Argentina's economic armageddon: Milei's scorched-earth war on inflation

Milei has rolled the dice on a financial gamble of epic proportions

Argentine president-elect Javier Milei Argentine president-elect Javier Milei | Reuters

The gates of economic hell have opened wide in Argentina, with annual inflation engulfing the nation at an apocalyptic 254.2% as of January 2024. This staggering figure represents the culmination of decades of fiscal mismanagement and monetary debauchery that have ravaged the South American country. 

Amidst this smouldering financial wasteland, a new gunslinger has ridden into town— President Javier Milei, a self-professed anarcho-capitalist gunning to be the inflation undertaker. 

Armed with a libertarian ideology and a shock-and-awe economic doctrine, Milei has declared total war against the scourge of runaway prices. But his scorched-earth campaign risks leaving a trail of devastation that could haunt Argentina for years to come.

Milei's meteoric rise to power in November 2023 was fueled by a tidal wave of public frustration over the country's chronic inflation crises. His radical free-market platform and uncompromising rhetoric resonated with millions of Argentines desperate for respite from the economic carnage.

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Upon taking office in December, the controversial economist wasted no time in detonating a financial shock wave aimed at the heart of the inflation monster. In a gutsy opening salvo, Milei devalued the Argentine peso by over 50%, instantly shattering a decade of stringent currency controls. This body blow was swiftly followed by the explosive elimination of price caps and generous subsidies for vital sectors like transport and energy. 

The fiscal shrapnel from these policies embedded itself deep in the economic fabric of the nation, with public transportation fares projected to skyrocket by up to 360% and businesses bracing for their energy bills to quadruple.

The collateral damage has been severe, threatening to plunge millions more Argentines into the depths of poverty. Yet, like a battle-hardened general surveying the smouldering ruins, Milei remains unfazed and steadfastly convinced that this path of creative destruction is Argentina's only salvation.

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"We are still in a first phase here," affirms renowned Argentine economist Amilcar Collante, a professor at La Plata National University, acknowledging the government's reliance on recession-induced demand suppression as its primary inflation-cooling strategy. 

"It is not sustainable. At some point, the government will need to launch a stabilization plan that allows us to lower inflation while also growing the economy," he said.

Indeed, the International Monetary Fund projects Argentina's GDP to contract by a staggering 2.8% in 2024, a brutal economic sacrifice on the altar of disinflation. This deflationary tailspin risks trading one catastrophe for another, as a prolonged recession could cripple entire industries and obliterate the livelihoods of countless Argentines.

But Milei's inflation exorcism was never going to be a delicate affair. His unapologetic remarks demonising the state as "the enemy, a criminal association" and branding communism as "a sickness of the soul" lay bare his conviction that only the most extreme measures can break Argentina's cycles of profligacy.

"Philosophically, I am an anarcho-capitalist, and therefore, I feel a profound contempt for the State. I believe that the State is the enemy, I believe that the State is a criminal association," the president declared in a recent interview, his words dripping with libertarian venom.

Wooing the world's powerful

At the World Economic Forum in Davos last month, Milei's bombastic rhetoric and uncompromising policies reverberated across the global stage, and an unlikely chorus of supporters emerged from the rarefied halls of economic power. 

The libertarian firebrand's first foreign trip since assuming office saw him drawing hearty applause as he excoriated the "neo-Marxists, radical feminists and climate activists," whom he accused of co-opting global capitalism's staunchest defenders.

"Whether they proclaim to be openly communists, fascists, Nazis, socialists...globalists, there are no major differences. They all say the state should steer all aspects of the lives of individuals," Milei told the elite attendees at Davos. Corporate titans fanned to interviews, seemingly enchanted by the economist's provocations.

It was not just Milei's full-throated embrace of free-market fundamentalism that bewitched the Davos elite. For an assembly of power brokers long accused of preferencing austerity over the greater good, there was an undeniable allure in a democratically elected leader who had campaigned openly on a platform of slashing subsidies and state interventions.

Milei's arrival on the scene offered something few giants of capitalism had dared dream of— an uncompromising free market ideologue, fortified with academic credentials, finally holding the reins of power in crisis-stricken Argentina. This recalled Wall Street's infatuation with Donald Trump and the promise of deregulation. Only this time, their romance seemed anchored in more than mere hope— Milei, chainsaw in hand, appeared devastatingly committed to dismantling the edifice of the Argentine state.

The path to liberation

"The only way to enter the system was to dynamite it," Milei proclaims, undeterred by the political maelstrom brewing around his shock therapy policies.

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And a tempest is indeed gathering on the horizon. Milei's attempts to ram through a package of tax hikes and spending cuts —central to his goal of swinging the fiscal balance from a 2.9% deficit in 2023 to a 2% surplus this year— were unceremoniously rejected by Congress. 

His La Libertad Avanza coalition holds a paltry 15% of seats, forcing the president to wield the executive axe on discretionary spending like subsidies and provincial transfers.

This has ignited a firestorm of outrage from powerful governors and legislators, threatening to derail Milei's already tenuous economic roadmap. "Any further indication that the government will have to give up its fiscal target will mean the economic plan starts to lose its anchor," warns Collante.

Yet the greatest threat to the president's disinflation crusade may lie in the treacherous realm of foreign exchange markets. While the government pegs the official peso rate at 820 per US dollar, a yawning parallel black market sees the currency trading at a 40% discount around 1,150 to the greenback.

This chasm actively disincentivises exporters from repatriating their US dollar earnings, starving the central bank's reserves at a time when it desperately needs an infusion of hard currency. Unless this gap is bridged, Milei's stated ambition of unifying exchange rates and abolishing currency controls by mid-2024 will remain an economist's fever dream.

"A sharp one-day devaluation, like the 54% one Milei's government ordered in December, would be the worst option because it would open a new rebound of price indexing," cautions Fabio Rodríguez of consultancy M&R Asociados. Instead, the economy minister Luis Caputo is opting for a gradual "crawling peg" devaluation of around 2% per month.

This high-stakes exchange rate juggernaut carries seismic implications not just for inflation but for the very survival of Milei's presidency. A botched unification could ignite a fresh wave of depreciation and hyperinflation, bringing the republic to its knees. Conversely, a miscalculation in pace could choke off critical export earnings, draining the few remaining drops of foreign reserves from Argentina's veins.

In this economic conflagration, confidence has become as precious a commodity as US dollars themselves. Even a whiff of backsliding on fiscal austerity or exchange rate correction could detonate a self-reinforcing spiral of currency collapse and runaway prices.

"But if (the government) can keep up what it has promised for the next five months despite the lack of support in Congress, then by mid-2024 it will be in a much better position to win support (at home and abroad) for a long-term program," ventures Collante.

For Milei and his band of libertarian gunslingers, this five-month window represents the climactic showdown in their battle against the inflation demon. Failure is not an option; the fate of 45 million Argentines rests on their ability to hold the line until the economic arsonists can declare victory and begin the long process of reconstruction.

Yet the scars of this scorched-earth campaign will likely endure for decades, a smouldering reminder of the prohibitive costs of economic recklessness. Generations of Argentines have been sacrificed on the twin altars of populism and interventionism— first by the left-wing Peronists, and now by the free-market extremists.

As the thunder of Milei's inflation exorcism echoes across the pampas, one wonders whether this nation has been condemned to an endless cycle of booms, busts, and destructive ideological over-corrections. The volatility of Argentina's history offers few valuable precedents for the trial by fire that the country now faces.

In the end, Milei's legacy may hinge on a single, existential question: Can his merciless economic Shock and Awe cleanse the system and give birth to a revitalised, stable, and globally integrated Argentina? 

Or will his administration's radical remedies merely compound the litany of crises, consigning the nation to smoulder in the ruins of another failed economic experiment?

Time will furnish the verdict, but one thing is certain— the world watches with rapt attention as this South American economic Armageddon unfolds. Milei has rolled the dice on a financial gamble of epic proportions, one that could eternally exorcise Argentina's inflation demons, or condemn it to become a veritable Chernobyl of collapsed economies. 

The battle is joined.


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