Friday, June 20, 2014

El-Erian Is So Incredibly Wrong on Argentina

In addressing the Argentinian debt crisis, global elitist conventional thinker Mohamed El-Erian placed a flawed notion at the foundation of his argument.
When a sovereign faces severe payment difficulties, the best option for the collective good is to find an orderly way to reduce debt and put the country on the path to economic recovery. 
No, no, and no.  This may be the best option if you believe in all manner of Keynesian nonsense, which El-Erian surely does, but it's a terrible way to approach sovereign defaults.

First, whether the process is orderly or not does not necessarily effect the views of the creditors involved.  The screwing of Chrysler's bondholders in the early days of Lightworkerism was indeed orderly, but I am sure that creditors learned valuable lessons that increased their caution.  Raw expropriation of property rights is damn orderly.  Likewise, a messy fight such that Argentina and the holdouts are now waging may ultimately vindicate the rule of law and hold borrowers accountable.  So orderly is meaningless.  Orderly is a nice to have, but it does not equate to just, fair or proper.

Second, why is the priority to reduce debt?  Debt can be restructured and most of the time, that's what happens because it is in the best interests of all that debtors have burdens eased without creditors having capital destroyed.  That El-Erian's stated priority from the outset is the destruction of creditors' assets is profoundly dangerous and reflects a special sensitivity to the sovereign's position vis-a-vis investors.  He thinks governments are more important and should have sway.  That's bad for too many reasons to list.

Finally, El-Erian assumes that wiping the credit card clean sets a country on a path to economic growth.  This is just daft and not worthy of an intelligent and experienced man such as El-Erian, thus my reference to Keynesian nonsense.  Wiping the fiscal burden clean and resetting a country's borrowing power simply sets up the next cycle of borrow and spend economics, perpetuating the disastrous, Keynesian treadmill that keeps these serially defaulting countries poor.  Is Argentina just unlucky, did they just happen into a one-time mess?  No.  They are irredeemably profligate.  They are, as El-Erian's colleagues at Bloomberg note, "persistently uncooperative and undeserving of sympathy."  Does anybody think that giving Argentina a pass won't start them on their next irresponsible credit-fueled binge?

There are many complex and wrenching issues involved in a potential sovereign default, and El-Erian pretends to address this, but his position is merely a deceptive pro-sovereign absolutism, which is dangerous in general and especially misguided in the case of Argentina.


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