America as Argentina? - Dead Cats Bouncing
With Hilary Clinton as Eva Peron singing 'Don't cry for me Obama'? One of the most remarkable economic reversals over the last decade has been the impressive macroeconomic discipline shown by leading emerging markets from Brazil to India, while developed nations such as the UK and US have become increasingly reckless and profligate. While the former have been steadily re-rated by investors leading to a huge secular bull market in emerging market equities and bonds, the latter have yet to pay the price for their growing fiscal irresponsability. Argentina's troubled history in recent decades leads many to forget just how prosperous and advanced the country was a century ago; in fact, it was one of the ten richest countries in the world on a per capita basis until the 1930's. Any analysis of the country's stunning decline into inflation and dictatorship a few decades later must begin with the role of an entrenched economic elite who pursued their narrow interests regardless of the national cost. Rather than investment bankers, Argentina had an elite of a few thousand landowners who equally dominated the economy via agricultural exports. The pursuit of naked self-interest by these 'oligarchs' led to an increasingly unbalanced economy that underinvested in education and infrastructure and was dominated by inefficient monopolies protected by political patrons. That effort to protect the status quo at all costs via a captive political system led to the failure of attempts to modernize the economy and income inequalities growing to a destabilizing extreme. Effectively Argentina metamorphosed from a productive to a rentier economy, with a small elite redistributing stagnant national wealth to their short-term advantage. Sound even vaguely familiar?
America's strongest remaining economic advantage has been its ability to reallocate capital and talent to the 'new thing', the innovative business models and technologies that can transform broader economic productivity and generate new wealth. That depends on both social mobility and an effective reallocation of capital and people from dying to rising industries, what Austrian economist Joseph Schumpeter termed 'creative destruction'. Regulatory and political capture by entrenched elites runs counter to both, and helps explain the unhealthy domination of the US economy by the finance and healthcare industries over the past decade, whose political lobbying and funding dwarfs any other sector. An economy riven by narrow vested interests seeking to direct public policy and profit from public funds becomes one saddled with perverse economic incentives that undermine the purging and renewal process that is central to capitalism.
The end result is secular decline, imperceptible at first, but eventually leading to a crisis of confdence in a nation's currency and its debt obligations.