Treasury Inflation-Protected Securities

The solution could require ‘the madman’ with a chainsaw. People adapt.

By David Enna, Tipswatch.com

During my recent visit to Argentina I asked a tour guide in Buenos Aires about inflation, because that’s a topic that always interests me.

Guide: “Inflation in Argentina is improving. It was down to 2.2% in January.”

Me, being ignorant: “2.2% annual inflation? That’s great.”

Guide: “2.2% a month.”

Ouch. I should have been more aware of the traumatic issue of inflation in Argentina. It is so dangerous and ingrained that the Buenos Aires Herald ran this headline on Feb. 13: “Argentina annual inflation plunged to 84.5% in January 2025.” Plunged to 84.5%.

Since I returned, the nation reported February inflation at 2.4% for the month, up a bit from January. But annual inflation dropped to 66.9%, the lowest since July 2022. Here is the annual trend over the last 8 years:

As recently as July 2024, annual inflation was running at 266% in Argentina. It has been coming down recently in the wake of the November 2023 presidential election of Javier Milei, a libertarian who has made sweeping cuts in government spending. His approach is known as “shock therapy” and includes reductions in public sector jobs, subsidies, food aid, along with freezing wages and pensions.

Milei, a self-described “anarcho-capitalist,” is famous for wielding a chainsaw in public (and for giving one to Elon Musk recently at a Conservative Political Action Conference in the U.S.). He told that group: “The only rational path is to shrink the size of the state as much as possible.”

Although inflation is declining rapidly in Argentina, Milei seems to be somewhat unpopular in a country that swings from left to right with every major election. Wage and pension controls — at a time of continuing high inflation — have recently triggering violent demonstrations.

Milei, 54, is known in Argentina by both critics and supporters as “El Loco,” the madman. Milei claims he hasn’t combed his hair since he was 13, adding: “From that moment on, the invisible hand combs my hair.” From a 2023 The Sun report:

A biography, El Loco, by journalist Juan Luis Gonzalez, told of Milei’s affection for his dogs, claiming he uses a spiritualist to seek guidance from his beloved English mastiff Conan, who died in 2017 and has been cloned four times.

Also, Milei created a huge controversy last month by endorsing a meme coin called $Libra on the day it was launched. Within 40 minutes, its market value soared to about $4.5 billion. Hours later, its value plunged by about 89% and the president “unendorsed” it. A criminal investigation is under way.

Wretched economic history

I certainly can’t explain how Argentina got into this economic mess, but Milei didn’t cause it. These problems have existed for decades. Rampant government spending and massive government borrowing are two important factors. The government has defaulted on its debt nine times. Argentina’s currency was devalued by 30% in 2015, and then again in 2016. Soon after taking office in December 2023, Milei devalued the peso by more than 50%. From an Associated Press report:

The South American country’s economy is such a basket case — and has been for so long — that many analysts believe that only such radical measures offer a realistic opportunity to rescue the economy. What makes his challenge so difficult is that Milei’s plan seems certain to make people’s lives worse long before they get better.

What does this mean for a typical Argentinian?

Our guide in Buenos Aires, Karla, talked about how people cope with out-of-control inflation. Some of her insights:

No sense in saving money. Got money? Spend it, because its value is going to decline dramatically over time. For this reason, you still see crowded shops and restaurants. In many cases, people pay with wads of cash.

CD rates. Karla said most people in Argentina would not consider putting money in a bank for longer than one month. Too risky. A one-month CD today is paying an annual rate of about 27%, but that remains well below the inflation rate of 67%.

Getting a loan. Who is going to lend you money when inflation is rising 67% a year? Getting a car loan or home mortgage is very difficult, and the interest rates would be severe over time. From the site TheLatinInvestor.com:

In Argentina, most transactions are conducted using cash, primarily in the form of US $100 bills. It sounds primitive but this is how it is.

Banking. People in Argentina don’t trust banks, and the country has a history of widespread bank failures as recently as 2001. U.S. banks don’t have operations in Argentina because of the unpredictable nature of the economy. This makes it a difficult environment for foreign investment.

U.S. dollars are popular. For people who can afford it, exchanging pesos for dollars is highly desirable. The current exchange rate is about 1,069 pesos to $1. In March 2023, that number was 200. For major purchases like cars or homes, $100 bills are often the desired payment method. From a New York Times article:

Nearly every big purchase in Argentina — land, houses, cars, expensive art — is done in tall stacks of U.S. currency. To save up, Argentines stuff bundles of American bills into old clothes, beneath floor boards and in bombproof safe deposit boxes past nine locked gates and five stories beneath the ground.

A sense of normalcy?

Argentina’s poverty rate has recently soared to 57% amid Milei’s austerity measures and currency devaluation. But life goes on. Prosperous areas of Buenos Aires look much like anywhere in Europe, with elegant shopping, cafes, nightlife. Many people have adapted to extremely high inflation and just hope for a solution.

Argentinians have lived with high inflation for decades. They have learned to survive, even in this harsh reality. From a recent discussion on Reddit:

We have some ways to mitigate inflation, but at the end it destroy us anyways. The things we do are: Spend the pesos as fast as we can in anything that will maintain or gain value against inflation, lower our lifestyles as the inflation surges, and the principal method for saving or planing long term is buying dollars or euros, most Argentinians have savings in dollars. …

All income is disposable income when saving makes no sense. What it destroys is any kind of long-term planning.

Most people will never be able to afford a house of their own for example, or a brand new car.

My motto for buying things is “If you have the money and want/need that, buy it now, tomorrow it will be more expensive.”

In the United States, we recently went through a very brief period of 9% annual inflation, which dropped to half that within a year. Yet, this was somewhat traumatic for a nation used to stable prices. Even today, as inflation drifts lower, many people are feeling the pain. But are we at the stage requiring a “chainsaw”? No, I’d say more like pruning shears.

Remember: Things are very good here. We have a good thing. And yes, inflation is an enemy we must resist.

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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.