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I went to Argentina and the US did a bank run.



Title: Trust, Inflation and the Economy: Lessons from Argentina

Context Matters

I’ve been in Buenos Aires, Argentina, for the last month, including through the recent turmoil in the banking industry in the United States and Europe. It’s a coincidence that has, um, given me some things to think about.

Argentina, like every country, is its own unique beast with a distinct set of political, economic, and historical issues that tend to render its economy a bit of a consistently inconsistent mess. There’s no one explanation on why it is the way it is, or how to fix it. But it’s worth backing into the bigger picture here, an issue that matters whatever the context: the question of institutional trust.

The Importance of Trust in the Economy

If you can’t rely on your bank to have your money when you need it or your government to keep things stable, it can wreak all sorts of havoc on society and on the economy. Just look at what happened in the US with Silicon Valley Bank’s collapse. It’s sparked widespread concern about the soundness of the US banking system despite the federal government’s best efforts to shore up confidence. The fear of contagion is strong, as America’s crisis is now spreading into Europe and the risk of recession seems to be on the rise once again.

A well-functioning economy requires confidence in the banking sector and the financial system; when that confidence is eroded, the entire system becomes unstable. Worse, getting that confidence and stability back is a tough order.

Argentina’s Unique Economic Navigation

I lived in Argentina for about seven years and go back from time to time. I want to keep up my permanent residency in case everything goes to hell in the US, and also I go because it is fun and great. Every time I’m back, I’m always struck by just how strange the state of economic navigation is, even if I more or less still get it.

Amid super-high inflation, people can’t bet on the value of the Argentine peso staying stable, so when they’re paid in them, they spend them fast or convert their money to American dollars. The government limits how many US dollars people can buy at the official exchange rate, so they buy them at a much higher black market rate, called the “blue” dollar. It’s about double the official rate. “The Argentine economy has taught the people here not to trust in institutions in general but also not to trust in one of the central institutions for the functioning of the economy, which is money,” said Santiago Cesteros, a research fellow at the University of Zurich and former consultant at the World Bank.

The Cost of Distrust

“Fundamentally, people only really want dollars because they don’t think the banks are trustworthy, they don’t think the currency is going to hold its value, and they don’t think the government is responsible enough to deal with it, either,” said Maia Mindel, an Argentine economics blogger who writes at Some Unpleasant Arithmetic. “There have been really clear experiences of saying, ‘I’m going to trust my bank, I’m going to take out a fixed deposit, put my money in this bank, my life savings,’ and then the entire thing comes crashing down.”

It’s sort of a you-have-to-see-it-to-believe-it situation. Nowadays, the money is probably fine in the bank, but what if it isn’t? In 2001, the Argentine government stopped a countrywide bank run by freezing billions of dollars in deposits; many people were never able to recover all of their money.

Knowing that everything in the country gets more expensive because it always does, Argentines have adapted by finding creative ways to try to keep up with the ever-increasing cost of living. Consumers buy things on long installment plans, knowing that over time, inflation will mean the payments they’re making on their televisions or laptops will amount to the cost of a pair of jeans or a cup of coffee. Banks offer fixed-term deposit accounts that pay annual interest rates of 75 percent and may still result in account holders losing money. The peso has a multitude of exchange rates. Workers and unions are consistently in search of higher wages to try to keep up with skyrocketing prices.

Lessons for the US

It will be years before we fully understand what’s going on in the banking world right now, what caused it, who’s at fault, and why so many people didn’t see it coming. Still, one issue front and center here is that of trust. Bank runs don’t come to pass unless people pull their money out, and once they start, they’re hard to stop. With the current financial tumult in the US and Europe, why confidence in institutions matters — and what happens when it’s lost — is worth ruminating on.

Two, three weeks ago, few people in the US would tell you that they were seriously worried about the fragility of mid-sized banks. The prospect of bank bailouts felt like a question largely of the past, or at the very least, one not in the immediate present.

With inflation looming, it’s important to remember the consequences of lost trust in financial institutions. Though each country is unique, lessons from the economic turmoil in Argentina can shed light on the cost of distrust in the economy and could guide economic policy with regard to ensuring institutional trust in the financial sector.




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