If you have ever seen Buenos Aires on “International House Hunters” you have probably thought that it is a very beautiful city. Indeed, in the beginning of the 20th century, Argentina was a very wealthy nation. Today, that International House Hunter has to come with a suitcase filled with US dollars in order to purchase the vacation condominium.
The truth is that Argentina is a glaring representation of what can happen when inflation goes awry. In 1913 Argentina was about equivalent to the United States as an economic power, but by 1998 it fell to about one third. Inflation ran at double digits for decades and peaked in 1989 at 5,000%. In one month, the Argentine currency lost 64% of its value against the dollar. The Argentine government defaulted on its debt twice between 1870 and 1914, once again in 1982, 1989, 2002 and 2004.
What is truly interesting about the Argentine story is their entitlement program dilemma. Because of massively underfunded public pensions, payroll taxes were increased from 5% to 26%, a value-added tax was added (VAT), and personal taxes on wealth were implemented. These all seem like very certain outcomes for the good ole United States of Argentina.
Where the story provides a twist that seems unconscionable to Americans today is what happened on October 21, 2008. The president of Argentina, Fernandez de Kirchner, announced plans to take over $29 billion of private pension accounts, saying a state-run system would protect retirees from fluctuations in financial markets. 401(k)’s, IRA accounts, private pension funds etc. – all pushed into a public program.
You might think that this could never happen, but let me just suggest a few possible scenarios:
- Austerity never takes hold in the United States. US debt is downgraded, interest rates spike, dollar declines precipitously, and equity markets plummet.
- Reinflation is ignited, larger bubble is created, larger bust ensues. 2008 serves as only a prelude to the real financial crisis.
In either scenario the United States is looking at certain default and potential/current retirees are looking at a black hole of losses in their own personal accounts. Enter Uncle Sam with a comforting smile on his face and a promise of guaranteed retirement income for the rest of your life. For many, that might sound like a fantastic idea, until you figure out that comforting Sam has stolen the majority of your wealth.
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