Limits to Expansionist Economic Policy in Argentina


When economies experience a recession, many central banks will turn to expansionist monetary policies as an attempt to stimulate an economy. Governments who measure a significant decline in aggregate demand may observe recession and cyclical unemployment. Discretionary spending policies are often implemented to resolve this, notably increased government spending, and reduced taxation or some combination of the two (McConnell, Brue, & Flynn, 2009). Economists O’Sullivan, Sheffrin, and Perez note that, “Policies that increase aggregate demand is expansionist,” and that, “Policies that decrease aggregate demand are contractionary policies,” (O’Sullivan, Sheffrin, & Perez, 2010). The idea behind the increase in aggregate demand is that enough government spending will increase consumer spending more and thus improve conditions in the economy. This is called the Fiscal Multiplier in as much as the shift in aggregate demand remains expected to outpace the initial increase in output of government spending (Quiggin, 2013).

More recently, expansionism included the creation of liquidity by the central bank through a phenomenon called Quantitative Easing (R.A., 2015). Quantitative Easing often comes in three varieties which include: an easing interest rates through the purchase of securities, the sale of short-term debt in exchange for long term debt, and portfolio re-balancing where investors sell assets to the central bank and use the funds to buy new assets in the economy (“Q’S, or not Q’S? ,” 2012).

American economist, Frederick Mishkin defined a financial crisis as, “a disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunitie,” (Mishkin, 1992). An US Senate Committee investigated causes of the financial crisis in 2008 and attributed high risk lending, regulatory failures, inflated credit ratings, and investment bank abuses as primary reasons for the crisis (Wall Street and The Financial Crisis: Anatomy of a Financial Collapse, 2011). Mishkin’s reasons for crisis dovetail the Senate where there is: an increase in interest rates, a decline in stock market, bank panics, increases in uncertainty, and unanticipated declines in the price level (Mishkin, 1992). Austrian economists diverge from the view that government spending stimulates an economy because the state cannot produce wealth without first procuring that wealth, even from future earnings through debt, from a productive entity in the economy (Stossel, 2011).

The history of South America remains richly influenced by its colonial history. Following the War of 1812 in the United States, British foreign interests were tied up in a war with Napoleon’s France. Economist Bill Still asserts that commercial banking house Rothschild cornered the London Stock Exchange with early news of a victory via an informant named Ruthworth in Waterloo while alluding to a defeat (Still, 2011). A rival commercial bank in 19th century London, Barings Bank, began to invest large sums of money in the United States and Argentina (Chapman, 1984). In the fall of 1822, following the adaptation of the Monroe Doctrine and the ability of the US to ride on the strength of the British Navy, the US government recognized Argentina who had declared independence in 1810 (Preston, 2015). Most of Argentina’s exports through the 19th century focused on agriculture trade with Great Britain and the US and its banking interests were dominated by British Barings Brothers Bank.

Starting with the First World War Argentina remained neutral and traded heavily with the United States and allied powers. The inter-war period in Argentina saw a military coupe which instituted the government of Maritinez De Peron in 1943. By 1950 Peron had nationalized many businesses in his country and upset many foreign investors but stabilized the country for a few more decades. This political arrangement lasted until another coup d’etat in 1976 where the joint chiefs of the Argentine Armed Forces took over the government. Calling state-sponsored terrorism a national reorganization, tens of thousands of people disappeared between 1973-1983 in what was called the Dirty War (Lewis, 2001). Following this restructuring period was a decade where civilian control of the military was returned and another decade following where social reforms by a ruler Carlos Saúl Menem (Sushant, n.d.). Facing the new millennium the country of Argentina inherited a crisis that resulted in the restructuring of the country’s debt with an International Monetary Fund Loan orchestrated by José Luis Machinea and allies in the United States (Kemp, 2013). In 2007 Cristina Fernández de Kirchner took over the Presidency who had been elected a few years earlier (Argentina – Cristina Fernandez de Kirchner Wins Presidential Elections, 2007).

Mises argued that economics remains informed of human action through a phenomenon he calls praxelogy (Mises, 1949). These political situations through centralized meddling of the economic state of Argentina coincided with actions of economic conditions. In the 1950’s Argentina nationalized British owned railways and infrastructure. This caused investment capital from abroad to dry up (Marsh & Brian Winter, 2014). During the Menem presidency there was huge inflation and a recession but tried to fix the dollar and the peso at a 1:1 ratio (Sushant, n.d.). The 1990’s saw privatization of the economy where nationalized businesses were sold to private affairs (Alonso, 2004). Gerber’s case study focused on the economic conditions of Argentina as a developing nation crippled by a 7% fall in GDP and 3080% increase in inflation. (Gerber, 2011). As competing countries in South America devalued their currency Gerber notes that exports suffered because Argentina fixed its currency to the dollar during the 1990’s at a ratio of 1:1. This means that every peso was backed by an US Dollar in reserve. The 1990’s saw, an economic crisis in Russia as the Ruble failed (Chiodo & Owyang, 2002) and foreign investment dried up (Marsh & Brian Winter, 2014). By 2001 shareholders and investors had lost confidence in the banking system and it was closed just before Christmas (McInerney, 2001) and unemployment soared to above 20% (Marsh & Brian Winter, 2014). Gerber noted that Argentina began to devalue its currency at this time stating, “When they reopened in January 2002, the peso’s link to the dollar had been cut. The peso began a steady decline, dropping from one peso per dollar to 0.7 pesos on January 7, to 0.545 pesos on January 22, and on down in value. Eventually, around June 2002, it stabilized around 0.27 pesos per dollar. In the end, it lost about three-fourths of its value,” (Gerber, 2011 ).

Argentina’s case for fiscal responsibility draws attention to the notion that by devaluing its currency, the recession became worse and foreign investment, a large portion of Argentina’s economy, dried up when faced with nationalization of industry or in Gerber’s 2001 case, inflation. Gerber pondered, “Does this mean those developing countries cannot use expansionary macroeconomic policies?” (Gerber, 2011 ).

Analysis and Findings

Gerber’s macroeconomic perspectives attempt to ask why developing nations cannot inflate their currency in the same manner as developed nations. Multiple developing nations experience this problem when they attempt to inflate their money. Additionally, interventionism by developed nations in the developing world can be viewed as a form of economic colonialism. Lastly, the dominance of the petro-dollar as the world’s reserve currency defines how expansionist policies work.

Several countries have tried to inflate their money. Brazil devalued its currency and caused a flood of investment which made the great depression in Argentina as it entered the 21st century worse (Eade & Sayer, 2006). Recently the Greek crisis hid expansionist policies to remain in the EU with the help of American banks (Balzli, 2010). Neighboring Venezuela following the death of Hugo Chavez holds the title of the world’s worst economy due to expansionist inflation at 68% (Gillespie, 2015). Russia’s tension with the US, amidst sanctions over Ukraine have placed the Ruble in crisis with a drop of 3% in the first month of the year (Ross, 2015). China has been accused of shadow banking despite economic troubles noted late in 2014 (“China Is Crashing. Credit Bubble, Financial and Industrial Bankruptcies, Debt and Bond Busts,” 2014). After passing the United States as the world’s largest economy it experienced a rout of $3.25 Trillion in the summer of 2015 (End, 2015). Each of these examples furthers the idea that it is difficult for the leading developing economies of the world to inflate their currency.

The value of money is its ability to exchange equal value among various people in an economy (Rand, 1957). When governments engage in an expansionist monetary policy the likelihood that the value of that currency remains equal among people in that economy is reduced. Political and economic commentator, Koerner observed that outcomes of inflation are that a society’s rich get richer and their poor get poorer—often through cronyism (Koerner, 2011b). He trumpeted a universality noting, “There is no welfarism, beloved of the old Left, without crony capitalism (which pays for it). And there is no crony capitalism, beloved of the old Right, without welfarism (which maintains the political stability that protects it),” (Koerner, 2011a). This measure explains the privatization in part of Argentina through the 1990’s. In December of 2001, Argentina defaulted on its $82 billion IMF loan and in 2014 (Huang, 2014). This money was approximately 1/7th of all the money the IMF had lent out at the time.

When countries make some dollars more valuable than others by using the powers of the state to choose winners and losers in the economy they drive the value of money. Rather than creating real wealth, they redistribute it. An example of this comes from what is called privatization but really is cronyism. In the sale of telecommunications infrastructures by the state, the Werthein family purchased a large share and a 58% share sold to Telecom Italia (“Argentina: Telecom Italia buys in,” 2010). Telecom Italitia remained 4/5th owned by a Swiss telecommunications company and became embroiled in a multinational money-laundering and tax avoidance scheme in 2010 (Povoledo & Jolly, 2010). Telecom Italia used a Panamanian intermediary for the transactions and were investigated in Brazil for duping customers with connection fees for deliberately dropping calls by the million (Samantha Pearson, 2012). In the energy sector and for a very modest $500 million, Perez Companc teamed up with two Chilean firms to buy the largest power company from the government of Argentina (Nash, 1992). Ten years later a 58.6% share of this company was sold to Brazilian energy giant Petrobras for $1.2 Billion (“Petrobras Seals Deal to Buy Argentina’s Perez Companc,” 2002). This kind of transaction happened throughout the Argentine economy and new investment in an infrastructure was driven by IMF restructuring of debt (Kemp, 2013). After the banking crisis in 2001, problems resurfaced again only a few years later because of this cronyism. Most foreign investment was from US based institutional lenders – like mutual and pension funds– and the original $14 billion IMF loan as well as a follow on $39.7 package attempted to stabilize the credit worthiness of Argentina (Roos, 2015). These loans impoverished the most wealthy members of Argentinean society and shortly after the fund managers divested themselves of Argentine investments. Libertarian blogger Dan Mitchell summarized the situation as, “Argentina’s economy, for all intents and purposes, is one giant Fannie Mae/Freddie Mac/Obamacare/General Motors/Goldman Sachs Obamaesque dystopia,” (Mitchell, 2011).

There is another perspective of interventionism. Economist, John Perkins described the role of economic hit-men whose goals are to forecast the effects of investing billions in infrastructure projects within a country and then to get leaders in that country to take on massive amounts of debt to pay large multinational corporations in the building of this infrastructure. (Perkins, 2005 ). This debt also gives the US socio-political leverage in targets of opportunity for UN votes, a military base, or access to natural resources (Perkins, 2005). Perkins notes that American culture has taught the world and its people to perceive these actions as altruistic.

In something other than altruistic perspective of building the US Empire, the US engaged in an operation called Operation Condor though the US Central Intelligence Agency (McSherry, 2012). In Chile, the CIA helped to overthrow the Allende regime with a military dictator named Pinochet (Kornbluh, 2000). Pinochet’s intelligence service in coordination with a CIA asset tracked down a key ally of Allende in the military who was exiled in Buenos Aries and had him killed. On three separate occasions the military attempted to oust the Peron government in 1946, 1952 and 1973 (“Argentina’s Truth and Justice Day: A Stark Reminder of Latin America’s Dark History,” 2015). Though out the late 1970’s and 1980’s military coup d’etat took places in South America with the exception of Costa Rica. In Nicaragua, Cuban intervention had brought about a military coup favoring socialism and the US in coordination with Argentine intelligence assets worked on a counterrevolution by funding the Somoza loyalists. Transfer of weapons was outside of legality in the US and became known as Iran-Contra (Silver, 2013). Argentine intelligence assets also coordinated with US intelligence assets in the region to assassinate left wing rebels and revolutionaries in a separate operation called Operation Charly (Miller, Vandome, & McBrewster, 2010). Operation Condor continued throughout south American and ensured that US friendly dictators were installed throughout South America (McSherry, 2012).

The problem with this perspective is that it is very state-centric and examines human action through the lens of centralized nation states in the Westphalian model. This kind of intervention does not examine the economic problem of intervention by the state and the idea that it should not be meddling in the everyday affairs of the ordinary man. When ordinary people notice these civil failures and the turn over resulting from instability imposed by military upheavals as fulfilled by Operations Condor and Charly, they are conditioned to believe that the failure of these efforts is a direct result of not enough control and some inadequacy of the state not going far enough (Mises, 1996). This should be viewed as a moral problem and not just a consequence of some human action (Beitz, 2012). This kind of planning and control doesn’t work and only served the interests of economic colonialism by the US in South America. Mises noted that if the state created on one hand jobs it so dictates it must on the other abolish some since it produces no resources but merely uses the power of force and law to coerce society to its desire (Mises, 1947). This legacy of centralized intervention has not helped free markets either but multinational conglomerates with Wall Street backers. It becomes a realized broken window fallacy with unrealized potential (Alford, 2012).

This intervention is not for the purpose of free and equal trade between countries and their economies but for the protection of the petro-dollar system (“Petrodollars,” n.d. ). This is the system that followed the Bretton woods and the US leaving the gold standard (Cohen, 2013). Gerber’s question about developing nations is based upon the idea that developed nations have this privilege and in the perspective of dollar supremacy as the world’s reserve currency that allows these things to happen in places like Argentina. Notably, Argentina sold all of its gold at the bottom of the market in 1997 and exchanged them for dollars (Vronsky, 1998). Argentina must buy US dollars to purchase oil on the open market and maintain US dollars to sell its oil (Parks, 2014). It is this means, the petro-dollar system which limits the ability of Argentina to inflate its currency or take on further debt when the instruments of debt are controlled by the same countries that have the keys to the reserve currency.


When considering the implications of US led intervention throughout the 1970’s and 1980’s, these interventions inhibited political stability in South America. The imposed artificial limitations on contractions and expansions of governments who were coerced into taking large loans and privatizing their infrastructure at pennies on the dollar to multinational corporations, many of which share interests with the US in their home country.


Alford, R. P. (2012). A Broken Windows Theory of International Corruption. Ohio State Legal Journal, 73, 1252–1281.

Alonso, V. (2004, January 14). Ten Years Of Privatization Made Argentina’s Crisis Worse. Albion Monitor. Albion. Retrieved from

Argentina – Cristina Fernandez de Kirchner Wins Presidential Elections. (2007). Argentina: Youtube Video. Retrieved from

Argentina: Telecom Italia buys in. (2010). Retrieved September 11, 2015, from

Argentina’s Truth and Justice Day: A Stark Reminder of Latin America’s Dark History. (2015). Retrieved September 13, 2015, from

Balzli, B. (2010, February 8). Greek Debt Crisis: How Goldman Sachs Helped Greece to Mask its True Debt. Der Spegal Online. Retrieved from

Beitz, C. R. (2012). Covert Intervention as a Moral Problem. Ethics & International Affairs, 3, 45–60.

Chapman, S. (1984). The Rise of Merchant Banking (Kindle). London, UK: Routledge. Retrieved


China Is Crashing. Credit Bubble, Financial and Industrial Bankruptcies, Debt and Bond Busts. (2014, March 8). Global Research. Retrieved from

Chiodo, A. J., & Owyang, M. T. (2002). A Case Study of a Currency Crisis: The Russian Default of 1998. St. Louis, MS: The Federal Bank of St. Louis. Retrieved from

Cohen, B. (2013). Bretton Woods System. Retrieved from

Eade, D., & Sayer, J. (2006). The Macroeconomic Context of Convertability and its Crisis. In Development and the Private Sector: Consuming Interests (Kindle, pp. 134–147). Bloomfield, CT: Kumarian Press.

End, R. F. (2015, July 25). China Intensifies Steps to End $3.2 Trillion Stock Rout. Bloomberg Business. Retrieved from

Gerber, J. (2011). The Limits to Macroeconomic Policy. In D. Battista, N. K. Seibert, N. Fenton, & A. Eusden (Eds.), International Economics (Fifth, pp. 261–263). Pearson Education, Inc. Retrieved from

Gillespie, P. (2015, February 20). Five reasons why Venezuela may be the world’s worst economy. CNN Money. Caracas, Venzuela. Retrieved from

Huang, D. (2014, July 2). Don’t Cry for Them: The World’s Biggest Sovereign Defaults Since 2000. The Wall Street Journal, p. Money Beat. Retrieved from

Kemp, J. (2013, March 8). IMF Helped Sink Argentine Economy. World Mysteries Blog. Retrieved from

Koerner, R. (2011a, May 5). “First Do No Harm”: Constitutional and Conservative Liberals. Huffington Post. New York, New York. Retrieved from

Koerner, R. (2011b, August 8). Inflation: Where Cronyism Meets Poverty. The Huffington Post. New York, New York. Retrieved from

Kornbluh, P. (2000). CIA Acknowledges Ties to Pinochet’s Repression. Retrieved September 13, 2015, from

Lewis, P. H. (2001). Guerrillas and Generals: The Dirty War in Argentina (Kindle). Brooklyn, New York: Praeger Security International. Retrieved from

Marsh, S., & Brian Winter. (2014, July 30). Chronology: Argentina’s turbulent history of economic crises. Reuters News. Buenos Aires, Argentina. Retrieved from

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Expansionary Fiscal Policiy. In E. Clevenger & A. Hilbert (Eds.), Economics: Principles, Problems, Policies (Eighteenth, pp. 608–609). New York, New York: McGraw Hill Irwin.

McInerney, A. (2001, December 13). Argentina after IMF “reform”: Banks close doors as economy nears collapse. Workers World. Retrieved from

McSherry, J. P. (2012). Predatory States: Operation Condor and Covert War in Latin America (Kindle). Plymouth, UK: Rowman & Littlefield Publishers;

Miller, F. P., Vandome, A. F., & McBrewster, J. (2010). Operation Charly (Google Boo). VDM Publishing: VDM Publishing.

Mises, L. von. (1947). The Failure of Interventionism. In Planned Chaos (Kindle). Auburn, Alabama: Von Mises Institute. Retrieved from

Mises, L. von. (1949). Human Action: A Treatise on Economics (Kindle). Aubern, Alabama: Ludwig von Mises Institute. Retrieved from

Mises, L. von. (1996). Destruction Resulting From Intervention. In H. F. Sennholz (Ed.), A Critique of Interventionism (Revised Ki, pp. 44–57). Von Mises Institute.

Mishkin, F. S. (1992). Anatomy of a financial crisis. Journal of Evolutionary Economics, 2(2), 115–130.

Mitchell, D. (2011, April 19). Greetings from Argentina – An Obamaesque Land of Crony Capitalism and a Warning to America. Retrieved from

Nash, A. C. (1992, September 6). The Big Push Toward Privatization in Argentina. The New York Times. Buenos Aires, Argentina. Retrieved from

O’Sullivan, A., Sheffrin, S. M., & Perez, S. J. (2010). Fiscal Policy and Aggregate Demand. In N. E. Anderson, D. Alexander, V. Guariglia, & T. McHenry (Eds.), Macroeconomics: Principles, Applications, and Tools (Sixth, pp. 214–215). Saddle River, NJ: Prentice Hall. Retrieved from

Parks, K. (2014, January 24). After devaluation, Argentina eases U.S. dollar restrictions. The Wall Street Journal. Buenos Aires, Argentina. Retrieved from

Perkins, J. (2005). Goals/Objectives of Economic Hitmen. In Confessions of an Economic Hit Man (Softcover, pp. 17–18). New York, New York: Plume.

Petrobras Seals Deal to Buy Argentina’s Perez Companc. (2002, October 18). The Wall Street Journal. Rio De Jinero. Retrieved from

Petrodollars. (n.d.). In investopeadia.

Povoledo, E., & Jolly, D. (2010, February 25). Telecom Italia Delays Results Because of Money-Laundering Scandal. The New York Times. Rome, Italy. Retrieved from

Preston, D. (2015). James Monroe: Foreign Affairs. Retrieved September 12, 2015, from

QE, or not QE? (2012, July 14). The Economist. New York, New York. Retrieved from

Quiggin, J. (2013, January 4). The big issues in macroeconomics: the fiscal multiplier. The Crooked Timber. John Quiggin. Retrieved from

R.A. (2015, March 29). What is quantitative easing? The Economist. Retrieved from

Rand, A. (1957). Francisco D’Aconia’s Money Speech. In Atlas Shrugged (Kindle). Retrieved from

Roos, J. (2015, April 17). The IMF in Argentina: A Bondholder’s Best Friend? Retrieved from

Ross, P. (2015, January 26). Russia Ruble Crisis: Currency Falls Further Amid Threats Of Tighter Sanctions. International Business Times. Retrieved from

Samantha Pearson. (2012, August 9). Brazil in Telecom Italia probe. Financial Times. San Palo, Brazil. Retrieved from

Silver, T. (2013). The Depths of Iran-Contra: Revealing the Shadow Government. Retrieved from

Still, B. (2011). The Money Masters. United States: Youtube. Retrieved from

Stossel, J. (2011, September 29). Governments Don’t Create Prosperity. Retrieved from

Sushant, G. (n.d.). An analysis of Menem’s Ten year regime in Argentina. New Delhi. Retrieved from

Vronsky. (1998). When Central Banks Sell Gold, Their Currencies Devalue. Retrieved September 10, 2015, from

Wall Street and The Financial Crisis: Anatomy of a Financial Collapse. (2011). Washington, DC. Retrieved from


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s