Lions and Lambs

♫ The only way to save us is through divine intervention ♫

incredible picture really

After Milei’s big(ish) win in the 2025 midterms, the question is whether he can hold on until 2027: is “The Lion” going to be Argentina’s first president in 16 years to win a second term? Probably, as of today, yes. But he is facing one last obstacle: not the (let’s be honest, DOA) Peronist Party, but another outsider like him: the evangelical pastor Dante Gebel. Gebel just finished up a sold-out tour of Argentina titled, I shit you not, “PresiDante”. He is noncommittal, but an eventual Dante Gebel candidacy is currently being hyped up by union leaders and the media. So could “PresiDante” be a reality, and why wouldn’t Milei stand every chance?

Disinflation nation

The real question about Milei’s economy is pretty straightforward: if he’s brought inflation to heel, shouldn’t he cruise to reelection?

It’s not so simple. The first issue is that disinflation has not only slowed, but reversed in recent months: monthly inflation has accelerated every month since May and reached 2.5% in November, significantly above expectations. And December finished with an evenhigher 2.8% monthly rate, again a very bad result. Even more worringly, core inflation was both higher (3.0%) and grew twice more quickly than headline prices (0.6 p.p. as opposed to 0.3), in large part due to the much feared adjustment to relative prices. Let’s explain. “Shock therapy” disinflations like Milei’s rely on a big, painful adjustment at the beginning, and then a rapid decline in inflation. However, the big adjustment implies some radical changes to relative prices, that is, how much things are worth in relation to each other - in particular, adjustments to the real exchange rate and real wages, as well as (government-subsidized) utility prices. When inflation declines from high (triple digit ranges) to moderate (around 20%), relative prices don’t matter that much, but in the 20-25% range most price setters are comfortable enough with the macro picture that they start thinking about making up for lost ground. The problem is that everyone, or just about everyone, lost ground during the shock phase, so everyone needs a readjustment, which can make relative price shifts very slow and, particularly, have a high impact on overall price growth because most other prices are stable. This is what’s known as inertia: inflation settling on a given level (usually 2% a month, or 25% annually) and then contract adjustments and expectation just not going down any further because prices need to keep adjusting relative to each other - particularly wages, which are still substantially before November 2023 (or 2022, let alone 2017) levels.

The main issue for Milei is that there’s no desirable combination of economic variables he can work around to avoid this. His strategy up to December was (as I’ve very strongly criticized basically his entire term) to let the exchange rate appreciate, that is, go up more slowly than inflation. This is only sustainable if the country has international reserves to defend the exchange rate parity - and if it doesn’t, then inevitably people try to force a devaluation (by holding out USD sales) to profit. Except Argentina does not have a respectable level of reserves: since June 2024 (when they hit a net positive level for the first time in three years), reserves have fallen by 16 billion dollars to levels even lower than when Milei took office, and that is despite the country borrowing 20 billion from the IMF earlier this year and the fake 20 billion dollar loan from the United States (that ended up just being 5 billion that the US spent on propping up the peso during election season)¹. The reason why this happened is that, in April, the government switched its exchange rate policy from a relatively normal pegged exchange rate (going up 2% a month) to a bands system where the exchange rate floated between $1,000 and $1,400, and the Central Bank committed itself to only purchasing currency below the lower band. This was, of course, a complete pipe dream, made much worse by the fact that the lower band adjusted downward by 1% and the exchange rate shot up from $1,200 to the top of the band within two months and has stayed up there ever since. This meant that there were no official dollar purchases for basically all of 2025, at the same time as the exchange rate grew increasingly slowly compared to inflation.

Why did Milei do this? This is a classic example of the “fear of floating”: countries tend to not want to let their exchange rates be determined by market forces for basically irrational reasons - largely, a fear that a higher nominal exchange rate will push up inflation. Inflationary inertia (that is, if inflation expectations are not sufficiently anchored downwards) means that this is a somewhat legitimate fear, which is why most stabilization programs from very high inflations tend to feature extremely prolonged disinflations: Uruguay’s successful effort took 5 years to bring price growth from triple to single digits. Exchange rate anchors are usually a normal part of the early process, but eventually they have to be abandoned: this is forced by either a change of strategy or, more often than not, a currency crisis. Back in the 1990s, most Latin American countries came from a similar high-inflation past and most adopted similar policies (monetary, fiscal, and financial reform paired with economic liberalization and exchange rate anchors) and most were forced by the late 1990s emerging markets crises to abandon their exchange rate pegs. When the crisis is what forces the float, stabilization usually fails².

The main difference between the mid-to-late 90s shifts and the current Milei dilemma is reserves: those countries tended to accumulate reserves. Argentina has not: as mentioned above, net reserves breached USD -15 billion in December, 5 billion lower than when Milei took office. This was because, also as mentioned above, the government hasn’t made any dollar purchases in the open markets since unveiling a new monetary and currency policy in May: the exchange rate floats between two bands and the central bank sets targets for topline monetary aggregates but not interest rates. It’s important to note that the IMF explicitly said the government could make FX purchases within the bands and the Treasury explicitly reserved the right to do so; Milei just didn’t want to. Why?

The government committed itself to a form of vulgar monetarism in its monetary aggregates targeting. The central bank only sets the amount of money circulating on the economy and the markets set interest and exchange rates in consequence; it’s still extremely unclear how they set this target, what the target is, or how they actually conduct policy in relation to it. But given Milei’s naive monetarism, reserve purchases increase the money supply, which causes excessive supply of money (relative to the target) and thus increases inflation because the peso is “excrement” as he once put it. The monetarism is naive because it ignores that money demand is endogenous to broader macroeconomic confidence and in particular is codetermined with the exchange rate: dollar purchases increase macroeconomic confidence so the extra money created is absorbed into the economy - think about why someone who doesn’t trust the currency would sell dollars for excrement. This whole thing where increased macroeconomic confidence pushes down exchange rates and interest rates was the entire macroeconomic program back in May.

The situation where the government just lets extra money exist in the economy is what’s known as an unsterilized purchase of dollars. With the alternative, a sterilized purchase, the government would have needed for interest rates to increase (a necessary conduit for the restrictive monetary policy that the central bank took - the aggregates targets are extremely unclear still), which would have reduced the exchange rate and inflation but would have slowed economic output and employment. So Milei’s strict adherence to very stupid ideas about macroeconomics put him in an extremely unenviable situation: he created a completely nonexistent tradeoff between buying US dollars and staving off currency issues or the economy growing more slowly because of tighter financial conditions.

So the government given its main two policy guidelines (a limited dollar float and monetary aggregates targeting) faces a dilemma between three economic variables: inflation, reserves, and economic growth. If the government wants low inflation and high growth, it needs to keep the real exchange rate low (to minimize relative price adjustments and boost imports and real wages), but with no reserve accumulation which leaves the country exposed to financial turbulence - if Scott Bessent didn’t bail out the country, there almost certainly would have been a balance of payments crisis weeks before the midterm elections. If, on the contrary, the government wants to have low inflation and high reserves, it needs to make sterilized dollar purchases that push up interest rates and thus depress economic output. And if the government wants reserve accumulation and economic growth, it needs a higher real exchange rate and lower interest rates, which means a slower disinflation overall.

There is, obviously, a way out of the gordian knot: readjust macroeconomic policy. The administration did just that, and in December they announced two things: they would adjust the FX bands by past inflation and they would make unsterilized dollar purchases to build up reserves. The adjustment by past inflation makes it very clear they’re basically giving up on a fast disinflation, which is reasonable from an economic (and political) perspective but unreasonable from a “the social media rhetoric of the Milei administration” perspective, which is married to this being the most effective and radical and rapid stabilization program in the history of economics. The unsterilized purchases part is also good because the government made the very obvious realization that Margaret Thatcher’s similar policy was idiotic and failed, and in contrast they could just increase the supply of money because it’s still around halfway compared to the historic average, a third of the historic maximum, and substantially below the average levels of other Latin American countries. By central bank estimates, the government has enough room to print pesos that it could buy USD 25 billion, which is also exactly enough to get Argentina to its (comically optimistic) 2026 IMF net reserves target of USD 10 billion.

So in an environment of greater macroeconomic confidence (which is what reserve growth gets you), the program works out and all variables go down at the same slow pace while the economy booms and the IMF is happy. And lower confidence, that is lower reserves, the exchange rate spikes up, inflation accelerates, the economy enters a recession, and bye bye El Peluca and his merry band of oddballs.

The reservations

This only happens, of course, if reserve growth is sustainable itself. Broadly speaking, there’s two ways the country can get higher reserves: from the current account or from the financial (also known as capital³) account.

The current account contains the balance of trade in goods and services; a higher current account surplus would entail more reserves from a virtuous source, that is, the generation of genuine jobs producing things for which there is a real global demand. A financial account surplus would come from foreign investment into the country - either portfolio investment (buying assets) or foreign direct investment (setting up businesses). The thing is that a financial account-driven strategy needs either a very attractive economy or very high interest rates, which sort of unravels everything else: in fact, back when the country’s economy slowly sank into persistent deflation in the 1990s, the main cause was an extremely large current account deficit caused by an extremely overvalued currency causing extremely high real interest rates and thus forcing extremely painful government cuts.

The Milei government is sort of betting on both: the three main winners of the Milei economy so far are agriculture, mining (so exports), and finance (so investment). In particular, the consensus is that a mix of oil and gas investment in Patagonia and lithium and gold investment up in the Northwest are going to produce colossal amounts of exports that sort out all the economic issues. The first problem with this is that it’s sort of a bonkers fantasy we’ve all been talking about for the better part of a decade: the Macri and Fernandez presidencies both were undone by huge balance of payments issues caused by overvalued exchange rates while the government waited on an export and FDI surge. The second problem is that all of this requires substantial investment in logistics and infrastructure (particularly oil and gas pipelines) that the government traditionally undertakes and which it has done nothing about for 3 years.

The major issue with the current account focused strategy is that it’s completely unfeasible: the country is on track to have a pretty sizable deficit this year. The first cause is the shrinking trade surplus (from 15 billion to 10 billion or so) because of an extreme surge in imports. The second cause is an explosion in the tourism and services accounts as people buy subscriptions, visit other countries at record levels, and just overall buy and spend in foreign lands. This is why you need a strategy that involves the financial account (since it’s relatively common for current accounts to turn “red” during stabilization) and the traditional stumbling block is the fiscal deficit: the government sucks up all the borrowing and drives up interest rates. In principle, Milei has achieved the greatest fiscal surplus in the history of all human fiscal surpluses (0.3% of GDP after interests), but in practice he hasn’t: a lot of the deficit is hidden in below-the-line interest payments that aren’t included in official government reports because they are calculated from the market capitalization of certain types of bonds. This isn’t really like, fraudulent or anything, but it does put an asterisk on the government’s fiscal achievements: it’s still, on net, borrowing from someone. And the need to borrow will become greater and greater: USD denominated interest payments grow substantially from now on: 9 billion in 2026, 23 billion in 2027, and then 19 and 20 billion in 2028 and 2029. Colombia, a country without the history of defaulting Argentina has, put together its biggest ever foreign debt refinancing last week at… 5 billion. The government wants to refinance twice that every year for the rest of two Milei terms. That means the government needs to come up with around 10 billion a year from somewhere every year for basically a decade.

One way to get it is from the private sector: by some estimates, the population of Argentina has over 100 billion US dollars in privately held savings. The government has passed multiple regulatory changes to incentivize people to convert their assets into pesos - that is, generate macroeconomic confidence. But obviously, with a high real exchange rate and with subterranean net reserves, this is not going to happen. In fact, net dollar purchases became extremely negative after Milei lifted some capital controls in April, with private citizens purchasing 30 billion dollars in eight months - the highest in the history of the country (but not in terms of GDP). That’s why I always thought it was a bad idea for Milei to try to rely on the financial account so strongly: he could never produce such a high fiscal surplus to offset the basically unlimited thirst for US dollars of Argentina’s population, which relates very heavily to a recent history of financial crises and high inflation. Retaining some capital and import controls (which he did for most of 2024) he could have accumulated reserves with a substantially lower real exchange rate than what’s needed now, because there were fewer outflows - particularly in “useless” stuff like Shein, Temu, Netflix, and New Year’s in Rio de Janeiro.

You might notice something interesting: that Milei’s net reserves accumulation now depends on macroeconomic confidence and macroeconomic confidence depends on reserve accumulation. If the country has reserves, then it won’t suffer yet another currency crisis, and thus it’s safe to invest in peso-denominated assets over US dollars, resulting in reserve accumulation. But if it doesn’t have reserves, then it’s not profitable to sell USD now versus later, which means a forced depreciation and thus a currency crisis. So it’s kind of like the traditional model of bank runs: they happen because people think other people think it might happen, and don’t happen because they don’t. I think that relying to heavily on foreign borrowing (such as the recent 3 billion dollar repo to refinance January USD denominated interest payments) is a massive issue because it exposes you to the sudden stop: people just stop wanting to lend you money and the economy implodes.

The vision thing

One of the weirder concepts in heterodox local economics is the social equilibrium exchange rate. Imagine an economy with two sectors: an exporting sector that is land-intensive and doesn’t demand labor, and an importing sector that is labor-intensive. A high real exchange rate results in a boom in the land sector, and a low real exchange rate results in a boom in the second sector; meaning, an economic depression, with high unemployment and deflation. Meanwhile, a low real exchange rate means a boom in the labor-intensive sector, but lower exports and thus a balance of payments crisis. This pits macroeconomic equilibrium against social equilibrium: a socially sustainable full employment economy is not externally sustainable, and a macroeconomically sustainable economy is not socially sustainable.

What this means is that behind major macroeconomic discussions is a hidden social conflict between “labor” owners (workers) and land owners (in agriculture and mining). The thing is that this relies very heavily on a given macroeconomic regime that doesn’t really exist anymore: a lot of the relationship between real wages and the exchange rate was predicated on the country’s core exports being staple food items and not soybean pellets and gold buillion. Unionized industrial labor isn’t really a big employer anymore, replaced by precarious service industry and construction work. And the country’s position in global markets has shifted to becoming a much bigger player in commodities, such that it can actually effect global prices in its favor in a way it couldn’t back in the 1960s. The main macroeconomic constraint left is the financial market: given the country’s terrible history, we can’t borrow, which means that the current account has to finance everything else. Imports being driven by matcha labubu instead of the the economic needs of industry is important, because there’s also a much smaller deadweight loss, macroeconomically, from external spending restrictions, which is why I’m not really uncomfortable saying a less financially open but more comercially open economy is a good idea.

The reason why I’m bringing the whole “it’s possible to stabilize the economy without full employment” thing is because, well, it’s happening right now. Compared to 2023, finance, agriculture, mining, and hotels and restaurants (tourism) are doing much better, but retail, manufacturing, and construction are doing worse. In terms of job creation, the economy has lower overall employment and the only creation has come from paltry growth in, well, finance, agriculture, mining, and hospitality. Hospitality is a labor-intensive service (as is the care sector, which is about to start growing due to population aging), but none of the other are. This creates a pretty weird environment: a liberalized, stable economy with a large number of unemployed or underemployed people. Is this a good environment for an evangelical president?

Back in the 1990s, it actually happened in Brazil. The Brazilian state liberalized trade as part of Fernando Henrique Cardozo’s stabilization program (fun fact, FHC was up to that point a sociologist specialized in dependency theory), which led to large employment shocks, which themselves led to a large number of lumpenprecariat types eager to find some source of meaning in the world. And they found it from… the evangelical churches springing up in the country, which promised divine salvation and material wealth by basically participating in pyramid schemes. These churches also worked hard to build their way to emphasize political positions to their faithful, which is why evangelicals are now a substantial voting bloc in Brazilian elections and their pastors have enormous clout over the political system.

Could this happen in Argentina? Well, yeah, that’s why I’m using it as an example. The thing is that it took two decades for this to happen in Brazil, and PresiDante hypers are expecting it to happen in two years. If Milei succeeds, his political project cannibalizes Gebel’s: he’s very close to the evangelical churches, who are too savvy to go out on a limb for someone who lives in the United States. If Milei fails, they all go down: there’s not going to be a right-wing alternative to a failed right-wing governent. Argentina also just doesn’t have the numbers for evangelical politics on a Brazilian scale: 63% of the population is Catholic and 14% are evangelical (the rest are 13% atheist and 10% miscellaneous others), compared to 57% and 27% in Brazil. Brazilian evangelical churches are also growing more quickly: in 2019, they made up 23% of the population of Brazil (meaning they’re growing by about 1% a year, given how old the 27% figure is), and in Argentina in 2019, they made up… 13% of the population. Meaning, for Argentina to reach Brazil levels of pentecostalism, we’d have to wait 65 years.

Conclusion

So all in all I think Milei is making wise but pretty standard moves towards a reasonable, gradual, and establishment macroeconomic policy. That’s exactly the opposite of the chainsaw and dynamite plan he ran on in 2023, but a perfectly respectable and internationally successful course of action. He promised shock therapy and instead he gave us gradualism with bad manners. Honestly, good for him, but if we’re deviating from the free market line I’d just start plugging up the current and financial account black hole that is import demand. If he manages to walk the line on slower disinflation without the need for external borrowing to blow up on his face, he’ll probably be quite successful. Otherwise, the whole thing will be a disaster.

This is why I wouldn’t really expect an evangelical project to be successful in the short run because it competes with Milei’s project - there’s only so much religious conservatism the population can care about versus the economy. Gebel’s politics are extremely slippery, but he’s an evangelical pastor endorsed by unions, which makes me think he’s like the social gospel version of Pare de Sufrir. In the long run, it’s possible for pentecostalism to become a powerful social and political bloc if Milei’s economic reforms economically displace large numbers of people - but that displacement doesn’t exist now, and unions are not powerful enough to turn their (Catholic, I assume) members into devout pentecostals. They’re not even powerful enough to stop Milei’s labor reform from trying to institute a 12 hour workday plus a de facto end to collective bargaining and ban on all meaningful union activity. Additionally, some of the chatter has focused on pentecostals growing by incorporating educated upper income people who embrace the positive sum prosperity gospel, which is also a sign that PresiDante isn’t happening: those people love Milei, and there’s not that many of them anyways.

1. Loans don’t actually get counted into net reserves so like, it wouldn’t have mattered anyways, but it’s kinda crazy how the government borrowed 20 billion from the IMF and still ended up with less money than it started out with.

2. Which is also why I think the whole long duree explanation of Argentina’s macroeconomic issues is so stupid - it’s only really been a substantial outlier from the rest of Latin America for the last 20 years and the reason for that is the Menem government also horrendously bungled the FX regime in a way no other Latin American country did.

3. Calling it the capital account is old fashioned but somewhat correct because the two are usually treated as a unit and the capital account only contains weird one-off transactions like intellectual property transfers and debt forgiveness operations.