Devon Zuegel on Inflation, Argentina, and Crypto

Devon Zuegel: Thanks for having me. I love this podcast a lot so it’s really exciting to come on to speak.

Devon Zuegel: Yeah. I guess I’ve had my own version of a semester-long course, which is, over the last few years I spent about a month a year now in Argentina because my fiance is originally from Buenos Aires. And so we go down there to spend time with his family. And, something that was just so striking to me the first time I went there was that almost every single dinner conversation ends up at some point coming to the topic of inflation, the topic of monetary policy. And, this is with people who are not economists. They don’t find it interesting as an intellectual exercise. But they’re all terrified, day after day, that their savings are going to be obliterated tomorrow. So, it’s–sort of a basic aspect of survival is swapping tips about how to beat inflation, where to store your money so that the government can’t take it.

And, something that was especially striking to me was that Argentina actually works fairly well in some ways. For listeners who have never actually been there, you might be imagining a place like Honduras or, like, somewhere that’s completely a mess and you walk around and you might get killed.

Argentina is not like that at all. Buenos Aires in many parts actually feels a lot like a European city. The downtown is somewhat safe. I mean, I wouldn’t walk at 3:00 a.m. by myself, but overall it feels quite safe. And, I think it’s just very interesting that there’s this underlying financial turmoil that is just creating problems constantly. And, it’s been the case for a hundred years or more.

So, anyways, that’s my education about Argentina and crypto [cryptocurrency]; and my personal background is that I’m trained as a software engineer. I also write a lot about urban economics in particular and the building and design of cities.

Devon Zuegel: Yeah. And, people point out, as you did that, that Argentina was one of the wealthiest countries about a hundred years ago. And, in monetary terms that was true. They had a high GDP [Gross Domestic Product] per capita.

But, I always push back when people say that because in some other ways they were not so wealthy. And, I think also it was a bit of a fluke of the particular time period.

So, in the early 1900s, the first few decades, Argentina was purely an agricultural economy. They had not really made any industrial progress or not much at all. And, this also happened to be a time of very high commodity prices. And so, as a result, they were making a lot of money, in part because of World War I. A lot of grain production had shut down in other parts of the world so Argentina’s grain was much more valuable.

And so, it made them rich temporarily. But, I don’t see that as real wealth because they weren’t really moving on to the next economic stage of industrial development.

So, I think that a lot of people say, ‘Oh, it’s such a mystery that they were doing so well and then they stopped doing well.’ And, I think it’s actually more like they were never doing that great. And, there was sort of a confluence of factors in the early 20th century that made them quite wealthy for a while, but those factors went away. And, then also mismanagement of the economy, in part due to inflation and some other issues, exacerbated those problems.

Devon Zuegel: Yeah. In the last hundred years, Argentina has seen an average of 100% annual inflation. So, to put that into context, that means that on average every single year the currency has lost half of its value.

Now, that statistic could be a little misleading in the sense that some years it’s much, much lower; and some years it’s much, much, much higher and you see hyperinflation. So, if you pick any random year in the last hundred years, it could be a very different number. But, if you had money from Argentina a hundred years ago, it would be utterly worthless now. If you halve something a hundred times it gets real small, real quick.

Another fun–well, ‘fun’ is maybe not the right word. Another interesting statistic is if you had had $100,000 worth of Argentinian pesos in 1995, they would be worth about $310 today. That means: if you held your savings in pesos, they’re gone.

So, Argentinians, they do not do that anymore. They tend to save in USD [U.S. Dollars]. That’s the typical preferred payment method.

Or, for people who are poorer and maybe don’t have access to dollar markets, they will save in bricks. They will literally buy a pallet of bricks each time they get a paycheck and they’ll build their house brick by brick, so that that’s their store of wealth. It’s not fully monetized because bricks are hard to transfer. They’re a little heavy. So, people don’t really trade in bricks so much. Once you buy it, it’s just like a savings vehicle. But, that works out all right for people.

And, there’s also no mortgage industry whatsoever in Argentina. So, people really do have to build things very incrementally. They can’t build out into the future.

Devon Zuegel: I don’t know. I would imagine so. They probably hold their value pretty well. Buildings do, all over the world, end up using recycled brick. So, I don’t see why not.

Another similar savings mechanism–I live here in Miami and in Miami there’s a very booming real estate market. There’s a joke that everyone in Miami is a realtor. And there’s some truth to it.

And, part of it is because people in countries like Argentina and throughout Latin America, wealthy people will purchase an apartment in the United States as a way to store their money. And so, wealthy Argentinians will have a $500,000 apartment in Brickell or downtown Miami as a way to save for their child’s college education. This is very inaccessible to the average Argentinian. This is just for very wealthy people who can afford an expensive apartment.

But, that’s one of the reasons why there’s such a mismatch of realtors versus other people in the economy, because there’s all of this external demand to buy real estate in Miami.

Devon Zuegel: Yeah. I was going to say: no legal way or no easy legal way that doesn’t result in you losing a ton of your money.

So, the list of challenges is extremely long. I will just name a few of them, but, trust me, that it’s harder than what I’m about to describe.

So, one challenge is that Argentina has a fixed exchange rate. What that means is that the rate when you want to buy or sell dollars, when you have pesos, is not set by the market. It is set by the government. What that means is that the official exchange rate results in the government effectively taking half of your money when you try to exchange it. So, if you have USD–let’s say you are an American company and you want to pay an Argentinian. You’re paying them in dollars, and it’s going to get transferred to pesos before it hits their bank account. The government has set the exchange rate such that they end up keeping more of the dollars and fewer of the pesos end up getting to the employee. Right now it’s about 50%.

Devon Zuegel: Compared to a black market rate–

Devon Zuegel: Exactly. Which–I should have explained that before.

So, there’s the official rate, the legal rate; and then there’s what’s called the black market rate, or they call it ‘dollar blue’ in Spanish. And, this is a very, very different number. I actually haven’t checked it today of what the exact rate is. It fluctuates every single day. But usually it’s much different. So, like, you’ll get twice as much money if you use the black market rate versus the government rate.

And, I think in the United States people tend to be kind of bashful about breaking the law, at least in my friend circles. In Argentina everybody breaks the law. Every single day. Because otherwise you get half the income, and like, you can’t pay your rent. And so people–everyone knows exactly what the black market rate is at all times. Politicians will even quote it. Like, it’s well understood that this is out there.

Long story short: Everyone tries to be in the black market as much as they can. There are certain transactions where that’s really difficult, but for the most part people will try to exchange their money in the black market.

And so, one tip if you ever travel to Argentina: Do not exchange money at the airport, or exchange the minimum amount. Instead, when you arrive, find an Argentinian that you trust and ask them to introduce you to their cueva. Cueva is the Spanish word for cave, which I like. And, that cueva–the cueva is a person who is a black market foreign exchange.

And, it sounds really sketchy. It sounds like you’re going to go do a drug deal or something. But it is not. It’s totally fine. If someone introduces you to one that they trust, you’re in safe hands. It’s going to be some random office in a building and every Argentinian who has any money at all does this a few times a week.

So, anyway, that’s one of the many challenges. The government also has a bunch of other–like, very high customs taxes and stuff like that, import costs, that also make it very expensive to move things around. It’s also illegal to take out dollars at an ATM [Automatic Teller Machine] in Argentina. So, there are no ATMs where you can get dollars. The list goes on and on of how the government makes it difficult to use money and move it across borders.

Devon Zuegel: Yeah, it’s not everyone.

So, unfortunately, the average income of an Argentinian is quite low. There’s a lot of people who don’t make much money in Argentina and so it doesn’t make sense for them to move any money into dollars to save because they don’t have money to save. I believe that the median person in Argentina doesn’t have enough money to save anything, and they’re living paycheck by paycheck. And so, they just keep their money in pesos.

But, anybody who has enough money to want to save money will usually be transferring it into USD and then putting that USD in their mattress, or, like a hole in their ceiling, or something like that.

Devon Zuegel: Yeah. Some people have saved in other currencies besides USD. USD is by far the favorite.

However, over the last few years, crypto is starting to make an impact and climbing up the charts in terms of how many people are using it to save. I asked my fiance’s brother at one point, like, ‘Why do you hold crypto? Isn’t it kind of stressful for it to be so volatile?’ And, he said, ‘Yeah, it’s volatile, but at least its value goes up sometimes.’ He’s used to having a currency where it just goes down. Like, it’s just nosediving. And so, for him, the fact that it might go up is pretty exciting.

Devon Zuegel: He was kind of joking, but there’s also some real truth to that.

And so, some other aspects of crypto–so, crypto is starting to fill in a few gaps in the Argentinian economy. So, in particular holding a lot of cash is pretty dangerous. And, it’s physically bulky: if your house burns down–you touched on all that before. There’s a lot of problems just saving in cash. Crypto solves some of those problems.

It also creates some new problems. So, there’s trade-offs, but for different types of contexts it might be useful.

So, for example, right now if you want to buy a house in Argentina, the typical way you will do this is you’ll get a briefcase full of hundred dollar bills and you will meet somebody–and there’s, like, an escrow agent. And, actually I should say, the housing market is dollarized, which means that when you buy a house, people will put the price in dollars. This is actually against the law because the government wants you to use pesos, but people do it anyways.

And, the housing market is in dollars because, imagine–it can take quite a while to close on a new house. And, imagine that suddenly the peso loses 50% of its value overnight. If you had denominated the sale in pesos, then you could get 50% less for that house.

So, this is a really big transaction, and so it’s been moved over to dollars; and it’s been like that for quite a while.

So, you cannot really use a bank account to move that money because it’s in USD. And, so people will bring suitcases full of dollar bills to buy a house from somebody. And, you can imagine all the issues with that. If you get robbed that day, there goes your life savings, there goes your house. It’s inconvenient. They have to count it. There’s a whole process just to count the dollars. It’s not how you want to buy a house. So, crypto–

Devon Zuegel: Oh. Yeah. So, basically you have to have, like, a third party who can serve as an observer to the transaction and say that this really happened, because it’s not logged anywhere. And, that is actually a very challenging problem in and of itself, because both parties have to agree that this person is trustworthy; and that person pretty easily could just run off with the cash. And if it’s cash for a home, that’s usually enough cash to–maybe you could go retire off of that money.

Devon Zuegel: I wouldn’t be surprised if it made it a less liquid market. I haven’t looked into any stats on that, but anytime you add a bunch of friction to a process, you reduce the frequency of that process.

So, this is a place where I think crypto is just starting to make an impact. I think it’s still very, very, very rare. But, there’s no reason it couldn’t become much more common. If you were to use crypto instead of dollars–and crypto could mean a number of things here. It could be in Bitcoin, it could be in Ethereum. You could do USDC [U.S. Dollar Coin, a.k.a. stablecoin–Econlib Ed.], which is pegged to the dollar. You could use anything you want.

Devon Zuegel: Yeah. For sure. So, there’s lots of different paths to go down there.

So, for one, stablecoins in the U.S. context don’t sound so useful. They actually do have uses, but it’s, like, less clear for the typical user who’s not super-deep into crypto.

In Argentina, though, a stablecoin–I’m sorry–a stablecoin is typically a cryptocurrency whose value is pegged to something.

In the case of USDC it is pegged to the US dollar. And so, one coin of USDC equals one US dollar, and that’s how it stays that way. There’s a number of other stablecoins as well that I won’t get into and they have different uses. But, for USDC and a number of other stablecoins that are also pegged to the US dollar, you can treat them roughly like US dollars.

And, from the perspective of an Argentinian, this is very exciting, because now, suddenly, they have access to digital banking again without having to use an actual bank that they trust.

And like, to back up as to why it’s so important to them: I could spend the whole episode just talking about all the different times that Argentinians have been screwed over by their banks and by government’s taking money away from them. But, I will just stick with one that is particularly incredible.

In 2001 there was a banking crisis, and the banks and the government responded with something called el corralito–the little corral–where they basically shut down access to the banks and anyone who had their savings in the banks at that time–which was a lot, because they had just gone through a 10-year period of quite a bit of stability, so a lot of people trusted the government more than usual. A lot of people just could not access their money for almost an entire year.

When they did get their money back at the end of the year and they were able to access it again, they discovered that all of their dollar deposits had been converted into pesos. And the pesos had lost two-thirds of their value in that time.

And so, people were very angry–as you might expect. And, anyone who had had their savings in a bank account learned, I can never do that again. Like: This will ruin my life. Some adults that I know and some of their parents had had their life savings in these bank accounts at the time. And, there were people who committed suicide. It was really a very dark time for many people in the country.

And so, people learned: we don’t want to put our money in banks because the government or the bank will do something that makes a huge problem for me.

So, that’s why they’ve moved to cash. But, the cash has all these issues.

And so, USDC, by being cryptographically secure and not something that the government or the local banks can tamper with becomes extremely attractive.

And, the stablecoin is nice because now it holds its value in a more predictable way, compared to the other cryptocurrencies like Bitcoin and Ethereum, which are extremely volatile, very difficult to plan your life around them. And so, those are more effective for speculative reasons and other reasons. Whereas USDC can be more useful for day-to-day transactions.

Devon Zuegel: Yeah. This is a place where I think some people might read my article and think, ‘Oh, she’s a complete crypto bull.’ And, other people might read my article and think, ‘Oh, she’s a complete crypto skeptic.’ And, the answer is somewhere in the middle.

When I look at the Argentinian use of crypto, it’s both much more than people realize and much less philosophically pure than people realize at the same time. So, stablecoins, they can hold their peg in a variety of different ways. Well, I won’t go down all the different paths of how they can work, but for something like USDC, someone has to basically have a dollar in reserve for every USDC coin that exists, so that if you want to exchange your USDC for USD, then you can.

This is something that needs to be audited. People have to trust the auditor. There’s like a lot of trust to say yes, this coin is equivalent to one USD. And, one challenge–we’ve seen over the last few months, that a number of stablecoins have actually missed their peg. People are now valuing at 98 cents on the dollar instead of a dollar. Which doesn’t sound like a big deal, but the entire purpose of a stablecoin is to be a dollar to a dollar. So, it’s actually a very big deal.

Devon Zuegel: Yes. Not unstable coin. And, there have been some, like Terra stablecoin, which have just completely lost all value; and it’s very much a trust game.

And so, I think it’s reasonable to point at the situation and ask: Why is that any different than trusting Argentinian banks or the Argentinian government? And, I think that that’s a pretty good question to ask. I think I would still maybe trust USDC over the peso just because we know the peso will just keep losing value. It has done so basically for its entire existence. And, USDC has been fine so far. And so, if I had to take a bet between the two, yeah, I would prefer the one that has not continually lost value every single year. But, there’s no guarantee. Unlike Bitcoin and Ethereum and others that are not pegged to something, those are things where the value is actually just set by the market, which arguably you could trust more or less depending on your risk appetite.

Devon Zuegel: Yeah. So, to circle back to the house-buying example, in this case you could just put the private key for whatever cryptocurrency wallet you have, put it on a USB [Universal Serial Bus] stick, carry that in your pocket to the transaction, and do the transaction that way. And, now you don’t have to carry a bunch of cash around with you.

I think there’s also potential in the future–this is not something I’ve seen before but I think it’s totally possible–to have a smart contract act as the escrow agent so that you don’t have to find that third party that you trust. There’s a lot of different ways that you could implement this, but there might be some ways to say: Okay, I’m going to put my crypto in this escrow that is handled algorithmically and–I’m going to make one up–but maybe the algorithm is that there’s, like, 10 people who all have to agree that the money was transferred for the money to be able to move and they all have to sign it with their private keys. And, if they all do that then the money can move.

And, that’s more secure because if you’re just trusting one person to physically hold the cash, it’s relatively easy for them to run away with it. But, if you have 10 people who all have to agree–then if they don’t agree then it just stays–then that’s a much safer situation.

I have not designed these things myself, so there’s probably someone out there who will do a much better job. But, I think it would be a pretty cool product to use and I think that in Argentina it would be quite popular.

Devon Zuegel: I don’t know so much about that. I think there might be some title issues in Argentina, but it’s not something I’ve heard people talk about. And, I get the sense that it’s at least lesser than in other Latin American countries. I know in Mexico there’s a lot of problems with title. But, yeah, I don’t know if I can speak to that in too much detail without putting my foot in my mouth.

Devon Zuegel: Yeah. I’ve seen more hundred dollar bills in Argentina than I’ve ever seen in my whole life, by a very wide margin. There’s a whole culture around hundred dollar bills.

So, for one thing people save in hundred dollar bills. Whenever we visit Argentina, my fiance’s family will ask us to take out hundred dollar bills. Specifically, they want crisp hundred dollar bills. Ones that are not crisp, but they are a little torn or folded, they’re worth less. You get less for your money on those. I’ve actually not totally sussed out exactly why that is. But, people like their dollar bills to be really crisp and clean. And, if they have a tear in them, people may not even accept them. And, we bring them down. It’s good for us because when we’re in Argentina we need pesos; so we’ll give the hundred dollars bills to his family, his family will give us pesos; and it’s a win-win situation. [More to come, 38:33]