When I was a kid visiting family in Nicaragua, I always wondered why my dad would exchange a wad of cash for a stack of local pesos in the parking lot of the local supermarket — isn’t that something you do at the bank? Little did I know that this was my first lesson in international monetary exchange. You see, the exchange rate at the time was about 25 local pesos: $1, which the bank would exchange with a fee, effectively bringing it down to about 20 pesos. But our guy outside the Pricemart here would honor the 25 and was open to negotiation. Outside of US, and especially in Latin America, the dollar is quite precious because many of the nations in this region are a bit unstable. Which brings us to Argentina.
Economic Makeover
Taking a break from domestic headlines, I noticed Argentina was going through quite the transition:
Argentina devalued the peso by 54%, overhauled its crawling peg and announced massive spending cuts to eliminate its primary fiscal deficit next year as the first steps in President Javier Milei’s shock-therapy program.
The newly inaugurated administration weakened the official exchange rate to 800 pesos per dollar, Economy Minister Luis Caputo said in a televised address after the close of local markets on Tuesday. It was 366.5 per dollar before the address. The central bank will henceforth target a monthly devaluation of 2%. - Argentina’s Milei Devalues Peso by 54% in First Batch of Shock Measures, Bloomberg
Other measures announced by the new administration include halving the number of ministries, cutting transfers to provinces, and suspending public works. This all comes only three days after President Milei took office. In his inauguration speech on Sunday, Milei warned that Argentines will have to endure months of pain while he works to pull the country from the economic crisis inherited from his predecessor. Inflation is already running at more than 140% annually, and prices are expected to jump between 20% and 40% in the months to come. The long-term plan is to scrap the peso altogether and dollarize the country, while essentially getting rid of the central bank.
President Milei is Argentina’s first libertarian president, a dramatic shift from the two dominant parties, the Peronists that have led Argentine politics since the 1940s and its main opposition, the Together for Change conservative bloc. To understand why the country overwhelmingly voted for change, with Milei winning 56% of the vote, we need to take a look at what caused this mess in the first place.
Recklessness
The word of the year has been inflation. But what Argentina has experienced over the past 50 years are cycles of hyperinflation, which are uncontrollable price increases at an extremely fast rate. It quickly erodes the real value of a currency, as the purchasing power of money plummets dramatically in a very short time. This happens when a country experiences a significant imbalance in supply and demand, often fueled by excessive money printing by the government, leading to a loss of confidence in the currency. But how did Argentina, once the richest country in South America, even end up in this situation?
It begins with Juan Domingo Peron, who was elected President in 1946. Peron, inspired by Mussolini’s fascist Italy, embraced economic isolationism along with a strong labor movement which led to vast expensive welfare schemes. Fast forward to the current century and we see that Peronism has influenced Argentinian politics over the past 20 years. Peronism’s distaste for globalization has caused Argentina’s exports to dramatically shrink year after year, which, for a country rich in resources like lithium and copper, leads to wasted income potential. Pair that with continued government overspending on social welfare programs and government wages, and you’re left with bankruptcy. Oh, and on top of the overspending, the central bank continues to print more money, effectively making it all worthless. The web of distortions across their economy goes beyond just reckless spending, I recommend this video from the Economist for a more detailed breakdown:
Confidence in the Argentinian peso is so low, that citizens are forced to save in dollars. The demand for dollars is so high that the government has restricted the purchase of dollars to only $200 per month at the official exchange rate, which has created a black market for currency with dealers on the street offering their own, more expensive rates of exchange. Argentines can’t make ends meet because of a worthless local currency, and their only option for value is limited by both the government and a corrupt black market, which makes them frustrated and desperate. Hence Milei’s appeal:
Argentina’s embrace of socialist ideas began with an idea that seems attractive but is actually a terrifying way to operate an economic system: The idea that where there is a need, there is a right. It’s a problem because there can be infinite needs but someone always has to pay for those rights, and the resources for that are finite. That sparks a conflict between infinite needs and finite resources. In the liberalist view, this conflict is easy to resolve through economic freedom and private property. This is a natural mechanism to resolve this tension in a society. - Javier Milei with Tucker Carlson, Tucker on X
The “natural mechanism” he’s referring to is the invisible hand, a fundamental notion in economics introduced by Scottish economist and philosopher Adam Smith in the 18th century. It suggests that free markets, due to the innate selfish nature of people looking to pursue their own personal gains, inadvertently benefit society as a whole. This whole concept backs up the idea of letting businesses do their thing with as little government meddling as possible, which is exactly what he plans to do. With the majority of the population angry with the current system, they are more than happy to do away with the whole thing and start over.
Public Frustration
Aside from his economic ambitions, President Milei is also quite the character. A former TV pundit and touted as an “unstable leader for an unstable country”, Milei embraces the criticism:
In several interviews, he reiterates that he is doing what he thinks he must do and what he thinks is right. We’ve seen this time and time again, where economic desperation leads to a frustrated population who will simply vote for the loudest voice of change, even when some of their ideas lean a bit toward the radical. While it’s easy to dismiss Milei as just another crazy right-wing leader, I think it’s important to note that a lot of what the Argentines are betting on with their vote is not so different from what you hear on the American campaign trail today. Although unemployment in America stands at an all-time low of 3.7%, a large number of Americans claim they’re living paycheck to paycheck. Negative economic sentiment, specifically when it leads to frustration, is probably one of the strongest drivers in voting out incumbents. Especially when the sentiment does not align with what the Biden administration is touting as success:
Never before was consumer sentiment this consistently depressed when joblessness was so consistently low. And voters rate Mr. Biden badly on economic matters despite rapid growth and a strong job market. Young people are especially glum: A recent poll by The New York Times and Siena College found that 59 percent of voters under 30 rated the economy as “poor.” - Want to Know What’s Bedeviling Biden? TikTok Economics May Hold Clues, NYT
Once you consider how off track the misaligned sentiment is then you begin to understand why Trump is leading in swing-state polls.
Thank you
I think a lot about economic sentiment. I’ve noticed that it’s not so much the increasing inequality that frustrates people but more so the diminishing idea of the American dream. This idea that hard work will at some point lead to success has always been the key driver among the middle class and incoming immigrants to continue contributing to the American economy. And to most Americans, their idea of success is simply to own a home and live comfortably, while continuing being able to support their family. But as homeownership becomes increasingly more difficult, people start to question the system and look to loud, convincing voices for change. Sometimes you need to look at an extreme example to realize how bad it can really get. As always, if you have any questions, want more explanations, or strongly disagree, comment below, follow me on Twitter (X), follow me on Threads, follow me on TikTok, or shoot me an email.
Disclaimer: These views are my own, and do not necessarily reflect the views of any organization with which I am affiliated with.
I want to share a message of hope with you, especially in response to my previous comment, which may have seemed a bit disheartening. We are fortunate to live in the greatest country in the world. The promise of achieving the American dream is very real, and as young, educated, and prepared individuals for the future, you should think long term.
Consider the American economy as a bounce house—you go up and down. Good periods provide growth, and challenging times offer opportunities. Just be vigilant and stay on the lookout. The combination of Capitalism and Democracy is powerful and has generated more wealth for its citizens than any other system on earth.
Work hard, look forward, and play the long game, and you will undoubtedly find success. As an immigrant like me, I found inspiration in a movie called "Coneheads." In it, Sinbad's character tells Beldar that the key to success in America is to "look good, be your own boss, and take cash only." So, watch the movie and follow your dreams.
Believe in yourselves, embrace the opportunities around you, and remember that success often comes to those who persist and play the long game.
Since we are talking about the devaluation of the currency in Latin American countries and its consequences, then let's talk about the devaluation of US Dollar in the United States via inflation.
The most glaring impact of this inflation is the devaluation of the US dollar. What was once a seemingly stable currency has lost some of its purchasing power, resonating with echoes of economic challenges faced by our Latin American counterparts. The repercussions extend beyond mere statistics, directly affecting the affordability of essential commodities.
Housing, food, and household goods, the staples of our everyday lives, have become significantly more expensive. The steep rise in prices has led to a growing disparity between our salaries and the costs of items we consume regularly. As someone who works hard to make a living, this disconnect is deeply felt and raises concerns about the sustainability of our economic well-being.
Adding to the complexity of the situation, there seems to be a dissonance in the messages coming from the Federal Reserve and the government. Despite the palpable impact of inflation on our wallets, official sources are assuring us of a "soft landing" for the US economy. For those of us who are not economists, these reassurances can be hard to reconcile with the stark reality of our day-to-day struggles.
As we navigate through these economic uncertainties, it becomes increasingly clear that the challenges are not confined to academic discussions or policy debates. They are tangible, affecting the lives of ordinary individuals striving to make ends meet. While the authorities may assert control over economic indicators, the lived experiences of citizens paint a different picture—one where the cost of living continues to outpace income growth.
In conclusion, I am not an economist, nor do I claim to have all the answers. Yet, I cannot ignore the growing disparity between our salaries and the escalating prices of essential goods. As we cautiously listen to promises of a "soft landing," the economic landscape remains uncertain, and the implications for our daily lives are very real.