How to Dodge the Debt Train

By John Mauldin

TFTF Image

Standing in front of a speeding train is rarely a good idea, but most investors are doing it right now. They survive only because the debt train is still way down the tracks. It is nonetheless coming, and you will want to move before then. But which way?

Over the last two months I made the case (summarized here) for a coming worldwide debt default/restructuring/financial engineering. Call it whatever you want but it won’t be good.

While I think we have a few years, I see little chance we can escape some kind of painful reckoning which I believe will culminate towards the middle to the end of 2020s. The opportunities to change course are behind us now. Yes, there are things many countries can do to put things back on track, but most are not politically possible in this fractured world. It will require a crisis to muster the political will to fix this.
While we can’t do anything about that—and the people who can do something are choosing not to—we can take steps to protect ourselves and maybe even profit from this approaching train crash. Many of you have asked for specific advice. I’m somewhat limited in what I can say, both for legal reasons and because we have readers in many different situations. Not everything is suitable for everyone. But I can give you some general ideas and rules to follow. Today, we will start with the smallest investors and then move on up.
Some of my Mauldin Economics colleagues also have ideas, which I hope you read in the special reports we’ve featured in the last few days. More on that below. But now, let’s consider how to dodge the train. I have four rules to follow, all of which would be good practice even if we weren’t in front of a speeding train.

Rule #1: Get Active
Remember when fund managers were Masters of the Universe? Few qualify these days, and not because they are any less talented. It is because the last decade’s generally rising markets favored passive “buy and hold” investment strategies. Why pay a manager when you can get great results for lower cost—nearly free for some index ETFs?
I’ve never been a buy and hold fan. I am aware of the Nobel laureates who say it’s the only way to succeed in the long run. They’re right about the numbers—but I think wrong about human nature. Any investment strategy works only as long as you stick with it. Telling people to throw their money in stocks and not worry when a bear market chops it in half does them no favors. Most will panic and sell at exactly the wrong time. Every advisor/broker has seen it happen.
Ideally, you would pair your passive indexing strategy with an advisor who keeps you from making rash decisions. The problem there is advisors can only do so much. It’s still your money and they have to pull it out of the market if you say so. Furthermore, advisors have to get paid somehow, which reduces the cost savings that justified passive investing in the first place.
That doesn’t mean advisors are useless—a good one can save your bacon. But it should be someone philosophically aligned with you and in whom you can place enormous trust. They aren’t easy to find. The largest investors in family offices generally have a team of people giving them advice.
An active manager worth his or her salt will manage risk as part of the deal, and risk management is exactly what you need when you live on a railroad track. It doesn’t have to be perfect, just good enough to mitigate the major drawdowns. If everybody else loses 40% and you only lose 25%, you’ll be way ahead of the crowd. And the right manager should avoid even that scenario and keep you near break-even.

Some Advice for Small Investors and Those Starting Out

A brief pause before we go on to Rule #2. If you are early in your investing career or still consider yourself small, the most important things you can do are:
1.   Simplify your lifestyle and save more money. That’s not particularly fun, but in the long-term will pay huge dividends.
2.   Get out of debt. Do not carry debt on credit cards. Pay your credit cards off as quickly as possible. Saving is easier when you aren’t paying 18% interest. You’re not going to get 18% on your investments.
3.   There are a whole host of options for how to save. For small investors, there is not much magic. Some of you are going to roll your eyes, but I suggest reading some books by my good friend Suze Orman, or (if you have a more religious bent) Dave Ramsey.
4.   Move as much money as possible into tax deferred accounts. Taxes are the #1 killer of investment returns (more on this below).
Where to invest? Now I’m going to talk out of both sides of my mouth. For smaller accounts, use low-cost index funds or ETFs. But consistent with my philosophy, you do not want to buy and hold forever. You need some kind of risk management rule. If nothing else, use the web to run a 200-day moving average on whatever index funds you choose. Check once a week and if your fund goes below the moving average, then rotate into a short-term Treasury fund. Jump back in when it crosses above.
Market timing is extraordinarily difficult. There is no perfect system. I have spent 30 years looking at money management systems from some of the greatest traders in the world. All of them will have problems from time to time.
We’ll discuss this more in future letters, but you get the general idea.

Rule #2: Use Multiple Tools

The problem with active managers is none of them are perfect. That’s not a reason to avoid them; it is a reason to use several of them covering different strategies and asset classes. Assembling the right combination takes some skill, though. It does you no good to have three managers who make and lose money at the same time. You succeed only in creating more paperwork. They need to be uncorrelated.
Further, an “active manager” who never goes to cash is not really active, at least from my viewpoint. He is simply a stock picker whose portfolio will get crushed in a bear market. I can give you literally hundreds of examples. Look at the portfolios of some of the great stock pickers in the last 20–30 years. Then see what happened during bear markets. It was ugly.
Multiple managers are the core of my personal strategy. I have money allocated to several different managers who use it to trade ETFs. In other words, they’re actively trading a passive portfolio. I think this is an ideal combination. You know what the ETFs’ components are, and you know (or at least think you know) whether they are in favor at the moment. If so, you want to own them and avoid them if not. The key is having the ability to adjust quickly.
I also am a strong believer in quantitative systems rather than human discretion. Do not, and I mean do not ever, give your money to gun slingers who “have a feel for the market.” They will lose their feel right after you invest your money. Trust me.
Also in my portfolio are multiple private hedge funds whose managers use more sophisticated techniques that you can’t do with ETFs. Their edge is the ability to move quickly and quietly. Look beyond the common long/short equity strategies.

There are all sorts of interesting markets available. As I’ve written in the past, the “alpha” in long/short equity has evaporated where passive investors simply buy everything. Even the dogs go up. It’s very frustrating for a value investor, which I consider myself to be. Our time will come but for now let’s do something else.
Having said all that, I should note I do have some long-term, buy-and-hold investments—mostly small-cap biotechnology stocks that I think have a good chance of achieving a moon shot. They would be hard to sell quickly even if I wanted to, but I’m fortunately able to hold them without too much worry. They are bonuses, not critical to reaching my financial goals. I’ll be disappointed if they should drop to zero value but it won’t affect my family or lifestyle.
And frankly, the world will be better off if we find a cure for cancer or can reverse aging. In my own small way, I’m trying to own investments that do some good.

Rule #3: Sell Liquidity

This one takes a little more explanation. If we see a serious possibility of a global debt default, then it seems obvious you don’t want to be a lender.

But in reality, it’s practically impossible not to. Even stashing your money in a bank is technically a loan; your savings account is a liability on the bank’s balance sheet.
Or maybe you avoid corporate bonds and buy equities… but you might still be an indirect lender, if the company, say, leases equipment or real estate to other parties. Those are a form of debt.
The only way not to lend your assets to someone else is to invest in physical, storable property. Gold is an obvious candidate and I think it’s a good idea to own some. But I also wouldn’t go whole-hog into precious metals. What else can you do?
The answer is to keep lending, but be smart about it.
Maybe you can’t avoid lending or predict whether a debt jubilee will annihilate your principal. You can, however, make sure that you earn yields that compensate you for the risk. And the best way to do that is to sell liquidity.
The nice thing about bank accounts, money market funds, and Treasury bills is you can always trade them for something else, with no notice. They are highly liquid, in other words. But we forget that liquidity isn’t free. You “pay” for it by receiving lower yield on those assets.
This can make sense if you really do need that money available instantly, but that’s often not the case. People leave cash in money market funds for months and even years, earning much less than they could by simply buying a three-month CD and rolling it over. There’s no significant difference in credit or interest rate risk. It is simply a lost opportunity—a gift you hand to other parties.
Obviously, you want some liquidity because things happen, but most investors want too much of it and it cuts deeply into their returns. With very little effort and almost no extra risk, you can enhance your return on cash by 100-200 basis points (that’s 1-2%) annually, just by accepting lower liquidity on money you don’t need to keep liquid anyway.
You might do even better. In the private credit world I’ve written about (see The Seven Fat Years of ZIRP), it’s possible to earn 300-600 extra basis points in additional yield. Those opportunities are legally accessible only to high-net-worth investors, unfortunately, but they are worth investigating if you qualify.

Rule # 4: Get Radical on Taxes

I’ve quoted Woody Brock’s prediction that the unfunded government liability problem will get solved with a wealth tax. Even if he’s wrong, I think the era of lower tax rates on wealthy people is drawing to a close. We had a good thirty years or so, but this most recent tax cut may have been the peak.
However, higher tax rates don’t necessarily mean you pay higher taxes. We’ll just have to get more creative in the business and lifestyle changes we’re willing to make, within what the law allows. I am aggressively exploring some options I would not have considered even a year or two ago.
Federal, state, and local taxes take a big chunk of my gross income. And, to the extent I receive government services, I’m happy to pay for them. I am not happy to pay for the follies and extravagance of politicians who have little interest in the public good and want mainly to line their own pockets.
I’ll have more to say about my own adjustments after I make a few decisions, some of which won’t be easy. I mention it now because it may benefit you to do the same: consider moves that you previously rejected. Times are changing and we have to change with them.
For instance, there are ways to use life insurance to defer your taxes. And there are very low cost annuities (as in $20 a month) in which you can control the investment and defer your capital gains until you sell. It’s just as liquid as a bank account, but tax-deferred.
If you own a small, privately-held business without many employees, consider setting up your own defined benefit plan. You can control the investments and place a lot more money into the plan than with a traditional IRA or 401(k). I know people with several of these.
Next week we will cover more options available to wealthier investors. But the basics apply to everybody, including me.

Puerto Rico, Maine, and Beaver Creek

Shane and I are visiting some friends in Puerto Rico this weekend. Then, of course, I have the annual Maine economic/fishing conference and a few weeks later, a board meeting for Ashford, Inc. at the Beaver Creek Park Hyatt which the company owns. If you are in Puerto Rico or Beaver Creek, drop me a line and maybe we can get together.
Writing this series and my book has made me reflect a great deal on my own personal finances and the future. Frankly, I need to take some of my own advice. Physician, heal thyself.
I like my lifestyle. Life has been good to me. But I can’t say that I’m conservative or (gods forbid) frugal. I will be 69 in about two months. I always assume that I can work forever, but I know that’s not really realistic.

So I’m going to have to make some changes in my lifestyle. While they may not be easy, I believe the cultural shifts I foresee over the next decade make them necessary.
They are mostly in the planning stages and I have not really pulled the trigger, but I can assure you that I have made a commitment to take my own advice. None of it is bad. I’ve just realized I can structure things a lot more efficiently, and I should do it today rather than wait until the changes get forced upon me.
Shane and I actually look at these changes as an adventure… something a little different for a Texas country boy and girl. I will write about them more specifically in the future as we make the decisions.
It is time to hit the send button. You have a great week. Take some time this summer to begin making your plans.
Your maybe-get-a-little-sun analyst,

John Mauldin
Chairman, Mauldin Economics

The Global Economy’s Uncertain Future

Jim O'Neill

LONDON – At the start of 2018, most of the world economy was experiencing a synchronized cyclical recovery that seemed to herald a longer period of sustainable growth and an end to the decade-long hangover from the 2008 slump. Despite the shock of Brexit, storm clouds over the Middle East and Korean Peninsula, and US President Donald Trump’s unpredictable behavior, rising investment and wages, alongside falling rates of unemployment, appeared to be in the offing.

Yet, as I warned in January, “the global mood [had] shifted from fear about political risks to obliviousness, even though many such risks still loom large.” Moreover, while my preferred global indicators were all looking up, I worried about whether that would continue after the first half of 2018, given foreseeable complications such as monetary-policy tightening across advanced economies, especially in the US.

Lo and behold, we are now halfway through 2018, and some of those same indicators are no longer looking quite so rosy. While the US Institute for Supply Management’s June Purchasing Managers’ Index (PMI) remains very strong, other comparable surveys around the world are not nearly as robust as they were six months ago. Most important, business activity has slowed in both China and Europe.

Another key indicator is South Korea’s trade data, which is published monthly and before that of any other country. On July 1, we learned that South Korean exports had fallen year-on-year in June 2018. Whereas 2017 was a record-setting year for the country’s nominal export strength, 2018 has ushered in several months of decelerating performance. Ironically, this slump coincides with improved relations with North Korea, while the strong performance last year occurred in spite of nuclear brinkmanship on the Korean Peninsula.

The weakening of South Korean exports calls for careful follow-up analysis, both of other major economies’ trade data and of South Korea’s July data, when it is published on August 1. Given the worrying escalation of Trump’s import tariffs and the retaliatory measures being pursued by China, the European Union, and others, one should not be surprised if the weakening of global trade persists.

That said, one also should not assume that falling trade numbers are a direct result of tariffs. We do not yet have a full regional breakdown of export performance. But from the data that are available for the first 20 days of June, we can see that South Korean exports to the US and China were actually rather strong; the weakness was in exports to Association of Southeast Asian Nations countries and the Middle East. If this remains the case, there is less reason to worry that the strong global-trade performance over the past 12-18 months is being thrown into reverse.

After all, we are in a decade in which the world economy is dominated by activity in the US and China. According to my calculations, 85% of the growth of nominal GDP worldwide since 2010 is due to these two countries, with the US accounting for 35% and China accounting for 50%. So, as long as China and the US are doing fine, the global economy can be expected to sustain annual output growth of around 3.4%.

As for the rest of the world, economic indicators from this time last year through early 2018 seemed to suggest that many previously weak performers were finally on the mend. In nominal dollar terms, Brazil, the EU, Japan, and Russia all experienced slight declines since 2010, but showed signs of improvement in 2017.

For example, at this time last year, the EU looked as though it was on the cusp of a robust, widespread cyclical recovery. But that no longer seems to be the case. Key economies such as France and Germany have experienced a slowdown, perhaps owing to fears of a global trade war. And, of course, the plodding Brexit negotiations, Italy’s new anti-establishment government, and an intra-EU political crisis over immigration have all created more economic uncertainty. The immigration crisis, in particular, could have severe consequences both for German Chancellor Angela Merkel’s government and for EU cohesion.

To be sure, Europe’s economic softening could prove temporary, and PMIs for eurozone countries did strengthen somewhat in June, following a couple of months of marked decline. But it would be foolhardy to rule out the worst.

Still, as we have seen, the sustainability of global growth depends largely on the US and China. Obviously, if these two economic giants are going to start trading blows with tit-for-tat tariffs, both will lose – and so will the world economy. For the US, where consumption accounts for around 70% of GDP, positive international trade and a stable, friendly investment climate are essential for sustainable growth. One hopes that someone close to Trump can turn him around before his policies derail the world’s long-awaited recovery.

Jim O'Neill, a former chairman of Goldman Sachs Asset Management and former Commercial Secretary to the UK Treasury, is Honorary Professor of Economics at Manchester University and former Chairman of the Review on Antimicrobial Resistance.

What the Stuttering Corporate Bond Market Means for Stocks

Stocks and corporate bond returns are diverging. That’s an important signal to watch

By Richard Barley

Yield on U.S. investment-grade corporate bonds 
Note: Based on ICE BofAML U.S. corporate bond index
Source: FactSet  

U.S. stocks have managed to grind out gains this year, despite a wild ride. That’s not true of U.S. corporate bonds, the yin to stocks’ yang. But the stuttering credit market could in time become a problem for stocks, too.

While the total return for the S&P 500 is north of 4% this year, U.S. investment-grade corporate bonds have been heading steadily in the wrong direction since February. The spread between the yield on U.S. Treasurys and that on investment-grade company debt has widened to 1.28 percentage points, from a postcrisis low of 0.9 percentage point at the start of February, ICE BofAML index data show. The index has returned minus 2.7% this year, underperforming Treasurys, down 0.9%.

Total returns on stocks and bonds

Source: FactSet

The move isn’t as dramatic as this year’s blowup in Italian bonds, or steep drops in emerging-market currencies. But it has shown little sign of reversing, even as more economically sensitive assets such as stocks and high-yield bonds have posted modest gains, shored up by the idea that U.S. growth is strong relative to the rest of the world.

The selloff has taken the yield on corporate bonds above 4% for the first time since 2011.

Company debt was previously buoyed by ultraloose monetary policy. Now the Federal Reserve is raising interest rates and starting to wind down its balance sheet. This brings companies into greater competition for dollar funding, especially with short-dated U.S. Treasury yields now at a 10-year high. Previously there was little alternative for yield-seeking investors but to buy riskier debt.

And the corporate bond market is bigger and riskier than ever. The ICE BofAML index now contains more than $6 trillion of bonds, more than double the amount 10 years ago. Nearly half of it is rated triple-B, the lowest investment-grade category.

Yield spread of U.S. investment-grade bondsover U.S. Treasurys

Source: ICE BofAML index via FactSet

Previous bouts of turmoil, such as when plunging oil prices and fears about global growth rocked markets in early 2016, lured investors into corporate bonds. Now investors seem suspicious of buying the dip. The probability that U.S. investment-grade bond returns will beat Treasurys over the next 12 months is now 47%, down from 61% a year ago, according to a survey of over 200 investors by Absolute Strategy Research. The same investors are still relatively bullish on earnings but seem to see more opportunity to benefit through stocks than bonds.

Is the stuttering credit market about to become a problem for stocks. Photo: Mark Lennihan/Associated Press 

The end of easy money is slowly eroding a key support for company balance sheets. This, in turn, will eat away at their earnings and risk appetite. Stock investors shouldn’t ignore the trouble brewing in corporate bond markets.

Statement by the IMF’s Managing Director on the G20 Finance Ministers and Central Bank Governors meeting in Argentina

Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), issued the following statement today at the conclusion of the Group of 20 (G20) Finance Ministers and Central Bank Governors Meeting in Buenos Aires, Argentina:

“The G20 meeting of Finance Ministers and Central Bank Governors took place against the backdrop of continued strong but more uneven global growth. Indeed, the world economy is facing increasing risks, especially in the short term, from rising trade tensions, financial pressures in vulnerable emerging economies, and the return of sovereign risk in parts of the euro area.

“During the meetings I encouraged policy makers to address these growing risks decisively and in a cooperative spirit to ensure that the recent period of strong growth endures and that the dividends are more widely shared. This is most crucial when it comes to safeguarding the open international trade system. I urged once more that trade conflicts be resolved via international cooperation without resort to exceptional measures.

“Macroeconomic policies should adapt to the changing outlook, taking individual circumstances into account. In many countries, especially in those with excess current account deficits, this means avoiding procyclical fiscal policies to help put debt on a downward path; and in excess surplus countries with fiscal space, it means investing more in human and physical capital to raise potential output and catalyze private investment. These steps will also help to moderate global economic imbalances.”

“In response to financial volatility, exchange rate flexibility should continue to play a role in buffering shocks in emerging economies, and prudential policies should address financial vulnerabilities everywhere.

“In Buenos Aires, our discussions also focused on the future of work, a key priority for the Argentine G-20 chairmanship. New technologies and rapid advances in digitalization, artificial intelligence, and automation hold both enormous potential and significant challenges. I am optimistic that with a comprehensive and coordinated policy response to facilitate change, the benefits of this new wave of technologies will by far outweigh the downsides. This response must include continued investment in education, lifelong learning and appropriate social safety nets.

“There was broad recognition in our meeting that the benefits of a strong financial regulatory system offset its costs and that global cooperation remains critical. There was also progress in the discussions on financial innovation and the importance of harnessing the potential of fintech while at the same time mitigating risks.

“I am encouraged that the G20 Ministers and Governors reaffirmed their commitment to a strong, quota-based, and adequately resourced IMF at the center of the global financial safety net.

“I would like to express my great appreciation to the Argentine authorities for their excellent organization and effective leadership of this G20 meeting. I look forward to returning to Argentina for the G-20 Summit in November.”

IMF Communications Department

Nicaragua's Implosion

What matters most to the U.S. is that the unrest is contained.

By Allison Fedirka

The United States’ current policy toward Central America is pretty simple: increase border security to stem uncontrolled migration flows and offload as much responsibility as it can to Mexico. It offers some Central American countries basic security cooperation when it has to, but otherwise, Washington prefers to keep its distance. If Nicaragua stays on its current course, distance may not be a luxury the U.S. can afford for much longer.
Sudden Descent
Given how quickly Nicaragua’s security situation deteriorated, it’s easy to have missed – or to have forgotten – how it got as bad as it is. And it’s bad: Nearly three months in, the protests and violence show no signs of abating. They began on April 18, when President Daniel Ortega moved forward with plans to increase the contributions of workers and employers into the beleaguered social security system. The International Monetary Fund has been warning the government in Managua for more than a year that its social security system is dangerously low on funds as a result of years of mismanagement. After the first few days of unrest, Ortega reversed course, but it was too late to put the lid back on. Anti-Ortega groups had already seized on the controversial reforms to spark nationwide, anti-government protests. Students and pensioners have been joined by business groups, Ortega’s political opponents and nongovernmental organizations, each promoting its own cause but united in their opposition to the government.

The protesters haven’t accomplished their objective of ending the Ortega administration, but they have succeeded in sending the economy on a nosedive. Before the protests started, the IMF projected 4.3 percent economic growth for Nicaragua. The country’s central bank was more optimistic, forecasting growth of 4.5-5 percent for 2018. At the end of May, however, the central bank revised its projection down to 3-3.5 percent. On June 29, the bank’s president dropped expectations further, to just 1 percent growth. The bank also noted that foreign direct investment in the first quarter had fallen 27 percent year-on-year to a mere $322.3 million, and it revised projected unemployment to 6 percent from 3.7 percent to account for an estimated 85,000 lost jobs.

Those are the optimistic assessments. The Nicaraguan Foundation for Economic and Social Development released in June an updated assessment of the country’s economic losses in the event the protests continued. It concluded that 215,000 jobs had already been lost – 2.5 times the central bank’s estimate. It also reported that in the best-case scenario (i.e., the crisis gets resolved by the end of July), the Nicaraguan economy would still contract 0.3 percent this year, and economic losses would total approximately $637.9 million. In the worst-case scenario (i.e., the crisis continues throughout the end of the year), the study estimated that the economy would contract 5.6 percent and see up to $1.4 billion in losses.

All indications right now suggest that the protesters won’t back down, the government won’t resign and the economy will continue to deteriorate. Several attempts at dialogue have ended in failure. The protesters have called for early elections, but the opposition has not yet presented a viable alternative to Ortega – and on Saturday, Ortega ruled out elections anyway. With dialogue and democracy off the table, one of the only options that remains is force. Here, too, there is stalemate.

The government has unleashed paramilitary groups on the protesters, but the protesters have proved resilient. A political organization known as the Broad Front for Democracy called on the military to disarm the paramilitary forces, but those calls have been ignored and likely will continue to be. But neither will the military put its thumb on the scales to defend Ortega. The Nicaraguan military was professionalized during the 1990s and is legally bound to the country’s constitution, not its president. Ortega has tried to politicize the armed forces since taking office in 2007. He favored loyalists for promotions, increased the presidency’s authority over the military and allowed officers to hold executive branch posts. He also bought loyalty with pay raises – something made more difficult since then by government austerity measures. Nevertheless, the institution of the armed forces has held steady and has respected the boundaries when it comes to domestic affairs. So long as Ortega has paramilitary groups policing demonstrators, this arrangement Works.

Nicaragua’s descent into chaos makes the population vulnerable to lawlessness, particularly gang activity and drug trafficking, and encourages mass migration. The U.S. has generally been able to overlook Nicaragua, focusing its attention instead on containing migration from the Northern Triangle countries: Honduras, El Salvador and Guatemala. These countries have poor economies, a high prevalence of gangs and complicated recent histories fraught with violence. Nicaragua has largely been an exception, with minimal drug trafficking and a budding basic manufacturing sector.

Though there hasn’t yet been an exodus from Nicaragua, neighboring Costa Rica has observed an influx of refugees. Their numbers will only grow the longer the instability lasts. And Costa Rica – which is dealing with its own financial problems as well as an increase in drug trafficking through its territory – is in no position to handle a flood of refugees. It is a long-standing U.S. ally that relies heavily on the U.S. for security. It would expect Washington to provide some assistance should things get worse, and failure to do so would damage a critical U.S. relationship in the region.

Bilateral cooperation between the U.S. and Nicaragua has been minimal. The ideological differences are strong, and the U.S. doesn’t approve of the Ortega administration’s alliances with Cuba and Venezuela. Instead, the U.S. approach toward Ortega has been similar to its policy toward the Nicolas Maduro government in Venezuela. During his recent visit to Latin America, U.S. Vice President Mike Pence called on Central American countries to work to solve the problems in Nicaragua, and on July 5, the U.S. placed sanctions on three key Nicaraguan security and political officials. (This comes less than a month after a dozen opposition senators from Nicaragua asked President Donald Trump to apply sanctions on governing officials.)

These measures alone will not bring down the Ortega government, and that is fine with Washington. The U.S. does not want to devote an abundance of resources to deal with the issue. It understands the potential for Nicaragua to further exacerbate the problems the U.S. confronts when dealing with Central America. Washington will avoid any decisive action unless it’s absolutely forced to act. In the meantime, it will encourage regional actors to assume responsibility and will gradually apply diplomatic and economic pressure on the Ortega government. The most important element of U.S. strategy toward Nicaragua isn’t that the Ortega government is demolished – it’s that whatever happens is controlled.

The Coming of the Roman Tax Collectors

By Jeff Thomas

The Decline and Fall of the Roman Empire has been written about many times over the last two millennia, most notably in Edward Gibbon’s six-volume set of books of the same name.

However, one significant aspect to the decline began in the fourth century that has received little attention from those who have written on the overall subject.

At that time, an exodus occurred amongst the farmers and merchants. They abandoned the “centre of all commerce” and moved to the north, to live amongst the barbarians. At first, only a relative few departed, but, over the ensuing decades, ever-larger numbers departed Rome, until much of the class of people that actually created and traded in goods had left Rome, making its economy unsustainable.

Essentially, this is the way events unfolded:

First, as the central government became more wasteful, it increasingly relied upon “bread and circuses,” or entitlements and public entertainment to placate the people. As the cost for these increased, taxes had to be raised on the productive members of society to pay the bill. This amount eventually became insufficient, as the number of recipients grew. Additionally, the government debased the currency by steadily removing silver from the denarius and replacing it with copper. But this solution was ineffectual, as it only served to create inflation, so more had to be done.

Throughout this period, the government also borrowed money whenever possible. As debt increased, more tax dollars were needed to pay for the ever-increasing interest.

With each false solution, the burden for keeping the failing system going was placed on the shoulders of the merchant class and all those who produced goods for profit. Eventually, the burden became so great that unrest became prevalent.

Draconian laws were instituted to keep the taxpayers in line. Restrictions on freedoms were implemented to assure that taxpayers found it more difficult to escape the system.

And the behavior of the tax collectors became more Neanderthal in exacting the tax.

At this point, the tax demands were so great that the producers no longer had sufficient wealth to expand their businesses, so business stagnated, whilst Rome steadily demanded more.

And, here, an interesting development occurred that’s not often related in history books: Rome, as a result of diminished tax receipts (which it had caused) discovered that they could no longer pay the mercenary soldiers that they were using as tax collectors. They cut the soldiers wages repeatedly which, of course, the soldiers were not happy about. Whether officially or unofficially, the soldiers were advised that they might make up for the shortfall by exacting further payment from taxpayers on their own behalf.

This, not surprisingly, led eventually to looting, destruction and rape, etc. by the soldiers. Each time their wages were cut, the usury increased.

And each time this occurred, more merchants and farmers left Rome for the relative safety of the north. By this time, the “barbarians” were behaving in a more civilized manner than the “civilized” Roman government and its mercenaries.

By the fifth century, the situation was so dire that tax riots and rebellion were the order of the day for those who had remained in Rome, but even this did not stop taxes from rising and more people being provided with largesse by the government.

It’s been written that “those who lived off the treasury were more numerous than those paying into it.” (An eerie occurrence, as we too have now reached that point.)

It’s significant that the decline took so long to play out. In the beginning, only those who were most incensed at the usury and/or who were the most courageous, made an exit. Then, when the next level of usury was introduced, another small percentage departed.

This is human nature. Different people have different breaking points. Had the entire producer-class risen up all at once, it’s likely that the government would have reversed its policies, but historically, that almost never happens.

Invariably, those who are the first to leave are the first to begin improving their lives. They have the initial hardship of starting over, but their self-confidence and work ethic soon make up for that. And, as can be understood, those that fare the worst in such a situation are those who repeatedly delay their exit and are often trapped when a collapse in the system eventually occurs.

It should be understood that, historically, in all such cases, government has always employed a very limited playbook: increased entitlements to those who are not productive, increased taxation, debasement of the currency, greatly-increased debt, more regulations, more restriction on freedoms, and more aggressive enforcement.

As the process is gradual and ever-increasing, there are always those citizens who are prepared to shoulder yet another small increase in the usury and political leaders are only too willing to oblige, with repeated increases in the abuses listed above.

And so we say to ourselves, “What was wrong with those people? Why did they continue to accept one injustice after another? If they had any sense, they would have gotten out when the first injustices occurred. They would have recovered more quickly and built a better life elsewhere instead of being slowly bled to death by their rulers.”

Quite so. Yet it’s a logic that the great majority of people invariably have difficulty in following, especially when it comes to their own well-being.

In much of the former “free world,” we’ve seen increasing “bread and circuses” – ever- expanding entitlements to the non- productive. As in Rome, this has now reached the point that “those who live off the treasury are more numerous than those paying into it.”

And laws have been written (particularly in North America and Europe) that allow banking institutions to decide how much of depositors’ money will be allotted to them. They can now legally put depositors “on an allowance” as is occurring in Greece. All that’s required is for the banks to declare a bank emergency for it to go international. In Rome, when they could no longer pay full wages to the tax collectors, they advised collectors to make up for the shortfall by forcing greater payment from the taxpayers and pocketing the difference. In 2008, when a recession forced the US government to cut back on payments to the states, laws were implemented that allowed Civil Asset Forfeiture by the police. This has resulted in authorities seizing some $3.2 billion from people not charged with any crime – an amount that would make Roman tax collectors blush.

These and other acts of increased taxation, inflation, debasement of the currency, increased debt, more regulations, more restriction on freedoms, and more aggressive enforcement manifestly demonstrate that, once again, history is repeating itself.

The outcome? Well, a small percentage of those victimized have already recognized where this is headed and have made an exit. They expatriated their wealth, have sought legal residency in another jurisdiction and then… quietly… left.

More have followed, but as has always been the case historically, people have differing tolerance levels. Those who make the move early will be those who prosper the most, whilst those who follow will, when the time comes, feel lucky just to get out. Yet, many more will remain and, as was true in Rome, the entire decline may span many years.

However, the principle remains the same: the earlier the exit, the better the outcome.