From the article of 'Petrel'
No.853 / Jan. 13, 2002

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 From a Financial Collapse to the Dissolution of the State and Economy
The Situation in Argentina Strikes Close to Home in Japan    
The National Debt in Japan is 600 Trillion Yen

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The new Duhalde government in Argentina has lowered the “fixed” exchange rate from 1 dollar = 1 Peso to 1dollar = 4 pesos. This was said to be because with the collapse of the state and economy there is no other option. Of course, lowering the peso is not a panacea, but will only temporarily make trade relations, that is exports, more advantageous (but this will in turn lead to other new trouble and damage). However, the bourgeoisie in Argentina can only cling to this policy. The “austerity measures” of the Peronist (Justicialist) Party reveal that their principal policy will be to lower the peso, and return to expansionary finances and credit—the basis for this being the “middle classes in the cities”—and are aiming to reconstruct the state and economy. This will likely be the fate of Koizumi’s “structural reforms” in the near future. To the bourgeoisie in Japan we say that what they are doing is the same as their counterparts in Argentina—this is certainly not just some question of a “remote” South American country.  In fact, there is nothing that suggests the future of Japan more clearly than the “failure” of Argentina and the collapse of its state. By studying the current situation in Argentina, we can learn many lessons and draw important practical conclusions.
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Is the Fixed Exchange Rate Really to Blame?

It is said that the collapse of the Argentine economy is due to the policy of the past ten years of adopting a fixed exchange rate and making the value of the peso equivalent to that of the dollar—this is seen as the root of the problem. Therefore, lowering the value of the peso and abandoning the fixed exchange rate in favor of a variable exchange rate is seen as the way out of the crisis.

Of course, however, even though the fixed exchange rate determines the economic subordination of Argentina to the United States, the fact that this in itself did not prepare the economic collapse is clear by looking at the situation in postwar Japan where a fixed exchange rate was in place and this did not lead to economic problems, but in fact made possible the period of economic expansion.

The economic collapse that Argentina faces is not due to the fixed exchange rate in itself, but instead to the fact that in the 1990s after hyper-inflation was overcome, and an economic boom period arrived, the Peronist Party continued the policy of expanding finances and spreading money to the “local” interests (just like the Liberal Democrats in Japan), thereby creating a huge national debt, and preparing the way for financial collapse and the dissolution of the state. Under the rule of the Peronist Party, political corruption and graft, in the name of “public works” and “welfare,” was rampant, and the parasitism of the state deepened.

In Japanese yen, the national debt is 17 trillion yen and this is the direct cause of the collapse of the Argentine state. This debt was created under the rule of the Peronist Party, which we could call the LDP of Argentina. They maintained power by using deficit spending to inject money for the benefit of special interests and “local” groups

The national debt of 17 trillion yen compared to the debt of Japan, which now exceeds 400 trillion yen, may not appear to be that great. However, this is over half of the GDP of Argentina, and of this 70 percent is foreign debt.

Half of the Japanese GDP would be roughly 250 trillion yen, so this would represent the comparative burden that is pressing on the Argentine state. The state was unable to repay the debt of 17 trillion yen, or bear the burden of paying interest on it and financially collapsed, but for countries like Japan which cannot even consider paying back the debt, and are trying just to pay the interest on the national debt, the difficulty can be clearly seen.

The bankruptcy of the Argentine state is not due to the fixed exchange rate, but was caused by financial collapse. In this sense, the situation in Argentina forebodes the near future of Japan. Compared to Argentina, Japan appears to be more flexible and more protection, but in terms of the level of the debt burden on the state, it is higher than Argentina (since the Argentine national debt is 51 percent of the GDP, while that of Japan is 120 percent). The situation is certainly not less serious than that of Argentina. It is just that the crisis in Japan has yet to directly take such a radical form.
　
The “Damage” From the Peculiarly Strong Dollar 

For Argentina the strong dollar has been unfortunate vis-à-vis the adoption of the fixed exchange system. Through the fixed rate some stability for the economy was brought about, but this backfired.　

That is, during this period the “value” of the dollar rose, and this became another cause of difficulties for Argentina. Since America’s trade deficit has expanded year by year the value of the dollar should be lowered, and if the exchange rate of the dollar falls, there would be some hope for the peso as well. However, the fact that despite running a trade deficit, the dollar became an even “stronger” currency was very unfortunate set of circumstances for the peso.

In the first place, fixing the rate of the peso to the dollar, depending on the situation of the Argentine economy, means that the economic policies in Argentina—i.e. the financial policies—are determined or constricted by the situation of the economy in the United States.
　
If the economic recession in the United States were to grow worse leading to a fall in the price of U.S. products, then the peso would also have to drop, otherwise Argentine exports would face difficulties and imports would rise. However, since they insisted on maintaining the fixed exchange, they had to implement “austerity” financial policies (this was what De la Rua did).

Conversely, if inflation were to arise in the United States, the Argentine exports would increase, but this would only put them on the bad side of the United States, and the U.S. would in turn put strong pressure on Argentina through inflationary policies.

With the variable exchange rate it is possible devalue the peso, but if this option is not available, whether they like it or not, they would quickly have to implement inflationary policies within the country.

If the dollar were to become “cheaper” worldwide, then the peso would as well (since it is linked to the dollar under the fixed exchange system), and this for the time being would be good for Argentina since this would make possible increased exports abroad and inflationary policies within the country.

However, for American to run a huge trade deficit while the dollar is “high” would be a terrible situation for Argentina. As long as the fixed exchange rate system with the dollar continues (i.e. the recognition of the high peso) Argentine exports will be in trouble, and it will not be possible to implement anti-recession policies or expansionary financial policies (rather the opposite policies will be enforced).

The dollar is a currency whose “value” should be lower, since it has the United States has a trade deficit that grows larger every year every year. However, by making use of the special situation of the dollar as “international currency” and the tremendous American money capital, the dollar has been able to continue to be “strong.” But this situation has been a source of trouble for Argentina.

However, while this is one real moment (element) in the crisis in Argentina, it is not the fundamental cause. The fundamental cause lies in the contradictions of capitalistic production, and the irresponsible policies of deficit spending of the Peronist Party—this is the same approach of the LDP government in Japan which leads to the dissolution of the state.

The Return of the Peronist Party (Which Abandoned the People ) to Power

The ones responsible for the financial crisis in Argentina and collapse of the Argentine state is the government of the Peronist Party. They consistently expanded finances (in the economic boom period even when they had an opportunity to pay off their debt) and they didn’t, or weren’t able to, stop the expansionary policies—and this is also the same as the LDP in Japan.

In Argentina the rate of tax evasion is 50 percent, but this is mainly done by big business, not the general population or small and medium size businesses. 

The class nature of the supposedly populist Peronist Party is perfectly clear: they represent the rule of the declining big capital. To hide this fact, the Peronists had to adopt some superficially populist policies and infused money into the economy. But with no thought to the future, they continued to borrow, and nothing could have been more irresponsible.

Naturally public confidence in the Menum government, whose only ability was to accumulate national debt, faded and the Peronist Party was swept from office when a large number of the cabinet officials were arrested on corruption charges.

The De la Rua government which took its place spoke of rebuilding the economy and finances, but with the recession and financial crisis, the president lowered public workers salaries and the pension system by 13 percent, introduced restrictions on. Bank deposits, and implemented strict “austerity measures.” De la Rua implemented the sort of firm policies that the Koizumi government has yet to do. But these policies led to an explosion in the mass anger of the people in general (the “middle classes in the cities, etc.)

In the end, the De la Rua government that had imposed “austerity policies” collapsed on December 23, and in its place the former Governor and Peronist Rodriguez became president, announcing a new policy of temporarily halting payment on foreign debt and creating a “new” currency (neither peso nor the dollar).This was a policy based on the premise of maintaining the fixed exchange rate.

However, calling something a third currency or removing the name peso is not in itself a currency expansion program, but rather a temporary papering over or whitewash.

Moreover, there was dissatisfaction towards the limits on bank withdrawals to 250 pesos a week (or $1,000), and the distrust of this policy led to an explosion of riots among the masses, so that the Rodriguez government collapsed within just a week. At the beginning of the year, a former leader of the Peronists, Duhalde became president. He is the man who lost by a huge margin in the prior presidential election to De la Rua, and is a typical Peronist.

The Peronist Party has thus returned to power after two years, and, influenced by the financial world, has been calling for the fixed exchange rate in trade to be removed quickly, the peso to be lowered and inflationary policies to replace the deflationary ones, and for much of the state debt to be reduced (i.e. bilking on the debt).
 
However, to only shift to a variable exchange rate for trade, while leaving all other business in the fixed rate, would lead to confusion, and could only be a transitional policy. In the end, they will probably implement the variable exchange system, and openly (and brazenly) return to the policy of expansionary financial policies. These are seen as a possible way to win popularity from among the “people.”
　
Lowering the peso will probably temporarily lead to an increase in exports, but on the other hand this will automatically increase the Argentine debt (that is the debt in dollars will increase if the peso is devalued) and in this aspect will worsen the economic difficulties and crisis.
　
Since the party that prepared the way for the economic and state collapse in Argentina is returning to power, there is certainly no guarantee whatsoever that the situation will get better rather than worse.

Under President De la Rua the economic crisis certainly did get worse, but the government debt reached the level of 17 trillion yen under the previous Peronist administration, and it was for this very reason that the Peronists were swept out of power and replaced by De la Rua.

Even though this Peronist Party has returned to power, they have little support and no one has any expectations of them. Up to now among the working class there has been some tendency to lend support to the Peronist Party, rather than more open bourgeois parties, with its policies aimed to win popularity (being a populist or Bonapartist party that makes promises to the masses while sabotaging real changes and aiding the rule of capital in the end) but these fantasies have already collapsed. In Argentina the day is not far off when the working class will crush this deceitful party, and create its own truly class political party.

Temporary Makeshift Measures Won’t Be Enough

Certainly, if the fixed rate is abandoned for a variable one and the value of the peso is lowered, and domestically the De la Rua policies are ended and inflationary policies resumed, this will have some temporary “effect.” However, that is all, and it is clear that this will not solve the fundamental cause of the crisis.

Through inflationary policies, the trade will not revive since this policy is totally inappropriate and in conflict with the goal of raising exports.

If the move is made to a variable exchange rate and a policy of low level of exchange is implemented (i.e. exchange dumping) this will certainly raise exports and soybeans or anything else will be sold worldwide, but the rise in trade by means of a low currency is only temporary, which will only lead to a reaction by competitor countries. If other countries resort to the same method, this will be powerless and have a negative effect.

The Peronist Party is the party which through its irresponsible policies, created the conditions for the collapse of the Argentine state and economy and is full of corruption and scandals (i.e. a party like the LDP).

Isn’t it totally clear that there can be few expectations when such a party returns to power (just like if Koizumi’s government loses in the near future there would be few expectations if the LDP later came back into power).

On the walls of banks in Argentina’s large cities people have written the slogan: “Down with the politicians who have sold out the country.” These politicians are of course the Peronists. In a recent demonstration the supporters of the Peronists were directly attacked. In short, the Peronists may have returned to power, but the masses despise this party, and consider them the enemy. It unthinkable that Argentina will return to “stability” or economic revival under the Peronist Party.

Wither Argentina!

The bourgeoisie in Japan will realize that Argentina is certainly not an isolated case—instead this is a glimpse of Japan in the near future.

Indeed, as we have already seen, in terms of the depth of the financial crisis, Japan is certainly not much better off than Argentina.

The fact that the bankruptcy of the state has not yet directly appeared as such is that the debt of the state has taken the form of government bonds, and the government has not yet sough for this debt to be repaid, also because of the unusually low interest rates, the interest payments on the enormous debt have been kept low.

If interest rates were to even rise one percent, the state finances in Japan would probably collapse, since this alone would greatly increase the interest payments—by trillions of yen!—and this would in turn lead to the need to issue more government bonds.

By means of “gentle” inflation it might be possible for the government to dissolve the debt bit by bit, thereby lightening the debt burden.

In this way, the crisis of Japan could take the form of “mild” inflation (the expression coined by top U.S. officials), but this would still not be any less profound than the Argentine crisis. And when the collapse of Japan becomes manifest, unlike the Argentine crisis, this will have a huge influence on the rest of the world.
　
The Argentine people drove out the De la Rua government that was asking the people to make “sacrifices” and bear “pain,” but this doesn’t mean that they have confidence in the Peronists. We could roughly compare the De la Rua government to Koizumi’s cabinet, and the Peronists to the LDP. This is because the De la Rua government was established through the ardent support of the “middle classes” against the government and defeated the Peronists by a large margin, and put into effect anti-inflationary policies.

The masses have certainly rejected the “austerity policies” of De la Rua, but this doesn’t mean that they hold out any hopes towards the Peronist government. Of course, the Peronist president will implement some policies to gain popularity, but the Argentine people already know where this will lead (they can simply recall the days when inflation reached 5,000%).

Japan is following closely on the heels of the experience of Argentina. The “austerity measures” of the Koizumi cabinet are much less thoroughgoing than those of De la Rua, and hardly merit the term at all. For this reason the bourgeoisie do not immediately face the severe crisis seen in Argentina. But also for this reason, they have been even more impotent vis-à-vis the economic difficulties in Japan.

If once again the sort of financial crisis from one year ago were to arise, would the Koizumi cabinet be able to handle it?

In such a case, who or what party would follow the Koziumi cabinet? The LDP, or the Democratic Party? In either case, just like in the case of Argentina, the people cannot hold out any expectations towards either party.

Where, then, is Argentina headed?

This question is not easily answered, but it is certain that the situation in Argentina will be full of important lessons for Japan and the working class in Japan. In this sense, we have a great interest in where the current situation in Argentina is headed.

(Translated by Roy West)

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