1. The U.S. Has Defaulted on Its Debts More Than Once. The Past Is Prelude

     

    The case cited in the article above may be the only time the Treasury has failed to pay interest and principal on its debt. But there are many other ways to default on debt than nonpayment.

    Countries can slap on capital controls so investors can’t convert to hard currency or get their money out of a country. Countries can impose 50% withholding taxes, so you can get your money out only after a 50% tax haircut. Countries can resort to inflation so that you get your nominal dollars back, but they’re not worth much in real terms. Countries can force creditors to swap debts that cannot be paid on time as agreed for debt with longer maturities.

    Paul Simon had a hit song called “50 Ways to Leave Your Lover.” Sovereign borrowers could collaborate on a new version called “50 Ways to Stiff Your Creditors.” With this expanded definition of default in mind, it’s clear that the U.S. has defaulted on its debts many times.

    In the 1950s, the income tax on interest income was 90%. Between 1977 and 1981, the value of the dollar was cut by over 50%. In both cases, parties who had loaned money to the U.S. government years before did not receive anything like what they bargained for in real terms after taxes and inflation.

    Perhaps the most egregious example of this kind of designer default was the annulment of contractual “gold clauses” by Congress in 1933, as this article explains. Gold clauses had been around since the U.S. hyperinflation during the Civil War. When a dollar amount was due under a contract, the creditor had the right to demand payment in “gold coin” or “gold equivalent.” This was intended to protect creditors against dollar devaluation and inflation.

    The problem was that FDR explicitly wanted to devalue the dollar and create inflation to escape from the deflation of the Great Depression. FDR knew that if gold clauses were enforced, many debtors would default because they would still owe the old debt in “gold equivalent” even though they were paying with newly devalued dollars. So Congress and FDR just made the problem go away by outlawing gold clauses. The court backed up FDR, and creditors got stiffed.

    Today gold clauses are once again legal, but I wouldn’t count on Congress or the courts to enforce them in another deflationary scenario. There’s one hedge that’s much better than a gold clause. That’s actual physical gold.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

     

  2. Think The U.S. Has Never Defaulted on Its Debt? Guess Again, It Has

    Two of the articles above focus on a potential emerging-markets debt crisis.

    This would be the third emerging-markets debt crisis in 35 years. The first in this sequence was 1982–85 and was centered in Latin America. The second was 1997–98 and was centered in South Asia and Russia. (This sequence omits the Mexican Tequila Crisis of 1994 that was confined to one country and was quickly bailed out by the U.S.) The third crisis has already started in Venezuela and Argentina and will likely spread to Turkey and Ukraine before affecting the entire financial system.

    Through all of these crises, the one port in a storm is the U.S. Treasury market. Investors have 100% confidence that the U.S. never has and never will default on its debt. But this article shows that confidence may be misplaced.

    The U.S. actually did miss principal and interest payments on Treasury debt in 1979. The amounts were relatively small compared with total outstanding debt, and the missed payments were made up to investors shortly thereafter. The Treasury blamed a back-office glitch and uncertainty created by Congress. But a default is a default.

    The U.S. debt burden is much greater today and congressional dysfunction is worse than ever. Computer systems are highly vulnerable, not to old-fashioned “glitches,” but to 21-century hacks and malicious cyberwarfare. In fact, there is only one asset class that has never defaulted in history — gold.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  3. The U.S. Is Putting the Screws to Iran. How Will Iran Fight Back?

    In 2011–13, the Obama administration waged an effective war on Iran using financial weapons alone without firing a shot. Iran was denied access to the global dollar payments system (Fedwire and the Clearing House Association) and later denied access to the global payments system for all major currencies (SWIFT). The result was a collapse of the Iranian currency, the rial, as black-market rates for scarce dollars revealed the value of the currency had been cut in half.

    This led to hyperinflation and bank runs. The Iranian banks had to raise interest rates to 20% to keep deposits from flooding into the black market. Social unrest was soaring and Iran was moving closer to regime change.

    Obama declared a truce in 2013 in exchange for negotiations on Iranian promises to curtail its nuclear weapons programs. Those negotiations resulted in a deal in 2015 (the so-called JCPOA, or Joint Comprehensive Plan of Action) that was in place until President Trump ended it in May 2018 because of Iranian cheating. Now we’re back where we left off in 2013, except this time the sanctions will be far worse and far more pervasive.

    This article reports on a recent speech by U.S. Secretary of State and former CIA chief, Mike Pompeo. The Pompeo demands on Iran are extensive and are unlikely to be agreed upon by Iran. If Iran does not agree, Pompeo and the White House threaten “the strongest sanctions in history.” This time the White House won’t mind if regime change happens.

    The problem for investors is the collateral damage that may arise from the Iranian response. In 1941, FDR put extreme sanctions on Japan by freezing their bank accounts and putting an embargo on Japanese oil imports. A few months later, Japan bombed Pearl Harbor in a sneak attack.

    Iran will not send dive bombers to the U.S. but may use terrorist bombers in retaliation for sanctions. Even more likely is a cyberattack that could close the New York Stock Exchange or disable systems at major banks. Investors should prepare by having multiple bank accounts, building cash allocations and buying physical gold, which cannot be hacked or frozen in cyberwarfare.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  4. King Dollar Is a Death Knell for Emerging Markets

    Using the Fed’s broad real trade-weighted dollar index (my favorite FX metric, much better than DXY), the dollar hit an all-time high in March 1985 (128.4) and hit an all-time low in July 2011 (80.3). Right now, the index is 95.2, slightly below the middle of the 35-year range. But what matters most to trading partners and international debtors is not the level but the trend.

    The dollar is up 12.5% in the past four years on the Fed’s index, and that’s bad news for emerging-markets debtors who borrowed in dollars and now have to dig into dwindling foreign exchange reserves to pay back debts that are much more onerous because of the dollar’s strength. Actually, the Fed’s broad index understates the problem because it includes the Chinese yuan, where the dollar has been stable, and the euro, where the dollar has weakened until very recently.

    When the focus is put on specific emerging-markets, EM, currencies, the dollar’s appreciation in some cases is 100% or more. Much of this dollar appreciation has been driven by the U.S. Federal Reserve’s policy of raising interest rates and tightening monetary conditions with balance sheet reductions.

    Meanwhile, Europe and Japan have continued easy-money policies while the U.K., Australia and others have remained neutral. The U.S. looks like the most desirable destination for hot money right now because of interest rate differentials. This article describes the problem and has some recommendations for faster growth among U.S. trading partners. But that advice is likely to be too little, too late.

    A new EM debt crisis has already started, as described in the previous article. The only issue now is whether the new crisis will be contained to Argentina and Venezuela or whether contagion will take over and ignite a global financial crisis worse than 2008.

    This new crisis could take a year to spread, so it’s not too late for investors to take precautions, but the time to start is now.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  5. Here We Go Again. A New Emerging-Markets Debt Crisis Has Begun

    Emerging-markets, EM, debt crises arrive every 15 or 20 years almost like clockwork.

    The first crisis in recent decades began in 1982, reached a crescendo in 1985 and was not resolved until late 1989. That crisis involved mostly Latin American borrowers such as Argentina, Brazil and Chile (the so-called “ABC” debtors) and Mexico. It was not finally contained until the invention of “Brady bonds,” named after the Bush 41 administration Treasury Secretary Nicholas Brady, who used long-term Treasury debt to collateralize Latin American debt while the borrowers paid interest and bought time to get their houses in order. I worked at Citibank in the early 1980s, so I was in the trenches for that crisis.

    The next crisis was confined to Mexico in 1994, but that was quickly followed by a global crisis that started in Thailand in 1997 and spread to Malaysia, Indonesia, South Korea and Russia before landing at a Greenwich, Connecticut, hedge fund called Long Term Capital Management, LTCM. I know all about that crisis too because I negotiated the bailout of LTCM as their chief counsel.

    After the Asia-LTCM crisis, the EMs built up what they called “precautionary reserves” so they could withstand a run on their currencies by foreign banks and speculators. That worked. The EMs sailed through the 2007–08 global financial crisis mostly unscathed.

    Now, 20 years after the last EM panic, a new EM debt crisis is quickly emerging, as this article reports. Right now, the crisis is mainly centered in Argentina, which has asked for IMF emergency funding. But Venezuela has already defaulted on some external debt as well. As in 1997, the panic will not be confined to one country. Turkey, Ukraine, Chile and South Africa are all highly vulnerable as well.

    The world has still not recovered from the 2007–08 panic and is not ready for a new crisis. I saw the last two EM crises from a front-row seat, so I know how they proceed. Individual investors should get ready with increased allocations to cash and gold.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  6. Millennials: All We Are Saying Is Give Socialism a Chance.

    A strange alliance between 70-something Democratic leaders and millennial voters is emerging. Many of the top candidates for the Democratic Party presidential nomination in 2020, including Bernie Sanders (actually a Socialist Party member running as a Democrat) and Elizabeth Warren, are openly espousing socialist policies including guaranteed basic income, government-guaranteed jobs, forgiveness of student loan debt and other budget-busting initiatives.

    Even younger Democratic hopefuls, including Sen. Cory Booker of New Jersey, are jumping on the socialist bandwagon. Their ideas are getting a warm reception from younger voters, the millennials (born between 1982 and 2000), who have the most to gain from these policies. Many millennials have had trouble entering the workforce or forming their own households because of the lack of high-paying jobs and the burden of student loan debt.

    Bernie Sanders-type policies have a lot of appeal to people stuck in gig jobs with Uber and Starbucks. This article explores the alliance of young and old under the banner of socialism. These ideas are not as far out on the fringe as most Americans imagine. In fact, recent polls have shown majority support for government-guaranteed jobs and close to majority support for guaranteed basic income, free money from the government with no work requirement.

    These formerly fringe issues are now going mainstream. The result will be enormous increases in the national debt and eventually inflation as the only way to deal with the debt. Investors need to prepare now with increased allocations to hard assets such as land, gold, silver and fine art.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  7. Trump Tries His “Art Of The Deal” With Nuclear Bombs and Missiles

    Policymakers and everyday citizens around the world breathed a sigh of relief last winter when tensions between the U.S. and North Korea were dialed down and a fruitful dialogue began. Now the Korean situation is headed for a summit between Kim Jong Un and Donald Trump in Singapore on June 12.

    That’s a huge improvement over the path to war that both sides were treading last fall. Meanwhile, tensions with Iran have increased significantly as a result of Iran’s violations of its deal to stop its nuclear weapons program and Trump’s decision to reimpose financial sanctions on Iran. One crisis has been alleviated, at least temporarily, while a second crisis has emerged.

    This article takes a different and much more original view. It makes the point that the North Korean and Iranian nuclear crises are inextricably linked. Iran buys weapons systems from North Korea, paid for partly with the gold that Obama handed over to Iran in 2015 as a bribe for Iran to enter into its deal with the U.S. North Korea also built a nuclear reactor in Syria, sponsored by Iran, which Israel bombed to rubble in 2007.

    Trump has taken a “get tough” approach with both North Korea and Iran in contrast with Obama, Bush 43 and Clinton, who either did nothing or were duped by Iran and North Korea with false promises of restraint. Six months from now we may be back on a path to war with North Korea while pursuing new negotiations with Iran, a reversal of the situation today.

    It helps to look at Iran and North Korea holistically as a test of the West’s willingness to stop nuclear proliferation. North Korea and Iran may take turns playing “good cop, bad cop” with the U.S. But Trump has shown a great deal of focus and consistency in his dealings with both. For Trump, this is the ultimate art of the deal.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

  8. Do Persian Gulf Crises Make Oil Prices Go Up? Actually, Prices Go Down.

    Conventional wisdom says that when tensions rise and war threatens in the Middle East, oil prices have to skyrocket. We’re seeing a little bit of that right now.

    Iran is confronting Israel in Gaza and Saudi Arabia in Yemen even as the U.S. confronts Iran with economic sanctions. Things will likely get a lot worse in the near future as the impact of sanctions starts to bite and Iran lurches into hyperinflation and social unrest, precursors to regime change.

    Right on cue, the price of oil has risen sharply lately. But, as this article explains, that price increase may be strictly temporary.

    History shows that when oil producers face geopolitical threats, they actually pump more oil, not less, in order to generate revenue to pay for lost trade and the costs of potential conflicts. This happened during the Iran-Iraq War in the mid-1980s when oil prices fell to $6 per barrel as Iran and Iraq pumped oil furiously to pay for the costs of their war. Oil also dropped during the U.S. liberation of Kuwait in 1991 and again during the U.S. invasion of Iraq in 2003.

    It seems that war is a good leading indicator of lower oil prices. Oil prices may still have further to rise in the short run, but history suggest that as tensions increase, the price of oil decreases. This time may be no different.

    Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.