I just returned from a six day trip to Buenos Aires. The last time I went there was in July 1983 and figured I might have more luck on this trip. In 1983, I was militarily detained for taking a photograph of the Casa Rosada - their version of the White House. Buenos Aires was still up in arms about the Malvinas conflict with Great Britain. Appearing to be a spy to them, it was one of the few times I regretted following my motto of "Dress British, Think Yiddish".
Buenos Aires is a beautiful city both in nature and in design. The trees are magnificent highlighting a huge park system and lining wide streets. The architecture is impressive as well. As I strolled in the quiet of the city on Christmas day, I found myself reflecting on how a city could be so elegant but yet so economically troubled.
Argentina is well-known for many things, but especially its agricultural products. Before the Great Depression of 1929, Argentina was wealthier than some European countries such as France and Spain. Much of the truly amazing art and architecture can be traced to this wealthy period. However, Argentina appears to have never recovered from the Great Depression and that, to me, was a powerful reminder of just how important good economic policy is.
During the Great Depression, the world fell into a self-reinforcing deflationary cycle. In my opinion, this was driven by the excess productivity of the agricultural sector. As food production increased, land values and wealth increased. However, appetites for food were not increasing at the same rate as productivity gains. Inevitably, food prices dropped and land values followed. Banks, anchored as always by real estate, followed in a collapse.
Different countries tried different remedies. Ultimately, FDR took a Keynesian approach and used fiscal measures to increase demand while allowing the agricultural sector to collapse into an employment shadow of its old self. Germany, under Hitler, used a fascist approach to employ the excess capacity to build an industrial machine that was later weaponized. In an overly simplified statement, neither approach was inflationary due to the deflationary gains of agriculture.
However, Argentina sought to maintain its agricultural employment, tax its fecundity and construct a state-owned industrial base. It was a well-intentioned approach to take the best of Germany's recovery and apply its success. But by muting capitalism's engine for productivity gains, Argentina has become mired in a perpetual issue of inflation and default. Since I was in Argentina in 1983, the rate of inflation has averaged over 220% per year.
