"Rising Poverty" in Milei's Argentina, Where the Annual Inflation Rate is Down 98%

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5 MIN READ - An Argentina inflation and poverty dispatch from the Cautious Optimism Correspondent for Economic Affairs (and Other Egghead Stuff).

Monthly inflation rate down 91% this year, annualized down 98%

As Cautious Rockers who have been following Argentina may have noticed Javier Milei is the first libertarian president of a major country in history. In his first year in office he’s closed thirteen government agencies, slashed federal spending, achieved Argentina’s first monthly balanced budget in over a decade, and is on track to post the first annual balanced budget in a century.

INFLATION

All these deep government spending cuts haven't been carried out for the sake of itself. Prior to his election the central government was running annual deficits exceeding 15% of GDP and ordering the central bank simply create monetary reserves to fill the gap and credit them to the federal government’s account (ie. print the money).

By comparison the Biden administration’s FY2024 deficit of $1.8 trillion is running at 6.2% of GDP, itself considered alarming, and America’s central bank—the Federal Reserve—is not allowed to simply create $1.8 trillion in new reserves and credit them to the Treasury’s General Account no matter how many Modern Monetary Theory devotees say so. In the United States the difference has to be borrowed using existing dollars. 

Furthermore, as the Argentine central government spent the newly created money, the reserves entered the banking system where they multiplied to even larger M1 and M2 balances via the commonplace process of fractional reserve lending which occurs in every country.

The endgame of 15% of GDP in new reserves for the government alone—multiplied over and over via commercial lending—was a 170% rise in Argentina’s money supply in the year before Milei’s election (as measured by M2).

It’s hard to compare the numbers to the USA where the Fed switched to a “plentiful reserves” floor operating system in 2008—something very different from Argentina—but we can go back to before 2008 for a more relevant comparison.

In December 2007 the U.S. monetary base (reserves plus currency) was $837 billion supporting an M2 of $7.484 trillion and GDP of $14.7 trillion. If the federal government ran a deficit of 15% of GDP ($2.21 trillion) and, like Buenos Aires, could command the Fed to credit $2.21 trillion in reserves to the Treasury General Account, the monetary base would increase 295% to $2.96 trillion. Assuming the same fractional reserve money multiplier, M2 would roughly quadruple the money supply in a single year whereas M2 in America normally tends to rise on average by 4%-6%.

Incidentally, decades of large fiscal deficits combined with an accommodating central bank explains why long-term prices in Argentina have risen 1,640,000,000,000,000,000% (1.64 quintillion percent) since 1960 compared to 977% in the United States.

The result of large, neverending deficits and money creation, along with the expectation that more inflation was still ahead prompting Argentinians to spend their money faster and faster (ie. rising monetary velocity), was the rampant inflation that preceded Milei.

But now that the budget is balanced and there is no longer need for the central bank to provide the government with new money, inflation has fallen sharply from (depending on what source you use) anywhere from 211% to 3,700% annually last year to 2.4% monthly today, itself a decline from 2.7% a month ago.

(The Argentina National Institute of Statistics and Census reports monthly inflation was 25.5% in December 2023 when Milei took office. Compounded over 12 months that translates to an annual inflation rate of 1,427%)

2.4% monthly inflation compounded over twelve months is 32.9% per year. So since taking office Milei has reduced the annual inflation rate from—according to official sources—1,427% per year to 32.9% and falling.

“RISING POVERTY”

Milei’s achievements after just one year aren’t going unnoticed domestically, and even the left-wing international press has been forced to admit his rapid progress in lowering inflation.

However he still has plenty of critics, mostly those ideologically disposed to socialism who will castigate Milei no matter what he does.

Milei, his critics say, has raised the poverty rate from 42% to 53% since taking office.

”Argentina records sharp rise in poverty,” –BBC

”Poverty in Argentina soars to over 50% as Milei’s austerity measures hit hard. Far-right president has been battling inflation by imposing steep cuts in spending, resulting in widespread poverty,” –UK Guardian

“Argentina’s poverty rate spikes in first 6 months of President Milei’s shock therapy,” -AP

“A year into Javier Milei’s presidency, Argentina’s poverty hits a new high,” -Al Jazeera

While the Economics Correspondent freely and gleefully admits a small number of the newly impoverished are now-unemployed government bureaucrats and employees who previously “worked” for the likes of the Ministry of Culture, Ministry of Social Development, and Ministry of Women, Genders, and Diversity, the reality is the poverty rate has not actually increased and more likely has come down. Milei’s policies have simply revealed the true poverty rate from the artificially lowered levels reported under previous administrations.

The reasons have to do with the poverty rate being counted based on income. As the central bank printed money that the central government gave away to the public, more recipients’ “income” rose above the official poverty line.

But with the massive inflation and price controls imposed by the government, most citizens couldn’t buy many basic necessities with their “income” due to price ceiling-imposed shortages. The inability to buy goods and services with “above poverty” income was not factored into calculating the official poverty rate—by design.

It’s not unlike saying Venezuela, with its shortages of milk, butter, meat, water, electricity, toilet paper, etc… is “lowering poverty” because the government is printing more money and handing it out to citizens.

For this point, the Economics Correspondent will defer to a most excellent comment he read online. Although Milei himself explained this phenomenon in a recent podcast interview, it’s hard for even him to beat the succinctness of this online commenter named J.J. Parson:

”The official poverty numbers went up when Milei removed price controls. But that wasn’t an increase in poverty—it simply revealed the actual poverty level which is masked by price controls.”

”When there was [a] price control on eggs, for example, nobody was allowed to sell eggs above that price. The result was they stopped selling eggs. You could not buy them. But government poverty statistics would say—based on the price of eggs and your income—you fall above the poverty line (those were fake statistics because of the price controls—they hugely undercounted the number of people under the poverty line).”

Kudos to J.J Parson, whoever you are.

The same phenomenon was recently reported with Milei’s repeal of rent control—also a price control/price ceiling. Back when rents were capped by the government more incomes were officially “above” the poverty line, but many people couldn’t find housing to rent with that money. One in seven apartments in Buenos Aires was being withheld from the market.

Not one in seven vacant apartments; one in seven of all apartments.

When Milei repealed rent control the supply of available housing tripled within months, meaning a huge portion of the capital’s available housing had previously been taken off the market. 

Those citizens who now have a roof over their heads likely don’t feel more “impoverished,” and the same calculus applies to tens of millions of Argentinians who previously may have had more money, but who were watching their money rapidly depreciate, who couldn’t buy many basic goods and services with that money, and who were perversely being classified as “above the poverty line” by the previous government.

A Political and Economic History of China, Part 28: The Northern Expedition of 1926-28 and Chiang Kai-shek Turns on the CCP

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff chronicles the very bloody opening shot in the war between Chinese Nationalists and Communists.

Photo: from the April 12, 1927 "Shanghai Massacre." Links to more brutal photos at end of article.

By 1926 Chiang Kai-shek had gained control of the Nationalist Party (“Guomindang” or KMT) through a bloodless coup. His main rival, left-leaning Wang Jingwei, had left for France. The Soviets, who supported the Nationalists on the condition they admit the small Chinese Communist Party, felt China was not yet ready for full communist revolution and instructed the CCP to continue working with the KMT which Moscow still supported.

THE NORTHERN EXPEDITION

Given his assumption of full leadership Chiang decided the time had come to carry out the late Sun Yat-sen’s vision of defeating the provincial warlords by military force. Chiang and his new army, trained at the Whampoa Academy that he commanded, would march from Guangdong in southern China northwards, unifying the country one province at a time.

The so-called “Northern Expedition” began in July of 1926.

Chiang’s multiyear campaign enlarged Nationalist-controlled territory applying multiple strategies, each deemed appropriate for the targeted rival warlord. If a warlord felt weak and feared soldier defections to the stronger Nationalists, he would join the KMT without bloodshed.

If one warlord was fighting another, he might join the KMT in the hope their combined forces could then defeat his rival—as was the case when the “Christian general” Feng Yuxiang joined Chiang Kai-shek to battle Manchurian rival warlord Zhang Zuolin who had just handed Feng a decisive defeat.

Some warlords simply stood their ground and resisted Nationalist forces, nearly always losing to Chiang’s ever growing armies. Some battles were quite bloody and lasted several months, with KMT victories coming at considerable human cost on both sides.

Throughout the expedition the Chinese communists played their own role, organizing workers to strike, sabotage and disrupt warlord territories in the path of advancing KMT armies.

While the CCP inconspicuously took credit for these behind-enemy-lines operations, their scale was actually quite limited. Much more commonly the Communists preferred organizing worker strikes and disruptions in newly liberated KMT territory—after Nationalist armies had already conquered them.

As KMT troops fought sometimes bloody engagements to seize provincial cities and countrysides and moved on, the Communists came up from the rear and operated in a pacified environment. After Chiang’s Nationalists had done the hard work the CCP began organizing workers and peasants to strike and disrupt the businesses, farms, and economies of newly-won KMT territories.

While Nationalists were fighting and dying on the front, the Communists were recruiting workers and peasants at a dizzying pace. CCP membership, which was only about 200 at the party’s founding in 1921, had grown to several million by 1927.

Furthermore, communist activity was causing real headaches for Chinese farms, businesses, and the establishment in general. Communists were redistributing land wherever possible, “fining” and imprisoning landlords, and “canceling” debts faster than American college grads in the Biden era, all while general strikes were grinding business production to a halt.

A rift was beginning to form between the Nationalists—always a party of the established classes—and the Communists, a revolutionary party that aimed to completely reorganize society into a proletarian dictatorship. The two parties even disagreed on where to move the new Nationalist capital with Chiang preferring Nanjing and Wang Jingwei, who by now had returned from France to capitalize on the KMT left wing’s resurgence, preferring Wuhan.

THE SHANGHAI MASSACRE

As complaints poured in from Nationalist officials and businessmen from all over KMT-controlled areas, Chiang surveyed the Communists’ ballooning membership rolls and growing strength. His armies were doing the heavy lifting, liberating China from warlords often one bloody province at a time, and the Communists were moving in after the dust had settled to sow chaos and transform recently won territories into Marxist strongholds.

Thus Chiang, already distrustful of communism and the USSR since visiting Moscow a few years earlier, decided to end the Nationalist/Communist alliance. After a brief period planning his next move he launched what the CCP has ever since named the April 12 Incident—a violent purge of the CCP from the Nationalist Party.

At dawn on the morning of April 12, 1927 Nationalist troops and Shanghai gang members attacked known communist offices and hideouts all throughout Nanjing, Shanghai, and other Chiang-controlled areas. Communists were arrested and killed later in the day, many dragged out into the streets and beheaded. The number of communists killed ultimately reached into the thousands, and even communists in the left-wing stronghold of Wuhan were purged and/or executed.

Chiang was supported by establishment intellectuals and government officials who were petrified at the sight of millions of workers and peasants seizing farms and shutting down factories, sometimes violently. Business interests also supported Chiang’s purge including his old friends in Shanghai’s Green Gang who in turn provided many henchman to carry out the killings.

The Communist Party was nearly decimated with only a few key leaders escaping the purge with their lives. The Correspondent recalls reading about Zhou Enlai, who later engineered Chinese-U.S. reconciliation with Henry Kissinger in 1971, barely slipping away from the massacre.

Meanwhile the Soviets were initially undecided about how to respond. Paralyzed by what was now a power struggle between Leon Trotsky and Joseph Stalin over who would succeed the late Vladimir Lenin, the Soviets couldn’t yet bring themselves to sever relations with the KMT. 

At the same time Chiang’s son Chiang Ching-kuo, studying in Russia and semi-brainwashed by the communist environment, publicly denounced his father as an imperialist counterrevolutionary, but the Soviet Communist International (Comintern) remained unmoved. 

Years later the young Chiang Ching-kuo would regret criticizing his father and by 1975 assumed the presidency of Taiwan as one of the world’s most vocal anti-communist heads of state.

Meanwhile as the Nationalist left wing and Chiang rival Wang Jingwei floundered and the Chinese communist movement was being decimated, instructions from the Soviets reeked of delusional fantasy.

Communiqués from Stalin instructed the KMT left wing to continue seizing and redistributing land—a difficult task in itself given the havoc being wreaked by Chiang’s purge—but to leave alone land belonging to military officers. Verifying whether each plot belonged to an officer or not and disseminating instructions to peasants on the ground, all while Nationalist forces were butchering communists, was a near impossible task to carry out. Stalin also ordered a tribunal organized to punish “reactionary” officers, again oblivious to the tactical difficulties involved in identifying every officer among the confusion let alone which ones were actually “reactionaries.”

Stalin’s instructions were effectively unenforceable.

In light of the purge and unrealistic directives from an ally that seemed completely out of touch with the reality on the ground, the Chinese communists became increasingly irritated with what they viewed as counterproductive interference from Moscow. This was the beginning of many disagreements between Chinese communists like Mao Zedong and Soviet representatives like Mikhail Borodin, and the friction between CCP leaders and Soviet advisors would linger for many more years.

With the left-wing in retreat and seemingly powerless to stop Chiang’s violent purge Wang Jingwei, always the opportunist and vacillator, blamed himself for the party’s schism and announced that Chiang was right, all before packing up and moving to Europe again.

Chiang Kai-shek was once again in control of the Nationalist Party, his rival again having departed China. Most of the Communists had been wiped out. Although a few survived, their organizational framework was gone and Chiang had the support of most of China’s establishment. Frictions between what few Communists remained and their Soviet advisors were at an all time high.

The CCP would never forget April 12th and even today commemorate it as the fateful day a treacherous Chiang Kai-shek betrayed them, firing the opening salvo in what would become a 22-year on again, off again civil war.

With most of China seemingly under Chiang’s control he set out to complete the Northern Expedition, advancing further north to Beijing. In April 1928 Zhang Zuolin, the most powerful of the warlords and based in Manchuria, elected to fight but by June his army was defeated and the Nationalists integrated Beijing into their domains. Little did Zhang know that he would soon be assassinated by the Japanese that same month.

The Northern Expedition was over. Chiang had successfully reunified China’s most populated eastern provinces from Guangdong in the south to Beijing in the north. Those sparsely populated areas in the west that he didn’t control directly were still effectively subservient to him via warlord alliances and agreements.

For the first time since Yuan Shikai’s death twelve years prior it seemed China was finally unified.
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Links to more brutal photos of the 1927 Shanghai Massacre:

https://lh3.googleusercontent.com/BpBGEQYTA6gTHDXbxzZGQnmEgMd7p3ovk6Ieho887OxhTg8tPk7zkJsYvoHnEoGLgcstOpVbEUY_F79I2DYA-7_jpiLXbO2DNGF68g=s1200?

https://cdn.thecollector.com/wp-content/uploads/2023/11/shanghai-massacre-1927.jpg

https://i.scdn.co/image/ab6765630000ba8a4d4df39cd205c6c91f991918

A Political and Economic History of China, Part 27: Chiang Kai-shek Rises to Power

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues with a history of China, this time explaining the succession of Nationalist Party leadership from Sun Yat-sen to Chiang Kai-shek.

Photo: Nationalist Party left-faction leader Wang Jingwei (left) and right-faction leader Chiang Kai-shek (right).

Let’s broadly revisit the circumstances that led up to what would soon be the Chinese Republican era’s violent climax in 1926-1928.

Revolutionary politician Sun Yat-sen’s work to overthrow the Qing dynasty teetered as the country broke down into warlord fiefdoms that often controlled weak central Beijing governments.

During the “warlord era,” Japan and the USSR in particular attempted to gain influence over China: Japan by taking territory, the Soviets by offering aid under the condition that Sun’s Nationalist Party (aka. Guomindang or KMT) accept the small, fledgling Chinese Communist Party into its ranks. The Soviets intended to eventually order the Communists to subvert the KMT from within, assume power, and transform China into both a communist state and Soviet ally on Russia’s large eastern border.

Sun, revolutionary and intelligent but too trusting and often politically naïve, had no reservations about letting the Communists into the Guomindang, but his young lieutenant Chiang Kai-shek saw danger in the Communist/Nationalist alliance.

CHIANG KAI-SHEK

As China careened into the chaotic warlord era, Sun Yat-sen decided his 1911 anti-Qing revolution had gone astray and must be righted. Instead of a united, republican, modern China the country had split into squabbling fiefdoms run by greedy, corrupt warlords.

By the early 1920’s Sun was convinced his revolution needed a strong military branch to defeat the warlords and unify the country by force. He founded Whampoa Military Academy in 1924 to train party officers for both an upcoming armed campaign of unification and later to serve in the military defense of the new China.

Sun appointed Chiang Kai-shek as the academy’s commandant.

But before we get into Chiang’s Nationalist military career we should establish a little about the man himself.

First there’s the question of his name. “Chiang Kai-shek” is Chiang’s Cantonese name. Although well known in the west, you will hear China’s one billion non-Cantonese speakers refer to Chiang by his Mandarin name: Jiang Jieshi, pronounced Jee-ahng (one syllable) Jee-eh (one syllable) Shuh.

However given that his Cantonese name has been publicized in the west for nearly a century, we’ll continue to refer to “Chiang Kai-shek” in the CO China series, just as modern day history books use it even as those same books generally use the Mandarin nomenclature format.

There are a few holes in the history of Chiang’s early life. However we know he was born in 1887 in Zhejiang province, bordering Shanghai. Like many Chinese men during the time, he became anti-Qing and highly nationalistic at an early age.

Wanting to rid China of the old corrupt dynasty and create a new modern country, Chiang decided early on a military career. He enrolled in the Baoding military academy in Beijing but transferred one year later (1907) to the Tokyo Shinbu Gakko military academy for Chinese students in Japan.

In Japan Chiang met several revolutionary anti-Qing students who were determined to overthrow the dynasty and he cut off his queue, a common act of anti-Qing disobedience. He then served in the Imperial Japanese Army (1909-1911) during which time he met Sun Yat-sen and joined Sun’s Tongmenghui anti-Qing society.

After the Qing was overthrown Chiang returned to China, working within the sometimes legitimate, sometimes not business world of Shanghai to finance KMT revolutionary activities. It was here that Chiang was mentored by Chen Qimei, fellow revolutionary and leader of the notorious Green Gang, a former anti-Qing society that raised money for the KMT through the opium trade and other lucrative vices.

Chiang’s Green Gang tutelage made him a much shrewder judge of political treachery than Sun, and the gang will come up later in the story as Chiang always maintained a relationship with his old business associates.

Finally we resume our story in 1923 when Chiang moved to Guangdong, Southern China, now the KMT’s power base although Nationalist territory was isolated, surrounded by warlord fiefdoms that controlled the rest of China.

Chiang was now one of Sun’s top lieutenants, placed in charge of developing the KMT’s new revolutionary army to defeat the warlords and reunify China. Sun sent Chiang to Moscow for three months to study Soviet military tactics where he even met Leon Trotsky. However what Chiang saw in Russia convinced him neither the Soviet system nor communism itself were suitable for China. He returned home distrustful of both, his time in Russia informing his anti-communist views.

THE CHIANG/WANG SPLIT

Meanwhile the KMT’s plans were derailed by unexpected news. In 1925 Sun Yat-sen was diagnosed with gallbladder cancer and died suddenly at the early age of 58. Without Sun Chinese reunification would have to wait until the question of new leadership was resolved.

There were a few lieutenants positioned to take over Sun’s office, but the two most powerful were Chiang, who represented the “right wing” of the party, and Wang Jingwei who represented the “left wing.” Chiang was in charge of the KMT military while Wang ran ideological and propaganda affairs.

Leaning left but not fully communist and backed by the Soviets, Wang appeared the favorite to gain control of the KMT.

Fortunately for Chiang, Wang Jingwei was a fairly weak rival. In 1926, while Wang was out of the country, Chiang announced the “discovery” of a communist plot against him and forced many of Wang’s allies out of power, even arresting some officials including a few Soviet advisors. Chiang also shut down trade union organizations and strike organizers.

All that Wang could muster in response was a few words of protest before announcing his retirement from politics and moving to France, although he would reappear a few more times over the years in failed attempts to reestablish power.

Chiang then “apologized” to the Soviets and freed their officials, but retained solid leadership of the party apparatus. He had pulled off a virtually bloodless coup and assumed full control of the KMT, even preserving a cordial relationship with and continued support from the USSR.

Meanwhile moderate KMT officials were concerned about Chiang’s heavy-handed power grab, but most remained silent since he had usurped communist leadership which they had secretly wanted ever since Sun signed the KMT-Soviet alliance in 1923.

Now in full control, Chiang set out to begin the military reunification the late Sun had coveted. He would launch it from Guangdong, southern China, historically the birthplace of so many Chinese revolutions of the past. His campaign to march north and reunite the country under a single government began in July 1926 and would become known as the Northern Expedition, a subject we’ll focus on in the next chapter.