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Market Oracle FREE Newsletter


Is the United States the Next Argentina?

Politics / US Debt May 23, 2013 - 12:46 PM GMT

By: Money_Morning


Garrett Baldwin writes: Drive the streets of Buenos Aires, and you will see regal architecture that rivals wealthy European enclaves in Monaco or London.

And along tree-lined walkways, you will witness monuments that speak of the legacy of Argentina's finest moments.

But all of it is just a façade-a reminder of what used to be.

Despite having one of the most educated and entrepreneurial populations in the world, an abundance of natural resources, and a dynamic agricultural sector, Argentina has been in steep decline now for eighty years.

And things are only getting worse.

Without a doubt there's a lesson here-- even though I recognize U.S. businesses have it comparatively easy when it comes to government mismanagement.

Even still, after spending the week immersed in Argentina's business culture, it's hard to argue the U.S. isn't on the same unsustainable path.

With the U.S. debt and obligations reaching new heights, new arbitrary regulations making it increasingly harder to conduct business, and examples of ruthless big government gone array in the AP and IRS targeting scandals, the parallels are too great to ignore.

This is far different from the recent comparisons to Greece--and actually much worse.

The truth is the United States is in danger of becoming the next Argentina.

Here's why: It's about business, always business.

The Cornerstone of Every Nation

A nation's success and the strength of its middle class rests on the ability of its people to have the freedom to conduct trade and business. It also relies on a political structure that ensures long-term sustainability.

From my trip there, I can tell you the business and political climate in Argentina is utterly dismal.

For a week, I drove through the heart of Mendoza wine country, dined with Board of Trade members who ship their grains, and circled through the public markets along the Buenos Aires parks.
Given the nation's beauty and reputation as a global destination, you wouldn't know it unless you sat down and spoke with individual business people. After hundreds of conversations, not one person I spoke to championed the Argentine government's positions on improving the business climate.

This is what happens when solutions to problems created by government action is always to add more government regulation or to centralize power.

It is also what happens when the populist government has focused exclusively on a social justice platform that emphasizes benefits to the 40% of its citizens who live in poverty.

In fact, on three occasions, I was told that advocates of President Cristina Fernández would offer a pair of shoes to voters in the slums. Voters would receive one shoe before the vote, and the other when they returned and showed their ballot.

When you hear these stories, you realize that elections are not so much about fixing problems as they are about the ascension to power that politicians seek.

Argentina's core problems stem from a financial crisis in 2002, where the country effectively defaulted on its sovereign debts. Widespread panic, rioting, a devaluation of the peso against the U.S. has led to a staggering erosion of wealth across the nation. Unemployment had soared to 25%, and 60% of the country fell below the poverty level. Horrific tales of scavenging and bartering became the norm.

But 10 years later, the business climate still remains stagnate in the face of trying to keep food and product costs down and things "more fair.”

Overregulation, steep export taxes, and import bans have led to a stifling effect. Policy decisions have made it impossible to conduct business, have facilitated the destruction of its middle class, led to rampant black markets, and incentivize the offshoring of capital by the wealthiest members of society.

And while the entrepreneurial spirit of Argentina is very alive and well, the government has done everything it can to tie one arm behind business leaders' backs, while chopping the other off at the elbow.

For example, take the flight we took from Mendoza to Buenos Aires.

Our regional flight was on LAN, a Chilean carrier and competitor to the government-owned Aerolíneas Argentinas. Our midday flight was delayed by a half-hour, but not because of the rainclouds circling above Buenos Aires. It was well known by my co-passengers that the Argentine government has ordered its flight towers to delay rival airlines flights in order to raise Aerolineas' on-time arrival score in comparison to companies like LAN.

Not only was that delay induced to enrage customers, but we also faced another 30-minute delay with our baggage, which was strange considering that all of the bags were off of our plane before we were (for some reason it took an extra 20 minutes to get access to a staircase to deplane).

So it shouldn't surprise anyone that LAN pulled out of the Argentine market this week. This will only drive price increases and provide fewer options for travelers. It will also do little to improve the on-time arrival scores of a poorly run state enterprise.

Why should any of this concern Americans?...

Here' s one of the connections: During the 2009 healthcare debate, we heard quite a bit from the Left about how the U.S. needed a public-option to compete against private healthcare companies.

But the reality is that private companies can never compete with politically advantaged, crony companies or options that have no true interest in market competition. A public option would make it virtually impossible for the private market to function properly.

And over time, you will witness a downward trend where private firms go out of business, and the politically advantaged companies rise but ultimately begin to fail overtime due to a lack of competition and market accountability.

The United States already operates the V.A. healthcare system with a pathetic track-record (as repeatedly noted by Jon Stewart and the Daily Show). We also see the U.S. Post Office, the de facto version of a shipping public option. Just think about how it bleeds cash, can't break union influence, and fails to provide quality or value in its services.

Meanwhile, private companies UPS and FedEx operate efficiently, despite persistent regulations to protect the U.S. Postal Service. And these aren't the only parallels

A Myriad of Problems

In fact, Argentina's state-run airline was just the first of many logistical problems that I witnessed.

The biggest problem that I saw facing Argentinean businesses in agricultural production was the lack of a railway system. Argentina does not just lack proper rail infrastructure to ship goods from remote farming regions to its ports. It pretty much does not have any access to ship goods from anywhere by any other method but trucks.

This is because the trucking union has such an influence on the Argentine government, that they have effectively blocked any future train infrastructure. Instead of shipping goods in a more cost-effective manner, trucks dominate the logistical network, which is more costly, less environmentally sound, and leads to serious bottlenecks in logistical operations.

Cronyism has stifled market opportunities to improve its logistical network, which will only lead to long-term shortfalls as the agro-sector attempts to compete with its neighboring rival in Brazil that is solving its infrastructure problems as I write this.

Argentina is also crippled by its own trade policies. The nation has extremely high business taxes, including a massive VAT and export tax on raw commodities.

In an effort to keep food costs down across the country, the nation has made it financially unfavorable to export grains by producers. As a result, investments into the agricultural sector remains stagnate.

And, again, while the country is doing its best to suppress rising food costs, the nation is about to find itself uncompetitive as neighbor Brazil creates a more favorable environment to international investment, infrastructure development, and more liquid financial markets.

But it's the last problem facing the Argentinean economy that is the most troubling.

And we'll cover that portion tomorrow in Part Two of this examination into the Argentine Crisis and how to profit from two successful global investment strategies.

Source :

Money Morning/The Money Map Report

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