How to Ruin Your Economy and Influence People

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Reckoning from Rancho Santana, Nicaragua…

We can learn a lot from the Argentines. When it comes to messing up an economy, they’re Numero Uno. They’re Olympians of financial legerdemain and masters of the old false shuffle.

In 2001, the country was deeply in debt. The government was out of money. And the currency was losing value fast. What did the Argentines do?

First, they broke their promise to investors and savers, cutting the peso loose from the dollar. Then, they seized control of banks and bank accounts. People had been saving money in US dollar accounts in order to avoid problems with the peso. But the Argentine feds forcibly converted their accounts to pesos, just as the peso was losing 2/3rds of its value.

The next thing was to take the reserves in the central bank and use them to pay current expenses – which caused the head of the bank to resign in protest.

And finally, a few years later, they took over private pension funds – to protect them for the pensioners, of course. What are they used for? To fund the country’s deficits!

But the Argentine feds are not just scalawags, they’re the pacesetters for the rest of the developed world.

Here’s The Financial Times with a warning:

Watch out as sovereigns eye company cash piles
By David Bowers

Much has been written about how the developed world must tackle its structural budget deficits. But the link that remains to be properly recognised is that the counterparts to those ‘unsustainable’ public- sector budget deficits are equally ‘unsustainable’ corporate-sector surpluses.

The conventional wisdom believes that the current sovereign debt crisis is the result of governments having been too profligate. But it is not that governments have been spending ‘too much’ that is the problem; it is that corporates have been spending ‘too little’. Moreover, because this corporate saving is the main counterpart to the government’s borrowing, until companies start to spend again, the burden of fiscal adjustment will have to fall on cutbacks in public services and higher personal taxation. It is time to shift the debate away from talking about the fiscal position, and focus instead on whether it is a shift in corporate behaviour that is responsible for the fiscal mess in the developed world.

It is very unusual for the corporate sectors to run sustained financial surpluses. Look back at the UK and the US for more than half a century and the corporate sector has tended to be a net borrower, not a net saver.

What has prompted the recent move into financial surplus has been the decision by companies to step away from investment. Investment- to-gross domestic product ratios in the developed world are now close to the lowest levels seen in 60 years. Corporates appear to have decided to run themselves for cash, and not for growth. It is this profound shift in corporate behaviour that policymakers and politicians have been slow to spot. Until this behaviour changes – or is changed – it will be very hard to improve the fiscal arithmetic.

In the Reagan-Thatcher era, politicians cut taxes so that companies would come to their country, invest, create jobs…so that those politicians could, in turn, be re-elected. It does not work like that anymore; globalisation has seen to that. The reality is that public services used by the ’99 per cent’ are taking the strain, while attractive corporate tax regimes are protected. Just as the trade-union barons of the ’70s failed to see the writing on the wall, so the global captains of industry may suffer a similar fate unless they put their cash to work in the countries in which they are domiciled.

The Argentines are the pacesetters for all modern governments. And The Financial Times is their newspaper of reference. It’s what the policy makers read. And the bankers.

Here, The Financial Times makes it clear what the policy makers should think: that corporations are to blame for current financial problems. They haven’t invested their money the way they should. If they’d invested more, instead of paying dividends and bonuses to rich people, we’d have more jobs…more spending and more growth.

Surely the feds can help them find ways to “invest” their money…

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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