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What it looks like when a country doesn’t trust its banks

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

Piles of Argentine pesos.
Ahead of your post-World Cup vacation to Argentina, you might want to give this story a little scan.
Ricardo Ceppi/Getty Images
Emily Stewart covers business and economics for Vox and writes the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

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.

For those unfamiliar, the ways people in Argentina navigate the day-to-day economy can sound wild. When you don’t think you can trust the bank, the currency, or anybody in charge, things can get pretty weird pretty fast.

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 — it’s unwise to keep your money in pesos for too long. The government limits how many US dollars people can buy at the official exchange rate, if they’re allotted any at all, and so they buy them at a much higher black market rate, called the “blue” dollar. It’s about double the official rate — at the moment, the official exchange rate is around 200 pesos to a dollar, while the blue rate is around 380 to one.

“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.

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.

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.

What it looks like to live in an economy where you trust no one

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. When someone was describing to me their peso-to-dollar-to-mattress scheme for saving money recently, I remarked how abnormal it was. “What’s not normal here? Things working well,” the person responded, laughing.

Last year, I went to visit a friend in the Buenos Aires province who casually informed me there was $20,000 in cash hidden in their small one-bedroom apartment. I spent hours wondering where it was. This year, another friend sold his mother’s house in a $110,000 transaction that will be in all dollars, all cash. He and his brother are trying to figure out how to make sure the dollars the buyer pays in aren’t fake. They think the best move is to put the money in the bank initially, but there’s debate about whether to keep it there — the other option is to take them back out in physical dollars and stash them away.

To be clear here, when I say people buy and stash dollars, I mean they purchase the literal, physical paper bills — preferably $100 bills with a big Ben Franklin face, or “cara grande,” not the small face, “cara chica,” because those are older. Indeed, if you’re on the flipside and want to sell your dollars to convert them to pesos, you’ll be hard pressed to hand off smaller denominations such as $10s, $20s, and even $50s. If the bill has been used or has marks on it, it’s considered less valuable, too — the guy at the exchange place, called a cave, or “cueva,” might not even take it. People can get dollar (and, of course, peso) accounts in a bank, but many prefer not to — instead, they hide stacks of dollars around their homes.

“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.

“I don’t think that the government would be willing to steal that money from the people and get the dollars and give them pesos like in 2001. I think they won’t be willing to assume that cost,” Cesteros said. “But I still think people are afraid of something like that. It’s like a ghost.”

“There is an idea that you need to save in a currency that isn’t the local currency, and you need to save outside of a bank,” Mindel said.

Argentina’s economy has been troubled for decades, its history punctuated by various episodes of crises, of hyperinflation, of booms and busts. There was a brief moment of relative calm in the 1990s, but it ended in deep recession and skyrocketing poverty. “Since the ’60s and ’70s, Argentines’ confidence in their currency and their economic institutions has been eroding,” said Roy Hora, an Argentine historian. “What Argentines have done is to adapt to that scenario.”

Hora compared it to boiled frog syndrome, where things get worse and worse but just slowly enough that in the day-to-day it’s rather imperceptible. Then, by the time the disaster has really set in, it’s too late. Argentina’s inflation rate just hit 100 percent annually. (In the US, it’s 6 percent.) Hora sent me a tweet about the country’s mega price increases. “Here’s a title for you,” he said, “Worse than expected, even for the biggest pessimists.”

The distortions caused by these intermittent economic crises, inflation, and generalized distrust in financial and governmental institutions show up in big ways and small.

Consumers try to 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. (In turn, retailers cut down on just how many installments are allowed.) Many businesses offer discounts in cash, the tacit agreement between seller and buyer being that the sale perhaps isn’t being recorded and therefore won’t be taxed. 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, including for the World Cup in Qatar and for Coldplay tickets. Workers and unions are consistently in search of higher wages to try to keep up with skyrocketing prices, leading to frequent pickets and protests and a sense that it’s just never enough.

“Knowing that inflation has very negative consequences for the medium and long term, for most people, it takes away the opportunity to save,” Hora said. “They can’t plan for the future, they have to live in an eternal present.”

Much of the turmoil is a question of inertia, Cesteros said. Everything’s getting more expensive because it always does. Everything’s chaos because it always is. “It is not easy at all to change people’s minds that inflation is part of the Argentinian economy,” Cesteros said. “You need a very strong change of regime in order to change the way that people think.”

There’s a saying in Argentina that if you leave for 20 days and come back, everything’s different, and when you leave for 20 years and come back, everything’s the same.

It’s not good when things fall apart

I’m not trying to suggest here that what’s going on in the US economy right now is anything akin to Argentina or that any one country can really be neatly compared to any other. But given current concerns about inflation, it’s not a bad idea to take a beat to think about what happens when prices really spiral in a way that seems unstoppable. 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, too. 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.

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, like what happened with SVB, don’t come to pass unless people pull their money out, and once they start, they’re hard to stop. It’s like a stampede, said Itamar Drechsler, a professor of finance at Wharton. “I might not want to stampede, but if everybody else does, it doesn’t matter,” he said.

Central bankers and government officials in the US and Europe are trying to reassure the public and investors that things are okay, to varying degrees of success. Some consumers and businesses are still worried that their deposits might vanish, even though, by and large, there’s absolutely no reason for concern. The markets are still jittery. The banks themselves are working to get people to relax as well — and to get the government to promise it will back them if things go awry, too.

You can debate whether making Silicon Valley Bank’s depositors whole above the $250,000 FDIC insurance threshold was a good idea or whether its customers should have known better. You can certainly question why some banks seem not to have realized that they were at risk among rising interest rates from the Federal Reserve and a very concentrated client base. You can also ask why bank regulators and supervisors didn’t sound the alarm.

On a broader level, plenty of people are, fairly, scratching their heads that much of the economy just doesn’t seem to make sense anymore. They’re also feeling stressed and angry about persistent inflation. In the US, price increases do seem to be slowing, and they’re not nearly as big as they are in other parts of the world, but they’re still happening. What’s more, one of the keys to keeping inflation in check is making sure people don’t expect it to keep going — they’ve got to, again, trust that the Fed will be able to get it under control.

The thing about confidence in institutions is that once it’s lost, it’s hard to get it back. Mindel said that for Argentina, she thinks it’s possible to get the economy on track — but it’s a heavy lift. “If you were to manage to solve all the country’s extremely serious and extremely deep-rooted macroeconomic issues and also have some large reforms in the financial system, [you could fix it],” she said. She laid out a laundry list that was a long one — reforming business statutes, labor, the informal economy, people paying so much in cash. “If you could do all that, you could have an economy that runs on trust.”

Whatever else, it’s a decent reminder of why it’s important not to lose trust in the first place.

We live in a world that’s constantly trying to sucker us and trick us, where we’re always surrounded by scams big and small. It can feel impossible to navigate. Every two weeks, join Emily Stewart to look at all the little ways our economic systems control and manipulate the average person. Welcome to The Big Squeeze.

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