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Argentina Is Now In Default, But There Is Life After Default

September 19, 2014

This is an interesting case study.  If you’re not aware of it, it may be instructive for what may happen in America when we begin to default on our debt.

When its economy reeled from the aftereffects of the Peronist episode in the 1950s, a period of time during which a nation once admired for being the world’s breadbasket became one of the world’s basket cases, Argentine authorities welcomed the intervention of world credit agencies. Instead of suffering the consequences of its policies, its rulers opted for a deal that allowed them to remain in power for several decades and to avoid paying the political price for the effects of its brand of socialism. For Argentina, the perverse effects of Peronism persist to this day.

Economists call such policies examples of moral hazard:  a skewing of incentives resulting from not holding people or institutions responsible for the consequences of their actions. Moral hazard is the primary product peddled by the World Bank and the IMF. They encourage governments to engage in those policies that bring positive short-run effects that allow them to remain in power. When negative long-run effects eventually kick in, effects that are consistent with economic theory, more loan money becomes available to mask them while ushering in new rounds of short-run stimulus.

Ultimately, it will mean a stop in the flow of easy money for the Federal government.  It will curtail their power and destroy thier power internally and externally.  I expect that the government will default and leave millions destitute who have been counting on the self-discipline of the elected officials to safe-guard their wealth.  Good luck with that.  We’ll find out who the real friends of America are as the debt is repudiated, our friends will be demolished as the US Dollar has been backing their currency will evaporate.  I expect it will be a tumultuous time, especially for Americans, but not exclusively Americans.


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