The Price of Affection

By John Lumbard, CFA ….

Argentina just defaulted on some of its bonds, for the very first time in 13 years. It’s their seventh default since declaring independence from Spain.  Investors kept buying Argentine bonds . . What were they thinking???

In the early 1900s the people of this bountiful land—their economy swelled by sophisticated immigrants from Europe—were the seventh richest in the world. Their decline accelerated in the 1940s and 50s under President Juan Peron and his wife Evita, populists who nationalized (a very nice word for theft) corporations and other property, and stacked the deck in favor of their labor-union supporters.  Inflation  soared to 40%, the economy collapsed, and Peron was sent into exile.  Only to return, 20 years later!  He soon died of heart failure, bequeathing the nation to his third wife, a nightclub dancer he met in Panama.  You can’t make this stuff up!

Under her populist leadership inflation surpassed 600%, and in 1976 the military staged a coup . . . Democracy returned in 1983. Under populist president Raul Alfonsin public payrolls swelled, and taxes were only collected from the 1%.  Inflation rose so fast—5,000%, according to Business Insider—that some supermarkets read prices out over intercoms rather than try to update price tags.

Whether it’s Argentina, Greece, Portugal, Italy, Ireland, Venezuela, or dozens of other nations, the story is always the same.  Populist politicians buy votes, causing the nation’s debt to quietly build …  until suddenly—surprise!!!—a financial crisis erupts.

And let’s draw an important distinction, before we go any further. People get mad when they hear about a politician buying votes with cash that comes from his own pocket.  But honestly, it’s far worse when a politician buys votes with other people’s money! 

“At the height of the global financial crisis in 2008, the IMF extended a nearly $17 billion bailout to Ukraine on the condition that it would work toward balancing its budgets. The Fund froze the payments a year later after [President] Yanukovych increased wages and pension benefits for workers during an election campaign, violating the balanced budget pledge attached to the money . . . Ukrainians pay just 20 percent of their fuel bills, with the government financing the other four fifths.”

— Alan Pyke,

Even the Ukraine crisis was the result of populism and debt.  Ukraine’s separatists wanted to secede so they could avoid the coming tax increases and austerity . . . It’s the same old story. Populist politicians buy votes, debt climbs, and then one day, seemingly out of the blue, crisis ensues.

In Thailand the Prime Minister bought her way into office by promising to give cash to rice farmers, and a free tablet computer to every household.  The intelligentsia rioted for months. Venezuela is still reeling from the “redistribution” imposed by Hugo Chávez, because businesspeople and the intelligentsia fled. You can still buy gasoline in Caracas for 6 cents a gallon, but you’d better get your tank filled soon.

Populism sounds so friendly. Rock-star politicians, telling their devoted followers that they’ve been treated unfairly—and that they’ll be showered with gifts.  Since the dawn of charity the gratitude for gifts of food and medical care flowed to the donors;  but today the gratitude flows to the politician—who then denounces the donors for their lack of generosity.

It’s an extraordinarily effective way to gain and consolidate power. Of course, the scam depends heavily on the notion that the donors can’t quit the game.  They can.


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