What a great town! Buenos Aires. We love it here.
Because it shows how you can completely foul up a major economy…and still enjoy a great steak dinner with a good bottle of wine.
Not only that, the weather is nice and the women are pretty. Who cares about GDP, debt, monetary policy and good governance?
Argentina is probably the best place in the world from which to contemplate the world’s financial future. Huge errors now being made by the US and most other governments are bound to lead to huge trouble. In other words, they’re bound to lead to the pampas, where the gauchos have been there, and seen that…more than once!
On Friday, US stocks rose. The Dow went up 70 points. Gold rose too – up 9 dollars. It looks to us as though the bull market in gold has resumed. The yellow metal could soon scale the $1,200 mark…and challenge its all-time high.
Why is gold moving up? Gold is usually what you buy when you suspect that financial policymakers are making mistakes. But what mistake are they making? The ‘recovery’ is a huge success; everybody says so. On Monday, the papers reported Larry Summers’ remark; he said the recovery had reached “escape velocity.” And on Thursday Ben Bernanke congratulated himself publicly for having saved the world from a deep, dark depression. The central bankers and finance ministers know what they are doing, don’t they?
Apparently, gold doesn’t think so.
And last week, the Bank of International Settlements agreed.
“The Bank for International Settlements does not mince words,” says a report in The Telegraph. “Sovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis…”
The problem is coming to the “boiling point,’ said the report.
The risk is an “abrupt rise in government bond yields” as investors choke on a surfeit of public debt. “Bond traders are notoriously short- sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decade. We take a longer and less benign view of current developments,” said the study, entitled “The Future of Public Debt”, by the bank’s chief economist Stephen Cecchetti.
“The question is when markets will start putting pressure on governments, not if. When will investors start demanding a much higher compensation for holding increasingly large amounts of public debt? In some countries, unstable debt dynamics – in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels – are already clearly on the horizon.”
The BIS, in charge of monitoring global capital flows, said public debt has risen by 20pc to 30pc of GDP across the advanced economies over the last three years. Semi-permanent structural deficits have taken root. “Current fiscal policy is unsustainable in every country (in its study). Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding.”
Historical data shows that once public debts near 100pc of GDP they act as a ball and chain on wealth creation.
If countries do not retrench quickly, they will create a market fear of “monetization” that becomes self-fulfilling. “Monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank”, it said.
Some states may be tempted to carry out a creeping default by stoking inflation. “The payoff to do this rises the bigger the debt, the longer its average maturity, the bigger the fraction held by foreigners.” The BIS said the danger that any government would consciously take this path is “not insignificant” in the longer run.
And more thoughts…
– Argentina is for economists with a sense of humor, if there are any left. It’s for anyone who likes a good drink and a good laugh. And for anyone who wants a peek at the future.
What do defaults look like? Look at Argentina. The Argentines pulled off the biggest default on sovereign debt in history. In 2001, they defaulted on $132 billion in loans. Later, they negotiated a settlement that left lenders with their worst haircut ever.
But at least the lenders must have had fun. They came down to Buenos Aires on rich expense accounts. They stayed at the Four Seasons. They ate steaks that were thicker than glaciers…and washed them down with a whole rio of malbec. They probably went to a few tango shows too. The visit may have cost them billions…but heck…
..it wasn’t their money.
How about inflation? Want to see that? Argentina has had plenty. Even hyperinflation. In 1989 alone, prices rose 5,000%. By 1992, it took about 100 billion 1982 pesos to equal one single new peso. And who remembers the austral? That was a currency introduced in ’85. It was worthless by ’92.
Don’t think you have to worry about inflation? Take another look at the BIS report (above). The lure of a little inflation will be irresistible. The arrival of a lot of inflation will be irreversible.
Ask the Argentines; they’re the experts.
So what kind of crisis will the US have? No one knows. But our bet is that it will have them all. Inflation…deflation…default…hyperinflation… Get ready; they’re probably all on the way.
– “Foreclosures hit the rich and famous,” says a headline in The Wall Street Journal. Hey, rich people sometimes can’t pay their bills either. And sometimes, it doesn’t make sense for them to pay.
Say you owe $500,000 on a house that is now worth $400,000. You could continue to pay $3,500 a month to hold onto the house and protect your credit rating. Or you could be $100,000 richer simply by sending the keys back to the lender. Which would you do?
And now mortgage rates are going up! The auction of 30-year Treasury debt didn’t go well last week. Mortgage rates – which are tied to long bond rate – rose. So, imagine you have to refinance your underwater house!
Coming soon: even higher foreclosure rates.
– “If I were a young man I’d go right to Brazil,” said on old friend on Thursday night. “The opportunities there are a hundred times greater than they are in the US.”
More to come…
– “I don’t like to say this, because people will think I mean something I don’t…”
We were on the plane down to Buenos Aires. Elizabeth was reading a book on “Family Success.”
“People think a lot about building a fortune. But who bothers to think about building a family? You can be successful financially by accident. You can get a family by accident too. But you can’t get a successful family by accident.
“That takes work. Not just on the part of the person who is making money…but on the part of the person who is building the family too.
“I don’t know how these young households do it. Women think they need a career. Men think they need a second income. So both of them work outside the home…and both share the burden of raising children.
“It may be hard for a person to earn a good living…but it’s also hard to build a good family. Trying to do both at the same time is a tough job.”
More on this too as our story continues…
for Markets and Money