Argentina spreads the wealth

Monica Showalter is the South America expert on the editorial staff of Investor’s Business Daily. Yesterday I wrote her asking for her thoughts the proposed expropriation of private pension funds by the government of Argentina. Tomorrow’s paper will carry her editorial, which she has kindly authorized us to excerpt:

…U.S. Democrats in Congress are mulling like-minded moves to scrap 401(k)s and transfer them into government-managed “guaranteed retirement accounts” with a 3% return, according to James Pethokoukis of U.S. News & World Report (full disclosure: Pethokoukis is a former IBD reporter).

Before they charge ahead, they should look what happened since Argentina’s announcement: Its stock market lost 23% of its value in two days, for a 57% loss since January. The losses spread to other markets in Brazil, South Africa, and Spain.

Markets don’t like expropriation of private property — including savings. And this takes away a key source of private capital. Moreover, one quarter of private pension assets were by law invested in Argentine stocks, making up about a quarter of the bourse’s value. So the seizure of pensions amounts to government ownership across the entire private sector.

“It’s a stealth nationalization of every single business in the country,” explained Diana Mondino, an Argentinian economist at Universidad del CEMA in Buenos Aires. “Will (the government) influence those companies? I would think so — anyone who owns 25% of a company will have a lot to say about how it’s run.”

***

Nationalization may pay the bills now, but it poisons prospects for growth. For that reason, Argentina’s sovereign bonds now trade at 25 cents to the dollar and yield 30%.

With no growth, another default becomes more likely after the pension move. The market is acting accordingly.

Yet Congress resists reforming the U.S. public pension system as its liabilities pile up as baby boomers start to retire.

If the next president sees private corporations as the class enemy and taxpaying as “patriotic,” and Congress continues to look at private 401(k) assets as a public piggy bank, there’s little doubt the same mess in Argentina could happen here, too. It’s worth thinking about.

Monica’s editorial is particularly valuable for the lesson it draws for interested Americans, which is the portion of her editorial I have excerpted above.

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