An Argentina-like Economic Crisis

By Scott Strzelczyk
AmericanThinker.com

The United States' economic decline precariously resembles Argentina's economic collapse, which started in 1998 and landed Argentina in a depression by the end of 2000. What began in Argentina as a recession mushroomed into a full-fledged depression due to bad economic and monetary policy. The Obama administration and its congressional Democrat lackeys are on the precipice of following Argentina's disastrous economic and monetary policy decisions.

Arguably, the United States economy has been in a two-year-long recession, and while some may posit that the country has started an economic recovery, others suspect the country will plummet into a deeper recession, or perhaps a depression. In the past two years, the United States government instituted economic and/or monetary policies detrimental to American's short- and long-term economic prosperity.

$700-billion TARP bill.
$787-billion economic stimulus bill the president deemed necessary to keep unemployment under 8%.
$410-billion Omnibus bill with 9,000 pork-barrel projects.
$1.3-trillion deficit in fiscal year 2009.
$1.4-trillion deficit estimated for fiscal year 2010.
$1 trillion or more for a health care bill that the majority of Americans didn't want.
Auto industry bailout with complete disregard to the bankruptcy laws, which turned the U.S. government into an equity owner and granted an ownership stake to the United Auto Workers union.
$500-billion bailout of Fannie Mae and Freddie Mac.
$145-billion bailout of Greece.
Billions spent by the Federal Reserve to purchase toxic assets.
$10.6-trillion dollar public debt the day Obama took the oath of office. In nineteen months, the public debt stands at $13.3-trillion (a 25% increase).

In early 2000, Argentinean President Fernando de la Rúa's government evaluated options to end the recession. According to a 2003 report issued by the Joint Economic Committee of the United States Congress, the de la Rúa government evaluated several options and settled on raising tax rates as the solution:

The De la Rúa government was worried about the federal budget deficit, which was 2.5 percent of GDP in 1999. The government thought reducing the budget deficit would instill confidence in government finances, reducing interest rates and thereby spurring the economy, which was showing signs of recovery in late 1999. Among the options for reducing the deficit, cutting spending was politically difficult; the government doubted that cutting tax rates would spur enough growth in the short term to offset lost revenues; it did not wish to abandon the convertibility system and simply print money[.]

That left only one option: raising tax rates. President de la Rúa secured approval for three big tax increases, effective January 2000, April 2001, and August 2001.

Argentina's economy continued to shrink throughout 2000. In April 2001, the Argentinean government proposed cutting spending by 4.5 billion pesos over a two-year period. Public outrage ensued, and special interest groups protested. Furthermore, government monetary policies manipulated current valuations, causing fear and instability, and debt policies such as refinancing debt at higher interest rates exacerbated a deteriorating economy. In late 2001, a newly elected government took control, and the Joint Economic Report summarized their actions:

In a series of blunders that made matters even worse, from December 2001 to early 2002, succeeding governments undermined property rights by freezing bank deposits; defaulting on the government's foreign debt in a thoughtless manner; ending the Argentine peso's longstanding link to the dollar; forcibly converting dollar deposits and loans into Argentine pesos at unfavorable rates; and voiding contracts

Coincidentally, the United States is in a two-year-long recession, and Obama and congressional Democrats intend on letting the Bush tax cuts expire at the end of the year. The outstanding public debt stands at $13.3 trillion. Any opposing viewpoints from Republicans or conservatives on cutting spending or addressing entitlement programs are met with media outrage, accusations of racism, and accusations that Republicans and conservatives are coldhearted people incapable of compassion or benevolence.

The Obama government's actions ominously mirror the actions and the timing of the Argentinean government in early 2000, when the first of three tax increases was instituted. Higher unemployment, more debt, falling wages, and eventually inflation ensued. Moreover, the Obama administration and the mainstream media deceive the American people regarding the impact of the Bush tax cuts. Obama and the MSM repeatedly espouse that only tax rates for those rich Americans in the top income tax bracket will increase.

Unfortunately, the truth is that all tax brackets are impacted, and even the Obama lemmings will recognize they've been duped when their payroll tax deductions increase in 2011 and their take-home pay decreases. Perhaps then the lemmings will seriously consider what "hope and change" means and that elections do indeed have consequences. A summary of the Bush tax cuts expiring at the end of 2010:

10% bracket reverts to 15%
25% bracket reverts to 28%
28% bracket reverts to 31%
33% bracket reverts to 36%
35% bracket reverts to 39.6%
Marriage penalty is reinstituted
Child tax credit cut from $1,000 to $500 per child
Dependent care and adoption care credits cut
Estate (death) tax returns at a rate of 55% on estates over $1 million
15% capital gains tax reverts to 20%
15% dividends tax reverts to 39.6%

Many economists recognize, though they many not publicly admit it, that inflation is the only feasible alternative. The government is limited to three possible revenue sources: taxing, borrowing, and inflating. Any sensible person realizes the country cannot tax its way out of a $13-trillion debt or sustain existing entitlement programs, much less government-run health care. The government borrows money by selling government-backed securities to investors. Eventually, investors will either stop purchasing government securities or demand substantially higher interest rates due to the increased risk. The only feasible alternative is to monetize the debt -- in other words, inflate it. Monty Pelerin's recent American Thinker article captured the essence of the problem:

The political class's survival is at stake. Eventually, anything that extends their rule will be tried. It is not concern for you or the economy that is driving policy, but the preservation of power of an increasingly wounded power elite. Their survival is now driving policy. Unfortunately, what benefits them is generally harmful for the economy.

Obama and congressional Democrats have chartered a course leading America down an Argentinean economic path. November may be the last reasonable chance to change course.