An Old Money Secret

In January 1994, I moved to Argentina.

By that time, I had already done short stints in Chad and Kazakhstan.

These aren’t places known for their good living.

I contracted malaria within two weeks of arrival in Chad and was diagnosed with bronchitis after 48 hours on the ground in Kazakhstan.

Everyone in Kazakhstan had bronchitis. Temperatures fell to minus 50 degrees each night.

Every night before falling asleep, I had to set my alarm to wake me so I could go outside to start my car at 3 a.m. Otherwise the battery wouldn’t turn over the next morning.

In Chad I was the only white guy for miles… in a village of mud huts.

Both moves were made on the directives of the international oil drilling company I was working for way back then.

Was I just a glutton for punishment? Not exactly.

I had an itch for adventure, yes… but, more than that, I realized, even at that age, the advantages of being an American offshore.

I was a 25-year-old kid earning oil company wages that would be 100% tax free.

Bad Times In Buenos Aires

Then, New Year’s 1994, that drilling firm sent me to Argentina.

Arriving in Buenos Aires for the first time, my initial reaction was…

This isn’t Chad… this isn’t Kazakhstan.

The international airport was busy but organized… orderly. The drive to the domestic airport to connect to my in-country flight to northern Salta Province, where I was being posted, took me through a metropolitan area that I later learned holds a third of the country’s population.

But, again, this wasn’t Third World Africa. The people were well dressed, the men in suits, the women chic even… everyone going about their business.

This was before the internet, and I didn’t know I was going to Argentina until the day I left Kazakhstan, so I had had no time to study up on the country in advance of my arrival. I showed up and began trying to size up the situation as I experienced it.

At first I thought that the prosperity I was seeing was the result of the country’s vast natural resources. After a couple of weeks, however, the local economics became clearer.

Yes, Argentina was doing well… but not the typical Argentine on the street. They were struggling to make ends meet.

Stores didn’t indicate sales prices on items but payment terms. Want to buy a shirt? You could make eight payments of US$4. A television… that was 20 payments of US$30…

Store owners were confused when I asked what the price would be if I paid in full. I was supplying a new office and camp for the drilling company. I had a lot of shopping to do, both immediately and ongoing. Paying over time would have been a nuisance.

Plus I figured we should be able to get a nice discount by paying in full up front… and indeed we did.

With the discount, prices were more reasonable—not cheap but OK.

Then someone told me about shopping in Bolivia. The border was only an hour from the town in Salta where my operation was based, and prices in Bolivia were a fraction of prices in Argentina for, in many cases, the exact same products.

So my assistant and I started traveling to Bolivia to do our shopping.

The Old Money Argentines Had A Secret

That got me thinking…

Why was Bolivia so much cheaper than Argentina?

Locals would tell me stories about when the reverse had been true. They could remember, they said, when Bolivians came across the border to shop in Argentina, where prices were much lower.

What had changed?

The currency.

Argentina pegged its currency to the U.S. dollar in April 1990, eventually changing their currency from the austral to the peso and using a 1-to-1 peg between the Argentine peso and the U.S. dollar.

Pesos or dollars… the average Argentine on the street didn’t know the difference and didn’t care.

However, the more sophisticated Argentines… the business people and the old-money families… they did understand the difference… and they wanted U.S. dollars.

In fact, they were accumulating them and hoarding them… in bank accounts outside the country.

They knew that the situation created by the artificial currency peg was unsustainable, so they were squirreling away everything they could and storing it outside the Argentine economy.

Prices for everything in Argentina rose and rose until, eventually, the country’s manufacturing sector vanished. It became too expensive to produce anything in the country. Cheaper to import goods… so that’s what everyone did.

I left the drilling company after six months in Argentina, and it wasn’t until eight years later that the economics of what I had lived through during those six months in 1994 became much clearer to me.

In December 2001, Argentina removed the peg between its peso and the U.S. dollar. The government converted all bank accounts from dollars to pesos in one fell swoop overnight.

Same for debt. Whatever you owed was no longer repayable in U.S. dollars… but now Argentine pesos.

People with savings in banks woke up one morning to find that their account values had been decimated.

Meantime, farmers with mortgages on their properties got big breaks as the peso fell in the wake of the decoupling. In 2002, the exchange rate dropped from 1-to-1, where it’d been with the peg, to as low as 4-to-1.

Banks closed and real estate prices collapsed. It was a bona-fide crisis investing opportunity and perhaps the best chances of our lifetimes to buy property in this country.

Unfortunately, I wasn’t able to get on a plane until October. Prices bottomed out in July, but I did still manage to find some amazing deals in October. Friends and I bought three downtown Buenos Aires apartments over the next six months.

What surprised me during my property scouting trips and then during the time I spent in the country over the next two years, while the local economy was trying to stabilize itself, was that most of the Argentine businessmen I met with didn’t seem concerned. They weren’t struggling financially. In fact, they were doing quite well.

What’s going on here, I wondered. What do they know that I don’t?

And then finally it began to sink in…

The businessmen and professionals I was speaking with were the ones who had been accumulating physical dollars and keeping as much of their wealth as possible outside their country. They could see the writing on the wall and had taken steps to prepare for the collapse they knew was inevitable.

Argentina’s economic history is filled with dramatic ups and disastrous downs. Over generations of experience, Argentines, I realized, had learned to diversify their wealth outside their own country.

It was simple—and effective—self-preservation.

That revelation in 2002 about the wisdom of keeping the bulk of your money outside your home country made a big impression on me. By this time, I’d already begun working to diversify my life and my investment portfolio, but watching this lesson play out in real life in Argentina compelled me to work harder and faster.

I wanted to be like the Argentine businessmen who were able to come through unfazed from what amounted to total economic collapse in their country… not like the average Argentine on the street struggling to pay his rent or buy groceries for his family because his life savings had literally disappeared overnight.

And, thanks to those Argentine businessmen, I understood in a real way the secret to making sure my family and I would be OK no matter what happened in the economy or markets of our home country… or of any other country for that matter.

For these Argentines, diversification was not a theoretical exercise. It was the key to survival.

A Lesson For America

Protecting your wealth is the most important reason for going offshore…

Unless you have this international mindset—looking at all your options, not just those closest to home—you’ll be at risk…

Now, what happened in Argentina may not happen in the United States.

People have been talking about the demise of the dollar for more than a decade now… I don’t see that happening anytime soon.

But other things—even everyday things—that threaten your wealth are happening, and will happen.

Fluctuating currency rates, bank issues—multiple banks have collapsed this year in the U.S. You want international diversification just to stay safe.

Argentina was once one of the wealthiest countries in world… but bad management by politicians ruined this once-great economic powerhouse…

Sound familiar?

I wrote a decade ago that America “is on a path of self-destruction that it’s probably too late now to avoid.”

That’s because of unsustainable debt… government spying on its own citizens… and too many other things, large and small, to go into right here.

The country’s course has been set… and will be very hard to change.

I wrote in that same article, published just before the 2012 election, that it didn’t matter who won that election—or any other…

No politician, I wrote, “can change the course the United States is on…

“In an effort to maintain its position as the global leader as long as possible, the United States will put policies in place that run counter to the constitution.

“This has already begun… It will continue to ignore citizens’ rights to privacy in the name of fighting terrorism or drugs or whatever war du jour they can propagate, meantime sweeping long-term problems under the rug.

“That is why globalizing your life in a way to keep your family, your wealth, and yourself safe no matter what happens in the United States or anywhere else is so important.

“Organize your affairs so you don’t have to worry… or at least so you can worry less.”

Just like those old-money Argentines, you can sidestep economic conditions on the ground… and even “opt out” of the bad decisions made by the politicians in power… by looking beyond your own borders.

Stay diversified,

Lief Simon
Editor, Offshore Living Letter