The Breakdown - Why A Pro-Bitcoin, Anti-Central Bank Economist Just Won Argentina’s Presidential Primary

Episode Date: August 15, 2023

Javier Milei shocked the world with an upset win in Argentina's presidential primary this week. NLW provides some background on the context in which the outspoken pro-Bitcoin, anti-Central Bank candidate has come to lead the polls. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Alex Kruger, who I frequently quote, who is himself from Argentina, said, Miele is neither good nor bad. He is different. And for Argentina, different means good. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, August 15th. And today, we are talking about the Argentinian presidential candidate who is a pro-Bitcoin candidate. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation,

come join us on the Breakers Discord. You can find a link of the show notes or go to bit. com.com. Hello, friends. Welcome back. If you have been on Bitcoin Twitter in the last day or so, you've probably seen someone talking about the pro-Bitcoin Argentinian presidential candidate that just won a primary election. As a representative tweet, Marty Bent said, Argentina electing an anarcho-capitalist president and embracing Bitcoin would be pretty epic, especially when the world sees how quickly they recover from a multi-decade bout of fiat-induced

economic mismanagement. Now, this is indeed a really interesting development. However, it can be very easy, all too easy, frankly, for Bitcoiners or crypto advocates to get so excited about a politician from somewhere else sharing our views on those particular topics that we fail, A, to see the politician for their full set of policies and beliefs, or B, fail to put it in the context of what's actually happening in the place that that politician has emerged. I think both of those things are extremely important, and so today what we're going to do is just a little bit, a very, very superficial background on Argentina, its recent economic turmoil, and of course, the candidate in question, Javier Miele. So first, let's talk about what actually happened.

On Monday night, there was a shock election result when libertarian congressman Javier Miele secured a victory in the presidential primaries with 30.1% of the vote. Miele came in ahead of pro-business center-right candidate Patricia Bullrich, who garnered 28.3% of the votes, as well as the candidate from the incumbent center-left government, Sergio Masa, who got 27.2% of the vote. Masa is the current Minister of Economy and is a party member of the Renewal Front, a part of the ruling coalition of Democratic Socialist Parties. To get a sense of why people around the world are talking about this, economics professor Lawrence White, wrote, 30% in the first round for a candidate who wants to abolish the central bank and dollar rise, remarkable and encouraging whatever disagreements I may have with Miele on other issues. So who is Javier Miele?

Well, he's a relative newcomer to Argentine politics. He was a founding figure in the Libertarian Coalition, which was formed in 2018. The party's power base is centered on the capital of Buenos Aires, but they are far from a dominant political faction. The party had a glimmer of success during the 2021 elections, obtaining a parliamentary seat for Miele. Overall, the Libertarian Coalition holds only four seats in the 257-seat lower house and none in the Senate. One of the things this could mean that if Miele is successful in the final round of presidential elections to be held in late October, he might need to form an alliance with the center-right opposition in order to pass legislation. Before turning his attention to politics, Miele had a two-decade-long career as a professor of economics.

He is firmly of the Austrian school believing in hard-money principles. He has been highly critical of the University of Buenos Aires, which he views as being responsible for the, quote, proliferation of Keynesian Brutes. Outside of economics, he is extremely socially conservative. He's put forward opinions, for example, around the extreme restriction of abortion, unrestricted civilian access to firearms, and climate change denial. Now, one of the things that you'll note if you've spent any time with Western press characterizations of Miele is that he gets compared to other right-wing populists like Trump and Bolsonaro quite a bit.

In fact, most of the American coverage of him includes some phrase like Trump-loving or Trump-admiring literally in the title of the article. What's important to note is that his political communication is significantly more focused on economic issues than those social beliefs. Indeed, his election campaign has centered on the economics of Argentina. During rallies, he has called for a massive reduction of government spending, formal dollarization, and the abolition of the central bank. He's also come out as a fierce advocate for Bitcoin as an answer to the control imposed by central banks over the money supply. However, before we go deeper into the Bitcoin dimension of this story, let's talk a little bit about the larger context.

The Wall Street Journal characterized Miele's victory as a middle-class revolt, and it's pretty hard to argue with that point. Milay outperformed both the center-right opposition candidate, as well as the center-left candidate from the incumbent government. Indeed, his victory in this preliminary stage of the elections is being viewed as a rejection of career politicians and the ruling class in Argentina. Current ruling party is part of a coalition of Peronist Democratic Socialist parties which have carried forward the political ideals of post-World War II President Juan Perron. While obviously the political history of an entire country is way, way out of depth for this show, at a very high Wikipedia-style level, Perona's presidents have been successfully elected in 10

of the last 13 elections in which they have been allowed to run, and so in that way, definitely represent the entrenched incumbents in Argentina. Their ideology features things like nationalization of industry, strong government-supported labor unionization, and a hefty dose of social welfare. However, this ideology has been increasingly on the outs over recent years. For example, between 2015 and 2019, Mauricio Macri from the opposing center-right party, the Republican proposal, held the presidency. In 2021, the Perotas coalition lost their majority in the Senate for the first time in 40 years, leaving the party impotent to pass legislation in their own right. Now, Miele's surprise victory on Monday could represent the final collapse of power for both of the major political coalitions in Argentina.

Pre-election polling had the dark horse candidate finishing in third place behind the more established party figures, but was obviously way off. Now, part of why there has been such a political shift is that Argentina is going on 25 years of economic dysfunction. Starting in 1998, a string of global economic shocks led to a three-year depression punctuated by a sovereign default in 2001. In that period between 1998 and 2002, the Argentine economy contracted by 28%. Because of that, the nation turned to the IMF for debt restructuring to deal with an exponentially growing pile of dollar-denominated debt. After 2023, growth did return, both unemployment and poverty decreased. However, that massive debt burden remained.

Argentina came out of the 2008 global recession with its growth intact, but the economy sputtered out again in 2013, and since then, Argentina has experienced five recessions in the past 10 years. Now, things arguably took a turn for the worst after the change of government to the long-time opposition in 2015. By the second half of that year, inflation hit 30%, and the Argentine peso was cut in half to an exchange rate of 30 pesos per U.S. dollar. The central bank responded by hiking interest rates to 45%, and draining its foreign currency reserves to bolster the collapsing peso. Inflation never came back down significantly below 40% prior to the pandemic, and the peso continued to devalue year after year. In 2019, power transitioned back to the dominant

center-left coalition, and capital controls were put in place. Citizens could no longer freely exchange their pesos for dollars. In this environment, the central bank sets an official fixed exchange rate, at which individuals are only allowed to exchange $200 per month without paying punitive taxes. In spite of that official rate, however, the nation functions as a semi-dollarized state with citizens exchanging currency at a free market rate known as the blue dollar. This exchange in physical dollar bills is illegal, but generally not enforced as anyone who has visited BA knows. Alongside the blue dollar rate, there are a range of other exchange rates designed to act as either a subsidy or a tax on certain import and export industries. Most notably is the agricultural or soy dollar

rate which was introduced last year. The soy dollar rate was intended to offer farmers a more favorable exchange rate after they began to stockpile their crops rather than participate in economically critical export markets, however still had the problem of not being the actual rate that dollars were fetching on the blue markets. Now, fascinatingly, on Monday, as it became clear that Miele had outperformed his rivals at the polls, the government announced another adjustment to the official exchange rate. The peso was devalued by 18% to trade at 350 pesos per dollar. Blue dollar rates also shifted by more than 14% and now sit at 675 pesos per dollar. That is a new all-time low for the Argentinian currency. Alongside the devaluation, the central bank hiked its key interest rate

by 21 percentage points to reach 118%. Inflation is now firmly above 100% per year, and there doesn't appear to be an easy way to stabilize the currency or the economy. Now, the devaluation is being blamed on an economic meltdown in reaction to the election. Alejo Costa, the chief Argentinian strategist at BTG Pactual and BA, said, investors like Miele's economic message, but fear the execution and institutional risk, considering his lack of power in Congress and aggressive style. Now, one concern is that Miele or any other president will have their work cut out for them. Claudia Callich, the head of emerging market debt at M&G investments, said that whoever is in charge by the end of the year will need to begin unwinding unsustainable policies.

And ultimately, this is what makes Miele's success at the polls start to make more sense. The core pillars of Miele's proposed economic reforms are to formally dollarize the economy and slash government spending to the bone. Given that the people of Argentina have seen their peso savings slashed by two-thirds in just the past year, the message appears to be resonating. So at this point, let's start to bring crypto back into this story. Argentina is a place that has embraced crypto for some time now. In fact, I've often told this story on other podcasts, but in early 2019, I actually

brought my father-in-law to BA for a couple-day trip where we effectively just hung out with people who were working in the crypto space, and that's where it really clicked for him. It was soon after that trip that he made his first Bitcoin investments, which, by the way, if you look at what Bitcoin was priced at at the time, was a pretty damn good time to get in. Now, back to Argentina itself, local laws allow for up to 20% of wages in kind, which some workers have used to receive part of their salary in crypto. That has represented a significant boost for global workers who otherwise would have had their U.S. dollar payments automatically converted into pesos with the banking system. According to International Payroll Company deal,

Argentina has more workers getting paid in crypto than any other nation in the world. Now, a big part of the adoption in Argentina is around stablecoins. This makes sense given how dollarize the economy is. Many blue dollar exchange offices now accept and distribute stable coins, and their use in the economy as a payment method is also increasing. Several major banks even began offering crypto services in recent years. Now, perhaps because of all of this, the amplified adoption of crypto in Argentina has alarmed the IMF. Since 2020, the government has been seeking IMF assistance in restructuring its debt, but negotiations have been painfully difficult. The IMF has insisted on a range of economic reforms and austerity measures, but a lack of a parliamentary majority made it difficult for the government

to make a firm commitment. In March 2022, the government signed a letter of intent with the IMF on a loan of $45 billion, and one of the terms of the agreement was that the central bank would discourage the adoption of crypto in Argentina in order to quell, quote, money laundering, informality, and disintermediation. This was, of course, the IMS's very own Operation Chokepoint, Argentina, and despite there being no formal policy, multiple major banks suddenly shut down their crypto services. Now, 5.4 billion of the IMF loan was distributed to Argentina earlier this year, but with elections and potentially a change in government coming, it's not clear when the balance of the loan will be paid out. For many citizens, the current government has used the central

bank to pursue a failed policy of currency controls and sky-high interest rates. And in spite of all of that, inflation is still above 100% and shows no signs of slowing down. Is it at all surprising then that Argentinian citizens are attracted to a politician who pledges to burn down the central bank? Now, several months ago when Miele was enjoying a groundswell of support, he made an appearance on national TV to put forward his economic positions. In that interview, he was asked specifically about his views on Bitcoin and what its adoption could mean for Argentina. Miele answered, and of course all of these quotes are translated from Spanish, the first thing we have to understand is that the central bank is a scam. It is a mechanism by which

politicians cheat the good people with the inflation tax. What Bitcoin is representing is the return of money to its original creator, the private sector. Money is a private invention. In order to be used to solve problems, for example, in a bartering economy, the double coincidence of wants and indivisibility. Then paper money appears in order to solve portability. And then that evolved in the currencies that people chose were silver for small transactions and gold for bigger ones. Then, because back then it was very dangerous to move the gold, people used to deposit the gold and get in exchange your receipt. Then in the year 1445 in the first Genevese Congress, the states appropriated the exclusivity to issue the money. That's the legal tender, which is a key point, because legal

tender allows the politician to scam you with the inflationary tax. Bitcoin has an algorithm that one day it will reach a certain amount and there is no more. It can compete with other currencies. In fact, it competes with Ethereum and others. And what is the good thing? It's the return of private money. But what is the problem? The problem is that governments will not give up the legal tender, because with legal tender, they can scam you with the inflationary tax. Bitcoin is the natural reaction against the central bank scammers and to make the money private again. The flip side is that the thieving politicians are not going to allow you to go against legal tender. In economies with high inflation, the scam problem is bigger. That's why, as I suggest, you can propose to close the central bank.

Now, I think there are a couple things that are important about this. One is that it's situating Bitcoin in monetary history. And two, Miele is running on a platform that is against, for lack of better term, fiat policies. Bitcoin he clearly admires as a private market solution to fiat policies, but it strikes me that it's less about him being a radical bitcoiner and more about him thinking, not only that hard money is a good idea, but that it might win in the market if allowed to actually compete. So what has the world's reaction to Miele's surprise victory been? Some see it as bad. Daniel Kerner, the Latin America director at the Eurasia Group said, the anti-establishment sentiment finally arrived in Argentina. After 20 years of economic crisis,

that's not surprising. This is the worst result for markets. Others see it as inevitable. Mary Anastasia O'Grady, an American columnist at the Wall Street Journal wrote, Javier Amelay showing has sent a message to Buenos Aires in the world that the Argentine middle class may no longer accept a status quo that robs them of the fruits of their labor. Bitcoiners are obviously interested. Dylan LeClair from Bitcoin magazine said, it's just notable to hear a leading presidential candidate call central banking a scam that steals from you while framing Bitcoin as a reaction against it. Overton window keeps shifting. But what about Argentines themselves? And particularly those who are intersecting both Argentina and the crypto space.

Santysiri said, I think his economic views are very much necessary in our country with huge inflation. He's definitely channeling the wrath of the people that see their savings losing value on a daily basis. The not-so-good part is that he also holds very conservative views on social aspects. Alex Kruger, who I frequently quote, who is himself from Argentina, said, Miele is neither good nor bad. He is different. And for Argentina, different means good. Now, the really frustrating thing for the citizens of Argentina is the sense that it doesn't

have to be this way. Argentina has incredible natural resources. The nation is still a leading beef exporter despite its troubles. It has plentiful deposits of iron, uranium, and other metals. Much like the U.S., Argentina has a vast river network that allows commodities to be easily floated to its ports. Indeed, Peter Zion, in his latest book, put Argentina alongside the U.S., Japan, France, and Turkey, as the country's most likely to succeed in a post-globalist world. The conditions that Zahan rated that by included geography, as he put at some sort of

crunchy exterior so people can't get to you. Mountains are good, oceans are better. Two, your own supply of food and energy. Three, a sustainable population structure with balanced ratios between children, young adults, mature adults, and retirees. And four, sufficient military resources to protect yourself. Argentina has all of those things. In fact, for many, it feels like they have everything they need to be a successful economy other than a functioning political class. That's why Miele's pitch is so appealing. Alex Kruger nailed it. He is different, and for Argentina, different means good. Now, of course, should Miele go on to win, he will have a hell of a task in front of him. But the story here is big. It's certainly bigger than Miele just being a

Trump acolyte, and it's even bigger than Bitcoin. It's about a global pattern of upheaval and change, taking place under very different circumstances than previous disruptive moments. And it will certainly be very interesting to see how it all plays out. Anyways, guys, that is going to do it for today's episode. Hopefully, this gives you a better context, a better, broader understanding of the environment into which Miele is coming. Apologies in advance to any of my Argentinian friends and listeners for facts that I have gotten wrong or mis-emphasies that I have made. But hopefully on net, this was still more valuable than having it not exist. Until next time, guys, be safe and take care of each other. Peace.