A critical time for Argentina

Mining, to a greater degree than most heavy industries, relies on demand from the emerging markets. Industrializing economies, historically, have used about twice as much metal per unit of production as the mature economies of the G7 countries.

It is not a coincidence, then, that metal prices have been correlated with economic growth in the emerging markets. The early-1990s runup in metal prices, for example, coincided with a period of strong economic growth in the Asian “tigers,” such as Korea, Malaysia, Taiwan, Thailand, Indonesia and the Philippines. Similarly, in the late 1980s, it was the reforming Latin American economies.

So the health of the emerging economies is an important concern for the mining industry and for the related junior sector. And conditions in Argentina, one of the largest and most advanced of the emerging markets, have deteriorated drastically in the two weeks since we last examined the country’s problems.

Upwards of twenty Argentines have been killed in riots that stemmed from dissatisfaction with the country’s internal currency controls, and their most immediate effect, a lack of cash to buy life’s necessities. In the last two weeks, the country lost, in succession, its finance secretary, Daniel Marx, its economic minister, Domingo Cavallo, and its president, Fernando de la Rua. A new Peronist government under Adolfo Rodriguez Saa lasted just long enough to announce the government would default on US$155 billion in debt and that the Argentine peso, pegged to the United States dollar, would be joined by a second currency, the argentino, which will start at par with the peso.

If the argentino is to do its work, it cannot remain there; but the Rodriguez government said that if the value of the argentino decreased, the government would mandate wage increases in argentino terms to bring paycheques back to their peso value.

With the appointment of a third government under another Peronist, Eduardo Duhalde, it is no longer clear that there will be a second indexed currency; but if there is, the greater the decline in its value, the more will have to be printed, and monetary hyperinflation will be well under way. (If that sounds unpleasantly close to the old ideas of Social Credit, well, it is.) Heedless monetary expansion was what the old dollar peg was meant to stamp out, and it is no solution to the present crisis: where a floating-rate devaluation would have been water on the fire, indexing is naphtha. Fortunately, there are signs Duhalde may opt for a plain devaluation of the peso, a sensible course that treats Argentines like adults. The old Peronist habit of indulging the public’s wishful thinking about economic reality was one of the curses visited on Argentine society in the twentieth century. It does not need to be visited on it again in this one.

Argentines could be told that the old solutions are no solutions: but it will take a government resolute enough to speak to the people over the heads of the protestors. Surely, though, Duhalde can make the case that next time, recession and sudden currency crises can be averted if people will accept some devaluation.

Moreover, the Argentine economy will long be burdened by the higher interest rates external lenders will demand after this default — a default that might have been prevented if the peso had been allowed to fall earlier, and the economy kept out of recession — and if the public sees this, there should be some support for better monetary policy and for a government willing to say, no mas, no mas.

A note here to proponents of the gold standard: the fixed value of the peso caused all this mischief. Fiat money could have provided the liquidity to prevent it. Case closed.

The Argentine-born novelist and essayist Alberto Manguel, writing in The Globe and Mail, read in the Argentine crisis a spiritual deficit, a loss of faith in the Argentine public’s idea of itself. (He also took a swipe at the International Monetary Fund, seemingly obligatory in the Globe these days, calling them “thieves” and “that modern incarnation of the sin of usury,” which was purely silly.)

We cannot be so pessimistic as Manguel about a whole people. There were, at the end, too few pesos to go around, because the government had staked its credibility on an unsustainable dollar peg. Much suffering could have been prevented — and those twenty lives spared — had the peso been allowed to find a sensible level at its own speed. Argentines are living through a severe economic crisis, not a spiritual one; it culminated in food riots, and Argentines can be forgiven for feelings of despair. The emptiness is in their stomachs and wallets, not in their souls.