What Argentina can teach us about money

People say immersion is the best way to learn a language. Well, spending time in Argentina is the equivalent for monetary theory.

There’s a lot we can learn from Argentina right now in particular. Cryptocurrencies are growing and USD inflation is accelerating, so understanding monetary systems is becoming a question of financial literacy and not just an intellectual hobby—though it’s fascinating in its own right too!

So I’m writing an essay about lessons I’ve learned in Argentina about how money really works. I spend a month here every year, and it's the best way to see the underbelly of a real monetary system.

The essay is targeted at a few overlapping audiences:

This post will start with practical tips (e.g. how to get the best currency exchange rate) and then extend into more abstract explanations of the underlying dynamics (e.g. why Argentina has had persistent inflation for a century). Grounding everything in specifics will help you build deep intuition for the monetary theory that affects day to day survival in Argentina. While you're along for the ride, you'll also learn a bit about Argentinian history, political economy, and culture.

As of Dec 2021, the official exchange rate set by the government is 100 pesos = 1 USD, but the black market rate is 200 pesos = 1 USD.*

Practically this means that everything is 2x as expensive if you pay with your American credit card compared to paying with pesos. You will get charged the official USD-peso exchange rate rather than the more favorable black market rate, because when you pay by card it goes through the banks, and thus it is under the watchful eye of the Argentine government.

Instead, bring USD cash and exchange your dollars for pesos at a cueva (a black market money changer). Some restaurants/hotels/etc will also accept USD cash directly at a fairly good exchange rate (probably like 198:1), but make sure you have some pesos around, because they won't take USD all the time. You will also have to ask them explicitly if you can pay in USD.

All this said, local prices in Argentina are really cheap compared to the US or Europe, so if you end up making a few purchases with a credit card here or there, you're probably not going to break the bank.

Enforcing an artificially high value of the peso is a way for the government to squeeze out more revenue from people who want to exchange pesos for USD. It's essentially a hidden way to tax the population without increasing tax rates.

As one illustration, let's walk through how this affects Argentinian exporters. Essentially they end up receiving half as many pesos as they should in exchange for their goods, and the government pockets the difference. Exporters can't get the more favorable black market rates, because they have to go through official channels like banks to sell in large quantities to the outside world.

Let's be concrete. Here's the flow of funds* that occurs when an Argentine soybean farmer sells USD $1 worth of soybeans to the outside world through official channels:

Note that the farmer would've ended up with twice as much savings ($0.66 USD rather than $0.33 USD) had the government not imposed the official exchange rate on the export. The stated tariff is 33%, but the effective tax on his revenue is actually 66% when you also count the amount lost via the official exchange rate. The result is that the government gets more revenue without having to increase tax rates.

There's a black market to avoid this rate, but it's extremely limited because the government tracks exports very closely. For example, one of my friends whose family has an agricultural business said that the government tracks how many seeds their farm buys each year, and from that they estimate how much output you should have produced that year. If you export less than that through formal channels, they investigate you. Smaller, black market businesses may have an easier time evading these controls, but it sounds like they're pretty difficult to evade. (Note that this also opens up lots of opportunities for corruption...)

Capital controls! The government sets a limit on the number of dollars Argentines can exchange for pesos at the official exchange rate. Last I heard, it was something like $200 USD/month per individual.

Argentines have a ritual of going to the bank to exchange the maximum number of pesos for USD at the official rate each month. Beyond that amount, they're stuck with the black market rate, where they get half as many dollars in exchange for their pesos.

Argentina's national debt is denominated in foreign currencies (mostly USD), because lenders don't trust that debt denominated in pesos will hold value. As a result, the government needs to have a net inflow of USD and other foreign currencies from the world to be able to pay its debts:

Argentina can increase its reserves by increasing the inflow or decreasing the outflow. The government has more levers to decrease the outflow through capital controls than it does to increase the inflow, since inflow requires people in other countries to want to buy Argentina's exports, and the government can't wave a wand and make that demand just appear.

As a result, the government imposes capital controls that limit the amount of foreign currency locals can buy legally. Capital controls take many forms, including:

Capital controls are extremely unpopular, as you might expect. A 2016 survey showed that 61% of citizens supported their removal. However it's a tempting source of government revenue and a relatively easy way to reduce the outflow of USD. As a result, capital controls have been added and removed and added again repeatedly:

Argentina has seen an average of 100% annual inflation for the last century. In 1989 alone, they saw 3,000% inflation! To put this impact into perspective:

Argentina has consistently led global inflation rankings since 1945. However it isn't totally unique. Other South American countries like Brazil, Bolivia, Chile, Uruguay and Peru saw significant inflation up until the early 1990s. "However, in the last three decades these other countries have managed to bring inflation down to single digit levels, whereas Argentina seems to have taken the opposite direction."

Argentina also has a long history of borrowing money and then not being able to pay it back. "Since 1980 foreign debt payments have been suspended five times (no country in the world has defaulted the same number of times) and Argentina today is the main debtor of the International Monetary Fund (IMF) with $44 billion outstanding," according to El Pais.

Another aspect of why the peso has lost so much of its value is that people don't trust that they have control over their money. In 2001-2002, the government enacted something called "el corralito", shutting Argentinians' access to their bank accounts for almost a year. When they could finally extract money again, they found that (a) their USD deposits had to be exchanged for pesos and (b) pesos had lost 2/3 of their value. The lesson the Argentines learned was that they couldn't trust banks or any other government-regulated financial services, because at any moment the government could just stop them from accessing their money.

Most Americans are somewhat familiar with the concept of inflation (at least in theory), but we're less familiar with devaluation. In the long run, inflation and devaluation have the same basic effects on the foreign exchange rate of the currency, but in the short term they look and feel very different.

The key difference is that USD is allowed to float according to market forces, while the ARS peso has an official exchange rate set by the government. For a pegged currency like the peso, there come times when suddenly the government changes the official value of the currency. This is what's called devaluation.

For example in Aug 2019, the peso (ARS) plummeted from 45 ARS = 1 USD to 60 ARS = 1 peso:

Here's the inverse of the above graph for the past 5 years. Notice that the curve to the left of Aug 2019 is quite bumpy, while the curve to right is smooth. This is because the government that was in power from 2015-2019 let the value of the peso float according to the market, and then in 2019 the government fixed the price again.

Devaluation can only occur in a currency with a fixed exchange rate system rather than by market forces. Americans aren't familiar with this because the value of USD is set by the market, and because USD is the reserve currency of the world and thus the value to which most people compare their currencies.

Currencies whose value is not fixed by governments can also lose their value, but it happens in a smoother fashion as a result of market forces. This is called depreciation (as contrasted to devaluation).

Devaluation occurs when the government changes the official exchange rate. They do this when the national reserves can no longer hold the exchange rate. The official rate is essentially the price at which the government commits itself to buying/selling foreign currency, so at some point they can no longer hold that price because people arbitrage it against the "real" market value of the currency.

Devaluation looks like a step function, and it's more about the value of the local currency relative to other currencies. Inflation is more of a continuous process. It can be caused by many things, but in Argentina it's generally caused by the Central Bank printing lots of pesos to effectively expand government services.

Practically, devaluation means that purchasing power in the domestic economy remains roughly the same (e.g. locally-made products like empanadas), but purchasing power to buy imported goods (e.g. MacBooks, vacations, cars) has decreased.

The short answer: the politics of short-term thinking combined with a central bank that's not independent plus a long history of immense inequality.

55% of all registered* workers are employed by government, so cutting taxes means reducing the income of a large voting block. Politicians who attempt this tend to not get reelected. Additionally, giving people cushy government jobs is a common way for politicians to gain political support, so the number of government workers tends to grow over time.

Crucially, unlike the US Federal Reserve, the central bank of Argentina is not independent from the executive branch. As a result, Argentina's political leaders can pressure the central bank to print more money to finance their expenditures. It's easier for voters to track the short-term positive impact of spending more money today than it is to see the long-term negative impact of increasing the money supply faster than demand for that currency.

These problems are deeply rooted in Argentina's history, going at least as far back as the Spanish colonial times. It's interesting to contrast Argentina to the United States: both countries had seemingly endless fertile land, and both countries attracted European immigrants by the promises of a fresh start in the New World.

But in South America a small aristocratic elite controlled the vast majority of the land, while in North America land was more evenly distributed (e.g. by the Homestead Acts, among other policies). In countries like Argentina, "large-scale immigration without the freeing of agricultural land for settlement created a disproportionately large urban working class that was highly susceptible to populist mobilization" writes Niall Ferguson.

Additionally, my sense of colonial history is that the Spanish were generally focused on resource extraction, whereas the British tended to build more industry (although the British were also very extractive at times too). As a result, the British invested more in local human capital that enabled long-term economic development, while the Spanish had a more slash and burn mentality that destroyed human capital. I suspect this also led to a more combative relationship between the rich and the poor, because the Spanish model really was worse for most people but the very wealthy, while benefits were more widely distributed the British model.

You still see echoes of this dynamic today; there are certain families in high class Argentina who are descendants of the big landowners, and they are perceived almost as aristocracy here. Their names adorn streets, buildings, and estates all over the country. Their lands have since been chopped up into smaller holdings and sold off as the family tree has branched and grown, but these people are still far wealthier and well-connected than the average Argentinian.

Concentrating economic and political power in such a tiny group left large masses of disenfranchised, angry people. This created a pendulum effect, where Argentina's politics have alternated between the extremes. In some eras, leftist populist governments have hiked taxes on the rich, printed money to pay for social services, and installed tariffs that protect local industry while curtailing global trade. In other eras, more right wing governments have taken actions that benefit descendants of the traditional ruling class. More recently, the right wing governments have been replaced by more classically liberal governments (e.g. President Macri, in office 2015-2019). These governments have lowered taxes, removed capital controls, and opened the country to more global trade. My view is that these are good steps to take for the long-term development of Argentina, but I see how they are painful in the short-term for many people who have come to rely on government subsidies.

Argentinians get paid in pesos but save in USD, since it holds value better than the peso. They achieve this exchange by maxing out the $200 USD limit to get the official rate and then using the black market to exchange the rest of the pesos they've chosen to save in USD. They hold the minimum number of pesos possible to pay for short-term expenses.

They also tend to buy hard assets, especially real estate, which tend to hold their value over time. This isn't ideal because these assets aren't liquid, and the government also has a history of imposing strong tenant protections that make it extremely risky to be a landlord. For example, they recently passed a law that says that all rental contracts have to be for at least 3 years. In a country with 100% annual inflation, this means that the value of the rental contract is likely to be 1/8th of its original value by the time it's over. Between 1943-1979, laws allowed tenants to unilaterally extend the lease without adjustment of rent. These sorts of policies make owners very skittish to rent out apartments, which means that many units sit empty until they can be sold rather than rented.

I've also been told that lower-income Argentinians sometimes save in bricks. The value of bricks is fairly stable, and they're actually useful to a family building out their house. Argentina doesn't have a mortgage industry, and thus buying a pallet of bricks each time you get a paycheck is an effective way to pay for your home in installments. Bricks aren't fully monetized, in that I don't think people buy bricks and then sell them later, so people only use this method of saving when they actually have something they want to use the bricks for.

Remote work is becoming increasingly common for Argentinians, because it gives them an opportunity to earn USD or euros or some other currency besides the peso. Many of these workers set up bank accounts abroad so they don't have to bring them back into Argentina (and thus under the watchful eye of the government). They hold funds in places like Payoneer, PayPal, Mercury, Estonian bank accounts, and US bank accounts and withdraw just enough to pay for the day-to-day expenses in Argentina. Sometimes these are set up legally, and sometimes they are not.

When you live in a high inflation environment, anything that looks like a debt suddenly becomes tempting to pay off as late as possible. This ends up creating incredible distortions in the economy:

Argentina does not have a meaningful mortgage industry. If you want to buy a house in Argentina, expect to buy it in cash.

Argentina's monetary system also makes it difficult and expensive for Argentinians to travel. They run into several issues:

I've been hearing of more and more Argentines using crypto to hold their savings, as an alternative to USD. Argentines love their USD, but there are serious downsides to storing $100 bills under your mattress: you can't count it, it's bulky, it can get stolen, it can burn up in a house fire, and on and on.

However cryptocurrencies' volatility make it difficult for Argentines to seriously use it as the primary storage for their life savings. Stablecoins are a popular way for cuevas to exchange crypto with their customers, and I expect more and more people are using tokens like USDT and USDC in place of $100 bills under the mattress.

One area where crypto has a ton of potential for wide adoption is moving money in and out of the country (i.e. evading capital controls) and for exchanging money with cuevas. These black market money changers now display peso exchange rates in their shops, so it seems as if they're starting to take off.

One interesting detail is that the cueva my friend went to prefers the Tron blockchain for these transactions, because it is much cheaper than moving BTC or ETH. The cueva said he accepts any cryptocurrency, but his users don't like using BTC or ETH so much because the transaction fees are so expensive.

A friend asked me "Who are the crypto users?", and to be honest it's a bit hard to tell since much of it is under the table. But from talking to locals, it seems like the users are disproportionately young, educated, and wealthy.

The middle-aged Argentinians I know are skeptical of digital currency, and the elderly are generally uncomfortable with software products (as they are in many places). This even shows up within the cuevas themselves—at two cuevas on this trip, when we said we wanted to exchange crypto instead of the usual USD, the head manager called down a younger guy from the back who had the Binance app to help out with the transaction.

That said, I know one Argentinian grandma who's owned Bitcoin since 2015. She barely uses a computer or cell phone, but as soon as she heard there was a currency that the government couldn't touch, she made sure her grandchildren helped her buy some right then and there. An understandable reaction when you've seen your country go through 5 different currencies in your lifetime...

Cuevas are using crypto behind the scenes to move money around and evade capital controls. This in turns enables people who are not crypto-native to more easily access dollars and other assets, even if they aren't interacting with crypto directly themselves.

TODO

If you know more about any of the issues above (or if you find an error in anything I wrote!), please let me know. Every time I come to Argentina I learn something new about money that I'd never considered before, so I'm sure that this writeup is incomplete.