation that had passed laws against the abuse of or corporal punishment of children in public schools in the 1970s in virtually every state; and a people who have been raised in a culture of freedom and civility compared with lawless or totalitarian regimes, that led them, for the most part, to be, on the scale of decency to cruelty, until two years ago, very decent people.
Argentina’s Election Results: The Unexpected Yet Insufficient Victory of Peronism
The results of Argentina’s presidential election have produced an interesting result in the recovery of the Peronist Sergio Massa from the primary election. While Javier Milei retained his 30 percent, Massa managed to convert his 21 percent into a respectable 37 percent, enough to snatch the election from the libertarian acandidate. Conservative Patricia Bullrich also experienced an improvement in her third position, from 17 percent to 24 percent. Insomuch as Argentina’s ballotage system requires a candidate to obtain 45 percent of the votes (or 40 percent and 10 percent more than the runner-up) to win in a round, the two most voted candidates will face one another in a run-off election on November 19.
They both have one month to attract the voters of the remaining candidates into their orbits. While it would seem clear that Sergio Massa could secure the voters of the also Peronist Juan Schiaretti and leftist Myriam Bregman, the former has often been critical of the current government (wherein Massa is the minister of economy), which would put his voters in an invidious situation. On the other hand, the voters of the conservative Bullrich might seem naturaly inclined to shift towards Milei. However, let us bear in mind that Argentina is a country where Peronism (i.e. State collectivism) has become so ingrained in the social fabric that even self-proclaimed conservatives flinch at the radical measures proposed by the libertarian.
During the crucial next four weeks, we can expect the government to put all their machinery into gear to back their candidate and smear Milei. At the same time, Javier will have to further delve into the political strategical game to try to appeal to a larger voting mass. The Argentinian politician Raúl Baglini gave his name in 1986 to a theorem stating that the closer a politician gets to power, the less radical and more mainstream he becomes. Unfortunately, idealistic libertarians will have to stomach Milei compromising some of his most controversial points to reach out to potential voters, as he already did to establish his platform La Libertad Avanza (e.g. although his personal position on drug legalization is publicly known to be favorable, such a thorny issue for his conservative allies has just been cast aside, and when pushed for an answer by journalists the answer is a succinct: “it is not an urgent issue at the moment”).
In anticipation of the run-off election, we can draw two main conclusions from these results. First, the fact that Milei received almost eight million votes with a message so counter-intuitive and difficult to process for most people is reason for hope and optimism. Second, the fact that the ministry of economy that led the country to an inflation rate of ca. 140 percent, with 40 percent of its population in poverty, received almost ten million is reason for concern. Concern about the power and influence that governments can have on their populations through State propaganda and by making them dependant on their subsidies and maintenance.
Arsonist Fireman Perfect for Job at Fed
Almost Daily Grant’s reports,
From CBS News local affiliate KDKA:
A Pittsburgh-area firefighter has been suspended by his own department after he was arrested and charged with setting four fires in the same community his department serves.
The Arnold Fire Department announced early Thursday that they suspended 21-year-old firefighter Andrew Bischof his arrest on arson charges in connection to four suspicious fires in the New Kensington and Arnold areas over the weekend.
This is a case of life imitating scholarship. In his book The Case Against The Fed Murray Rothbard wrote “The culprit solely responsible for inflation, the Federal Reserve, is continually engaged in raising a hue-and-cry about `inflation,’ for which virtually everyone else in society seems to be responsible. What we are seeing is the old ploy by the robber who starts shouting `Stop, thief!’ and runs down the street pointing ahead at others.”
Grant’s echoing Rothbard with this quip, “This guy [the fireman] has a bright future in central banking, after the trial.”
Argentina: What is the Right Way To Kill a Defective Currency?
Argentina has accumulated seven months of over 100% of year on year consumer price inflation since February 2023. The official and parallel exchange rates between the Argentine Peso (ARS) and the US Dollar (USD) have doubled in half a year, while the spread between the official and parallel rates has held steadily at around 100%. The central bank of Argentina has been for most of its history the prime example of fiscal dominance and inflationary bias, despite sparse periods of de jure independence. The Argentine Peso is one of the most defective currencies in the world and it is being kept on life support at the expense of the stability necessary for a functional market process and everything that implies.
In this context, combined with a presidential election, the idea of retiring the Argentine Peso through the liquidation of the central bank has gained popularity. There are three relevant coalitions in the current political theater in Argentina. The incumbent coalition, Union for the Fatherland (UP), has Sergio Massa as the presidential candidate. Massa is a long time politician and lawyer who is the current Minister of Economy. They represent the continuity of the status quo, with minor adjustments if any. The coalition that represented the main opposition until recently, Together for Change (JxC), is running Patricia Bullrich for the presidency. Bullrich is a long time politician and political scientist who was the Minister of Security under the previous government. They represent the option of change within the establishment; the usual swing of the pendulum. The new coalition mainly consisting of outsiders, Liberty Advances (LLA), is led by Javier Milei as presidential candidate. Milei is an economist with sympathies for the Austrian school and has been a Member of Congress since 2021. They represent the push for a substantial overhaul.
Milei is having a surprisingly good electoral performance. Betting odds markets currently give him an over 70% probability of winning the election. Massa has an under 20% probability and Bullrich has an under 10% probability. In terms of relevance to monetary reform, Milei and Bullrich agree there should be a change to the monetary regime, making it likely to happen. Bullrich proposes going to a bi-monetary regime. Milei proposes what is known as a dollarization, but goes beyond past dollarizations in scope. Within Milei’s technical teams there are two camps that differ about how to get there. There are two dimensions to all proposals: changes to the legal tender rules and changes to the central bank.
The main exponent of Bullrich’s bi-monetary plan is Carlos Melconian, an economic consultant who would become Minister of Economy if Bullrich wins the election. Melconian has not given a detailed account of the plan but has, in diverse interviews, given clues to what it may entail. A cornerstone of the plan shared by the rival plans is fiscal equilibrium. This is rather sensible, since in the case of Argentina stopping the monetization of debt is a necessary condition to anchor inflation expectations. A problematic element of this step is that they intend to achieve a lower deficit through an increase of the revenue in real terms, rather than through extensive spending cuts. Taxation already represents over 30% of GDP, and the effective tax burden for the average company is 106% of profit, according to a report by the World Bank.
In regards to legal tender rules, this plan would have US Dollars and Argentine Pesos sharing legal tender status. Whether Theirs’ or Gresham’s law would apply depends on the exchange rate policy. In the early days of the campaign, Bullrich had said that they would eliminate exchange rate controls on day one. If this was the case, then Theirs’ law, by which good money drives out bad money, would apply. The problem with this, albeit transitory, is that it would cause a discrete and substantial jump downwards in the demand for Argentine Pesos, in a context where unanchored inflation expectations already exert such pressure.
The central bank has remunerated liabilities known as liquidity bills, in spanish letras de liquidez (LELIQs), which are effectively analogous to the Federal Reserve’s Interest on Reserve Balances program (IORB) by which they sterilize issued money. The interest rate currently paid on the LELIQs is over 200%. The LELIQs are held by banks, which in turn pay interest on deposits. The high interest is necessary to keep holders from fleeing to other assets. The size of the outstanding LELIQ mass is three times the monetary base. Along with the government’s fiscal deficit, the interest paid on the LELIQs is a cause for automatic monetary expansion.
If the exchange rate is allowed to float without disarming the LELIQs, or without increasing the exchange rate further, the lower expected future relative value of deposits would drive the holders to spend them or exchange them for other assets, thus driving the banks to liquidate the LELIQs to fulfill the withdrawal requests. This would imply the quadruplication of the base money in circulation in a high price inflation context.
Melconian has since retracted the proposal to float the exchange rate on day one, suggesting that it would be something achieved gradually. His transitory exchange rate policy proposal consists of an administered exchange rate for importers and exporters with a special focus on everything linked to food and basic necessities, as well as a floating exchange rate for everyone else, with an ultimate goal of convergence. In practical terms it is not very different from the status quo. Maintaining a spread between a floating and an administered exchange rate is rather expensive, especially in the context of bi-monetary regime. The spread is effectively a subsidy on imports and a tax on exports, but it is not self financing.
Melconian and Bullrich have not said what they will do about the LELIQs. For this plan to not be inflationary, the government’s budget surplus would have to be large enough to cover the flows from the LELIQs and the cost of maintaining the spread. This cost could represent over 10% of GDP, so it would require substantial spending cuts or substantial revenue increases. This does not seem sustainable. It appears that their intention might be to let the proverbial bomb explode at the beginning and stabilize afterwards. This is especially likely if we consider that part of their proposed monetary regime would take away the payment function from the peso by making debts in dollars only payable in dollars, whereas they are currently only payable in pesos at the official exchange rate. Under these conditions Theirs’ law would apply, they would not increase or would even decrease the interest rate, the sterilized monetary mass would circulate, there would be a jump in inflation, and everyone would switch to dollars.
The administered exchange rate would be a form of limited corporate welfare for importers during this period. The exporters would simply avoid it if they can switch their payments of inputs to dollars. The central bank would continue to operate and they would probably build a new peso from the ashes of the prior one by eliminating four zeros or so, as it happens after most hyperinflations. The central bank and the government would however have limited flexibility in conducting monetary and fiscal policy, as Theirs’ law would keep them in check as long as there continues to be a floating exchange rate and the dollar maintains its legal status.
The main exponent of Milei’s preferred plan is Emilio Ocampo, an academic, historian, and financier with Wall Street experience, who would be named president of the central bank if Milei wins the presidency. Ocampo wrote a book on the matter with Nicolas Cachanosky, who is an economist and professor at UT El Paso. Ocampo’s plan has both transitional and long term institutional aims. It seeks to avoid causing undue harm to those who hold pesos or claims denominated in pesos during the transition. It also seeks to usher in a monetary regime with free currency competition and a free and stable banking environment.
In the end state of this plan, the Argentine peso would no longer exist and the central bank would have been liquidated. Under this regime, everyone in Argentina would be free to denominate their contracts in any currency, commodity, or index they want. Banks would be able to freely issue banknotes and take deposits denominated in any currency, commodity, index they want. There would be no government controlled clearinghouse nor a singular lender of last resort. The banks would either be forced or encouraged to take their treasury balances offshore, such that they are beyond the reach and responsibility of Argentine jurisdiction. The authors of the plan expect that the absence of a safety net will lead the banks to follow better risk management practices, to form a private clearinghouse, and to seek emergency liquidity from larger international entities.
The operational plan for the transition is complex but consistent. The exchange rate and capital controls would not be removed but until after the sterilized monetary mass from LELIQs has been disarmed. In order to do that, the LELIQs would be repurchased by the central bank at present value in exchange for US Dollars at an exchange rate calculated from the bond markets which price the same bonds in Argentina in pesos and in New York in dollars. It has been speculated that this process might take around three months and it would take about $30 billion USD.
After the LELIQs have been dealt with, the capital controls would be removed, the exchange rate would be allowed to float, freedom of currency would come into effect, and the central bank would start to repurchase the monetary base. Any remaining deposits in pesos held by the banks at the central bank would be converted into dollars at the unified floating exchange rate. The banks would be instructed to convert the peso balances in their clients’ accounts into dollars. At that point there would be a flexible period for the physical currency to be deposited or exchanged for physical dollars at the banks. The main difficulty in that phase is that most dollars physically present in Argentina are high denomination and the largest denomination peso note is currently equivalent to $2 USD. The plan would be to import lower denomination bills and to allow private banknotes to satisfy some of that demand for physical currency, even if it is slower than digitalization.
Milei has rejected the idea of digitalization as a solution for that particular issue because he fears the government having higher tracking capabilities. Digitalization would put Milei in an awkward position because around half of the economic activity currently takes place outside the tax collector’s radar. Having the data for those transactions would place him in the dilemma of taxing the transactions and therefore disrupt the sector that could not survive being taxed, or not taxing the transactions, thus effectively bestowing a discriminatory privilege that is inconsistent with his equality under the law messaging.
Once two thirds of the physical pesos have returned to the possession of the central bank, a countdown for redeeming the remaining third would be triggered. The physical pesos would be redeemable for three months at that point. The monetary base is currently equivalent to around $10 billion USD. By the end, the central bank would have discharged all of its obligations, any remaining assets would be transferred to the government’s treasury, and it would cease to exist. Milei and Ocampo expect the entire process to take a maximum of 24 months.
There is a skeptic camp within the ranks of those who support Milei’s presidential campaign. The main exponent of this camp is Dr. Carlos A. Rodriguez, a Chicago economist, founder of UCEMA, and Secretary of Economic Policy during Menem’s government, who would be the president of Milei’s council of economic advisors if he wins the election. The main concern Rodriguez has regarding Ocampo’s plan has to do with securing the US Dollar liquidity necessary to execute the plan.
The central bank has around $10 billion USD in relatively liquid assets, and it has around an equivalent value of $30 billion USD in relatively illiquid assets. The relatively liquid assets include gold, foreign currency cash, and credit swaps. The relatively illiquid assets are mainly obligations owed by the Argentine government, most of which are in the form of bonds known as untransferable bills, in spanish letras intransferibles, which are subject to Argentine jurisdiction.
Ocampo’s plan is to convert all these obligations into bonds subject to New York jurisdiction like the ones which are currently traded in the markets. Those bonds would be transferred to a new monetary stabilization fund which would be subject to foreign jurisdiction. The bonds would serve as collateral for a line of credit that would provide the US Dollar liquidity necessary for the liquidation of the central bank.
The issue in dispute raised by Rodriguez is over the value of the bonds. The bonds which are currently tradable have a market price of around 25% of their face value. The obligations which would be converted into tradable bonds have a face value of around $120 billion USD. This represents around a third of Argentina’s total government debt. 25% of $120 billion is indeed $30 billion. Rodriguez believes however that the conversion of the government obligations held by the central bank into tradable bonds would negatively affect the market price of the tradable bonds. Rodriguez concludes therefore that the most viable path to disarming the sterilized monetary mass is by gradually lowering the interest rate of the LELIQs, around 10% per month.
The problem with this suggestion is that financial instruments have a high relative price elasticity, such that gradually lowering the interest rate would have a similar effect to lowering the interest rate in a large discrete jump, as Cavallo did in the 70s during the military regime. Thus, if the suggestion was adopted, the transition would be effectively the same as the one implied by Melconian’s plan. The end result would be different because instead of building a new peso as Melconian would do, Rodriguez would support Mieli’s plan to liquidate the central bank, which would be a lot cheaper after a hyperinflation, as the dollar value of the liabilities would go down with the peso’s value.
The objection that Rodriguez raises to Ocampo’s plan is not likely to be an issue. It is true that the conversion of the government obligations held by the central bank into tradable bonds applies a downward pressure on the market price of the tradable bonds, and that other things being equal the market price of the tradable bonds would go down. But other things would not be equal if the whole plan is executed. There are four elements that mitigate the issue with this downward pressure.
The first element is that these converted bonds would not circulate, they would remain in the balance of the monetary stabilization fund. The fund would pay the flows owed to the liquidity credit line with the flows from the bonds, rather than by selling the bonds. The second element is that there will probably be no need to use the totality of the liquidity credit line, as the LELIQs would not all be repurchased simultaneously but over the course of three months and the banks would not necessarily immediately redeem their resulting dollar claims but would rather keep them as deposits at the fund, because the liquidity credit line would provide credible redeemability.
The third element is that a substantial part of the risk that is keeping the market price low comes from the government’s portfolio currency mismatch, which would be eliminated by the process. The government currently has their income flows in pesos and the relevant owed flows are paid in dollars. This risk would cease to exist because most of the government’s inflows and outflows would be in dollars by the end of the process. The fourth element is that the other part of the default risk would be greatly mitigated by Milei’s parallel plan to reduce public spending by 15% of GDP.
Milei plans to achieve this spending cut by having all infrastructure projects be funded privately, eliminating subsidies, privatizing state-owned companies, streamlining bureaucracy, and not exercising discretionary items in the budget. He would not eliminate welfare programs and would honor pensions in order to avoid social havoc. This spending cut would be deep enough to even cut taxes and probably not suffer a reduction in tax revenue, as a result of laffer curve effects. The third and fourth elements would exert an upward pressure on the tradable bond market price, probably larger than the downward pressure from the mere conversion of government obligations held by the central bank into tradable bonds.
If we compare the alternatives, it is clear that the long term monetary regime achieved by either of the paths that could be followed by a Milei administration are superior to Bullrich’s bi-monetary regime and to Massa’s status quo, because it would provide relative monetary stability with a higher degree of credibility stemming from higher costs to reverse the reform. Comparing alternative transitions, it is clear that adopting the path suggested by Rodriguez to achieve Milei’s proposed monetary regime would be no worse than Melconian’s plan. Ocampo’s path is the most desirable, if achievable, because it would minimize economic disruptions and harm to the most vulnerable; it would effectively disarm a hyperinflation. It is reasonable to believe that Ocampo’s path is achievable. The worst case scenario would be to stay the course in the status quo with no clear stabilization plan on the other end.
References
Central Bank of the Republic of Argentina. 2023. “Estado Resumido de Activos y Pasivos.” Weekly Balances. https://www.bcra.gob.ar/PublicacionesEstadisticas/balances_semanales.asp.
Lott, Maxim, and John Stossel. 2023. “Argentina 2023.” Election Betting Odds by Maxim Lott and John Stossel. Accessed October 11, 2023. https://electionbettingodds.com/Argentina2023.html.
Madero Radio. 2023. Basics Dolarizacion en criollo con Emilio Ocampo. https://www.youtube.com/watch?v=OtOSUygFyrI.
Madero Radio. 2023. BASICS El Wingman de Ocampo en la Dolarizacion. https://www.youtube.com/watch?v=FSyE22vNKIU.
Madero Radio. 2023. Basics invitado Carlos Rodriguez. https://www.youtube.com/watch?v=f7KKqwr6a1k.
Neura Media. 2023. Carlos Melconian presenta su plan de economía con Alejandro Fantino. https://www.youtube.com/live/dBqmIiahNCg?si=nwi15p-yQHM6awdF.