martes, mayo 21, 2019



"End of Days"

By Joel Bowman, Editorial Director, International Man


The caption loomed over a friend’s photo of the grand Notre Dame Cathedral in Paris, as it stood engulfed in flames.

The picture was eerie… apocalyptic, even. So too were the videos of solemn onlookers, singing Ave Maria on the banks of the Seine as the embers rose into the air around them.

At over 850 years old (and 200 years in the making) the burning building reminds us that nothing lasts forever… at least not in the same form.

Political empires... their monies and their militaries... the hearts and minds of men.

We are always and in every moment changed, constantly transformed by our experience. So too does the world around us groan and morph into something new.

Many will read the great fire on the Île de la Cité – especially at the beginning of La Semaine sainte – as some kind of omen.

The beginning of the fall of Europe… a sign the continent is breaking apart… the end of an era… or of the world itself.

But let us not be too hasty in immanentizing the eschaton.

There is much in this world to celebrate yet… even if it has to be turned upside down from time to time.

Here in the “Paris of the South,” where politicians are constantly upending the Argentine economy, there is plenty of silver lining to frame the brooding clouds.

Yes, the peso lost roughly half its value in the last year... and yes, inflation is running somewhere in the mid double digits… and yes, the coming presidential election might see a return of the Kirchner regime…

But there is opportunity in crisis… if one knows where to look.

A few days ago, your editor broke bread with the original international man, Doug Casey, and our good friend, Robert Marstrand. That is to say, we three feasted on Patagonian lamb and thick cut bife de chorizo, accompanied by papas fritas and strong Malbec wine… all washed down with pistachio ice cream and limoncello digestivos.

We ate and drank like civilized men, in other words, even as civilization itself threatens to turn itself inside out.

And, as anyone who knows the company would assume, we mused on the state of the world.

Topics of conversation included money, old and new – from the recent bump in cryptos (some were up 85% in the preceding week) to the increasing mission creep of the state when it comes to individuals transporting gold and silver coins across borders.

We spoke about investing – how to grab rock solid Russian stocks on the cheap (while avoiding the political risk of being frozen out of the market, should the West impose further sanctions.)

And we waxed about political correctness – and the dire need for an irreverent outlet that really spoke truth to power, consequences be damned (watch this space…)

We'll have more from the Fin del Mundo in future issues...

In the meantime, we invite you to enjoy Mr. Marstrand’s take on the madness that is Modern Monetary Theory… and how it could end in a flaming pile of fiat scrip for those not properly prepared.

Money for Nothing

By Robert Marstrand

“That ain’t working, that’s the way to do it
Money for nothin’ and your chicks for free.”

~ Money for Nothing, by Dire Straits (1985)

“Modern Monetary Theory”, or MMT, keeps popping up in financial commentaries. It’s a theory that appears to be gaining ground among academic economists, in monetary policy circles, and... of course... among deficit-spending politicians.

MMT involves central banks creating new money to directly fund government budget deficits. It’s practically the same as quantitative easing (QE)... at least when QE money is used to buy government bonds.

But MMT removes some of the smoke and mirrors. Instead of laundering the money through the bond market, it’s handed straight to finance ministries to spend as they please.

There’s nothing at all “modern” about this. Places like Argentina have been doing it for decades. In fact, the Argentine central bank only stopped doing it last year (most recently), as the country battles to reduce high inflation. Last year, consumer prices rose around 50%. This year, most people are expecting 30-40%.

This funding of government budget deficits by central banks tends to have two results. First, deficits get even bigger, as politicians are let off the fiscal leash. Second, due to the inflation in the money supply, the currency is devalued and prices of goods and services take off like a rocket.

Here’s a chart that shows the size of Argentine budget deficits since 1961. The only time there was a surplus was in the early 2000s. That was shortly after a massive currency devaluation and during a huge commodity price boom. (It was also an opportunity that was squandered by the government, and the budget and trade deficits soon returned.)

Right now, we have very high inflation in Argentina. But the country also suffered from hyperinflation in the past. Between 1975 and 1990, the average inflation rate was 300% a year.

The guy who cuts my hair told me that, in the late 1980s, he would work in the morning. Even during hyperinflations, people still need a haircut. Then he’d go straight out after lunch to buy his daily groceries and other necessities, before prices went up. Any spare cash was converted into US dollars at the first opportunity.

This is the very definition of hyperinflation: wholesale currency dumping. The collapsing currency is like a hot potato that no one wants to hold on to. (Although that’s unfair to hot potatoes, which at least have nutritional value.)

Consider this. I’ve lived in Argentina for over ten years. When I arrived, one US dollar bought 3.2 Argentine pesos. Today, one dollar will buy 43.4 pesos. Put another way, relative to the dollar, the peso has lost a staggering 93% of its value in a decade. And the dollar has also lost purchasing power over that time.

(My kids, now aged 13 and 12, have learnt about this stuff early. They already know that they need to convert their peso savings - garnered from birthday gifts and unspent pocket money - into US dollars or British pounds.)

Ironically, the cost of living in Buenos Aires is now the cheapest it’s been since I’ve lived here, in US dollar terms. That follows last year’s currency collapse, when the peso was cut in half. That’s good news for people with dollar incomes, or for foreign visitors.

But, in the past couple of years, a great many local people’s peso wages have fallen way behind peso price increases. Life is tough right now for many Argentines.

(I always mentally price things in dollars here. Peso prices change so rapidly that you can’t keep up. A lunch at a decent restaurant 18 months ago could have cost the equivalent of US$40. Now, the same lunch is more likely to be US$20.)

In this world of QE and MMT, it pays to know something about what money really is, and how it’s created by banks (of either the central or commercial varieties). For example, many people seem to think that banks “look after their money” when they make a bank “deposit”. But, in reality, a deposit is just a loan to the bank. That’s why banks report customer deposits as liabilities on their balance sheets.

This progressive edging of developed countries towards a monetary cliff is a good reason to own some physical gold. With the dollar (and euro, pound, and yen) under increasing threat from trendy new-old theories, gold is the go-to inflation hedge. It’s a better alternative to the sanctuary that Argentines find in US dollars.

Argentines have placed their faith in dollars for decades. After all, the paper bills (which are VERY popular here) do bear a comforting message - “In God we trust”.

But trust in the almighty may not be enough to protect the dollar in the future. The Fed’s already got away with printing trillions under QE. When it started, everyone thought the policy was insane. It was only ever meant to be a temporary, emergency measure. But now it’s an accepted (and permanent) practice. Now that they’ve warmed everyone up with the foreplay of QE, how long until they go the whole way with MMT?

Of course, currencies may not collapse immediately. Most likely, nothing much will happen for years. But then bad things could happen quickly. As more and more politicians and central bankers believe they can print money for nothing, they’re edging closer and closer to dire straits.

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