The Second Coming of Norman Angell

The Vengeful Gods of Monetarism

In the 1990s, the sins of the Argentine politicians against the Gods of Monetarism were, while not venial, not obviously mortal either. They did many good things. They halted inflation. They privatized industry. They tried hard to firm up the foundations of the market economy. They did about 80% of things right. They did only 20% of things wrong. During a five-year boom interrupted by a one-year recession, they allowed the country's debt-to-GDP ratio to rise from 29% to 41%. But they did everything else right.

Thereafter the punishment, while not swift, was inevitable. Recession caused rising debt. Rising debt brought forth higher risk premiums. Higher risk premiums caused debt to rise faster. Faster-rising debt pulled higher risk premiums along, which deepened recession, which brought still further increases in debt. The debt-to-GDP ratio went from 41% to 64% in three more years, and then came the crash.

But there is an alternative in which it all turned out well. Turkey and (so far) Brazil are in that alternative.

Paul Blustein blames:

  1. The politicians of Argentina, for pretending not to know that their much-loved currency peg required budget surpluses.

  2. The IMF, for not rubbing Argentina's nose into the fact that their much-loved currency peg required budget surpluses.

  3. The IMF, for not requiring that Argentina have a currency-peg exit strategy when it became clear that the currency peg required larger primary surpluses than Argentina could attain in a recession.

  4. The private market, for being so eager to lend money to Argentina in the mid 1990s that its politicians could ignore the fact that their much-loved currency peg required budget surpluses.

  5. The private market again, for being professionally overoptimistic about Argentina.

  6. The Bush-O'Neill-Taylor led U.S. government, for futzing around.

I'm inclined to give the IMF much more of a pass on (2) at least. The IMF is doing other things while it is dealing with Argentina. In its handling of the East Asian crisis, it became clear that the IMF had placed too much stress on budget surpluses, and to some degree its wariness with Argentina is a reaction to the fact that it had been wrong and knew it had been wrong about the importance of budget surpluses in East Asia. The IMF is also, at this time, coming under regular and sharp criticism for being too aggressive and too dictatorial toward countries seeking assistance. And, remember, the IMF has two successes--Brazil and Turkey--to count alongside one disastrous failure--Argentina--so far in this millennium.

But the most important lesson from Blustein's book, I think, is that the Gods of Monetarism are jealous and vengeful Gods, and you sin against them at your peril: monetarist arithmetic is indeed unpleasant.

And let me highly, highly recommend the book.

Paul Blustein (2005), And the Money Came Rolling in (and Out): Wall Street, the IMF, and the Bankrupting of Argentina (New York: Public Affairs: 15486482459).