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Why Is Trump Bailing Out Argentina?This is about ideology and Trumpian fealty, not America’s interests
In its dealings with other countries, Donald Trump’s administration is following a clear agenda of undermining liberal values, fomenting discord and withdrawing critical financial support. One of the administration’s first acts was to drastically cut funding for the U.S. Agency for International Development, then shut the agency down completely. Independent estimates suggest that these cuts have already led to hundreds of thousands of deaths, many of them children, and will lead to millions more deaths in the years ahead. It is trying to shutter Voice of America, a federally-sponsored news agency founded to fight the Nazis and promulgate democratic values throughout the world. The administration has vocally supported extreme right-wing parties like the AfD in Germany. He has withdrawn the US from the Paris Agreement environmental accords and the World Health Organization. He has severely reduced aid to Ukraine, a democracy struggling to survive conquest by Vladimir Putin’s Russia. So it might have seemed out of character when Scott Bessent, the Treasury secretary, suddenly announced on Monday that the United States is prepared to offer open-ended financial support to Argentina:
But although in this case America is offering aid rather than taking it away, our new Argentina policy is part of the same Trumpian agenda. It’s true that the plan to aid Argentina looks quite a lot like Bill Clinton’s bailout of Mexico during that nation’s financial crisis of 1994-5. But we had a compelling interest in helping Mexico, which is our neighbor and one of our most important trading partners. We had just signed a free trade agreement with Mexico, and were also trying to bolster Mexico’s transition from one-party rule to genuine democracy. Argentina, in contrast, is not systemically important to the United States. Argentina is a miniscule player in terms of US interests. The U.S. accounts for only about 1/8th of Argentina’s imports, less than its imports from the European Union and much less than its imports from China. It’s definitely a lot less important, both strategically and economically, than Brazil, whose economy is more than three times as big as Argentina’s. Yet Trump has completely alienated Brazil, imposing 50 percent tariffs on the nation for daring to try and convict a former president who attempted to overturn his electoral defeat. Always indulging his personal grudges, Trump has imposed sanctions on the judge who oversaw Jair Bolsonaro’s prosecution — and on his wife. It obviously doesn’t matter to him that both the tariffs against Brazil and the personal sanctions are surely illegal. Trump’s behavior has had a devastating effect on America’s interests, driving Brazil into China’s arms. But remember that, in Trump’s world, America’s interests don’t count. Only his interests count. And Javier Milei, Argentina’s president, has been an important poster child for right-wing economics. The early success — or apparent success — of his policies was widely celebrated as a great victory. In February, Milei and Elon Musk shared the stage, wielding a chainshaw, during the Conservative Political Action Conference (CPAC.) And Milei has deftly played the part of the Trump acolyte, praising Trump’s tariffs and deportations at the UN, while attacking “left-wing infiltration” of American institutions. But the victory celebrations were premature: Mileinomics is now in big trouble. So Bessent is offering large-scale aid — not to defend U.S. interests, but in an attempt to rescue the reputation of Trump’s preferred ideology and cult of fealty. When Milei took office in December 2023, he imposed a regime of economic shock therapy, especially severe spending cuts. He also instituted a strong peso policy, propping up the exchange rate — the rate at which the peso trades against other currencies like the dollar and the euro — hoping that the currency’s strength would bring inflation down. For a while these policies looked like a triumphant success. Real GDP in the first quarter of 2025 was up almost 6 percent from a year earlier, while inflation came way down. As I said, Milei quickly became a poster child for right-wing economics. But in recent months things have been falling apart. Unemployment has jumped to a four-year high, while investors have been losing confidence in Argentina, with capital fleeing the country. Argentina has been trying to defend the peso but is rapidly using up its foreign exchange reserves and may soon run out. What went wrong? Milei’s spending cuts are inflicting widespread suffering on Argentinians, and he never built robust domestic political support for his policies while playing to the international right-wing crowd. Not surprisingly, he badly lost a legislative election in Buenos Aires and has suffered a series of defeats in the national legislature. Fears that his project is collapsing politically set off the current run on the peso. But his problems aren’t just political. WONK WARNING: IT GETS ECONOMISTIC FROM HERE ON I’ve done a lot of research over the years on currency crises — episodes
And my immediate reaction when I first heard about Milei’s inflation plan was, “This sounds a lot like the Argentine tablita 2.0.” What? In the late 1970s both Argentina and Chile tried to control inflation with what economists call a “tablita”: an exchange-rate-based stabilization plan that slows the rate at which a currency is depreciating in the hope that this will reduce domestic inflation. In both cases the reduced rate of depreciation temporarily reduced inflation and interest rates, because investors became more willing to hold peso-denominated assets, which in turn caused an economic boom. But these booms were short-lived, because while inflation did, in fact, slow, it didn’t slow enough to avoid serious problems. With prices in these nations rising faster than their currencies were falling against their trading partners, both countries found their “real exchange rates” — exchange rates adjusted for international differences in price levels — rising. This made their domestic industries ever less competitive on world markets. Thanks to this growing overvaluation, both the 1970s tablitas ended in grief. Chile experienced an extremely severe economic crisis in 1982, which caused a 14 percent decline in real GDP. The junta that ruled Argentina at the time tried to distract the public from its economic failures by invading the Falkland Islands, which did not end well. So sure enough, Argentina under Milei has been following the same ill-fated script. As the chart below shows, Milei began with a large devaluation of the peso — the blue line — followed by a much slower rate of depreciation intended to pull inflation down. But inflation remained high enough that Argentina’s real exchange rate — the dashed green line — rapidly rose after an initial fall, making Argentina less and less competitive:
And so the inevitable crisis came. Argentina is experiencing a classic currency crisis, with capital fleeing the country because investors fear a peso collapse, and this capital flight pushing the peso ever closer to collapse. The current surge in aid from the Trump administration has temporarily reduced the pressure on the peso and will buy Milei some time. But time to do what? As far as I can tell, the political theory behind Milei’s economic strategy was that he could deliver an economic miracle before the backlash against his policies had time to consolidate. I claim no special insight into Argentine politics, but to an outsider it looks as if that plan has already failed. To be fair, I don’t have a great alternative strategy to propose. Argentine economic policy has been hobbled by internal political conflict my entire adult life (my wife Robin Wells’s dissertation was about Argentina’s 1980s debt crisis!), and I have no idea how it can escape that trap. What I can say is that I can see no legitimate reason for the U.S. government to risk billions in American taxpayer dollars in an almost surely doomed effort to bail Milei out. Above and beyond the economics, it is an outrage that we are doing this while condemning African children to die to save a similar amount of money. But in Trump’s petty world view, humanity and reason, much less America’s interests, don’t count. MUSICAL CODA Argentina’s macroeconomics is a mess. But there’s some enjoyable music coming out of Buenos Aires:  |
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