How Argentina’s Javier Milei looks set to undercut Australian lithium

Lithium prices have crashed by 75 per cent but this cannot last. There is a structural shortage of the EV battery metal, which is why Elon Musk is so assiduously courting his fellow libertarian in Buenos Aires.

Output to increase tenfold by 2027

Argentina’s mining ministry says production will rise by 50 per cent this year alone. Eurasia Group expects output to increase tenfold by 2027.

Milei enjoys goading the eco-literati on global warming – a “socialist lie” – but he will not let it stand in the way of an EV lithium boom. He has picked an enthusiast to be the new mining chief. The industry is purring with delight.

Argentina is the world’s biggest exporter of soybeans, and a big force in wheat and maize. La Niña and the worst drought in living memory cut grain output by 45 per cent last season, depriving the country of $US20 billion of export earnings. This bad luck was the last straw, setting off the final run on the peso.

The return of El Niño is bringing back the rains, and refilling the hydro power basins. Grain dollars will soon be arriving again.

Milei inherits a country that has suffered a 15 per cent contraction in GDP since the commodity supercycle rolled over in 2011.

Inflation hit an annualised rate of 300 per cent in September and October, nearing the point of hyperinflationary take-off. Central bank reserves are a tiny $US21 billion but closer to zero once you subtract Chinese swap lines, according to Arturo Porzecanski from the Emerging Markets Investors Alliance.

An economic role much like Australia

Argentina is in arrears on a $US44 billion package from the IMF. Firms have been unable to access the dollars needed to pay $US16 billion of bills to foreign suppliers. All this must be covered before normal commerce can resume.

Argentina was never as rich as legend would have it. But it was in the upper tier before the First World War, with a GDP per capita and an economic role much like Australia.

It supplied raw materials to the British commercial empire. Australia’s GDP per capita is five times higher today. That diverging fortune is the contrast between accountable government and authoritarian caudillo clientelism.

If you had to identify one great sin, it was to force commodity exporters to sell their produce to the state at sub-market prices, generating money for Juan Peron’s patronage machine and his descamizados.

When that dried up, the Peronists borrowed ore, leading to serial defaults. When loans dried up, the central bank covered the fiscal deficits.

Milei’s advantage

The situation is desperate, but desperate is good. Milei’s advantage is that young Argentines know beyond all doubt that the Peronist racket of trade union and corporatist statism – inspired by Mussolini – has reached a historical dead-end.

It has sputtered out in a thicket of subsidies, price controls, theft, and three separate exchange rates.

Milei has a 56 per cent landslide for his chainsaw anarcho-capitalism. He promised violent shock therapy: the closure of 16 government ministries and state shrinkage by 15 percentage points of GDP. He promised to adopt the dollar, and to turn the central bank into a museum. They voted for him anyway.

Mauricio Macri failed to deliver his free-market revolution from 2015 to 2019 because he neglected the deeper Zeitgeist. Milei has learnt the lesson.

He is fighting the war on two fronts: he is a technical economist in the Austrian school of Hayek; he also copies the Gramscian methods of the political Left, advocating a march through the institutions to defeat “Marxism” – collectivism and wokery in all its forms.

‘He has to take the risk and go all in’

“It is not the time for gradual measures, it is going to be drastic measures,” said Axel Kaiser, doyen of Chile’s Austrian school and a confederate of Milei, in an illuminating podcast for the Institute of Economic Affairs. “He announced it, so the country is getting ready psychologically, which is something Macri didn’t do.”

“It is a huge challenge. He might fail, but he has to take the risk and go all in. If he doesn’t tame inflation and bring back some prosperity, he is not going to be forgiven.”

Milei’s shock-jock celebrity style is not my cup of tea, but the grand press in the US and Europe is too quick to hurl the epithet of far-Right populist.

The term is particularly useless in sifting the opera buffa style of politics in Latin America. Milei cannot resist Ayn Randian provocations and winding up critics with outlandish libertarian mischief: a market for human organs; the sale of minors; the privatisation of streets.

Tabula rasa starts to make sense

Will he do these things? Of course not. He will husband his political capital for core Thatcherite objectives. He has eight seats out of 72 in the Senate, 37 seats out of 257 in the House, and no governors. Nothing can be done without alliances.

I would normally deem it madness for a big commodity exporter to adopt the dollar and tie itself against economic logic to the monetary cycle of the US Federal Reserve.

But the total loss of confidence in Argentina’s existing order has gone so far that tabula rasa starts to make sense. The economy is already half dollarised. There are $US200 billion of US dollars in circulation, used for purchases of houses and fridges.

Macroeconomic experts at Anker Latinoamérica wrote a detailed report in June warning that dollarisation was not a “magic solution” and could go horribly wrong, but was feasible if done in stages with the right policy mix.

It would be the quickest way to conquer inflation. Ecuador’s inflation dropped from 91 per cent to single digits within two years after it switched in 2001.

Milei’s Wall Street wizard

The central bank does not have enough dollars to mop up the peso money supply and short-term bills. It could be done by marshalling the country’s foreign reserves, pawning $US84 billion of central bank assets for loan collateral in New York or London, all backed by another IMF package and ferocious fiscal retrenchment.

The chief author was Luis Caputo, a Wall Street wizard and ex-governor of the central bank. Milei has just appointed him economic plenipotentiary. If anybody can do it, he can. And we know exactly how he will try to do it.

There is a near-consensual view in the posh global media that Milei is a borderline nutcase and that his plans are absurd. I would suggest that he may instead succeed, setting off a wave of Hayekian ferment and helping bury the “dependency theory” doctrines of Raul Prebisch, which have so blighted economic thinking across Latin America.

To the extent that he resists the current infatuation in the Global South with China’s Leninist economic model, all the better. We need Argentina back in the West, where it belongs.

The Telegraph London