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The -critical- importance of international diversification


I’ve spent the last few days at a Chinese offshore strategies symposium here in Shanghai as a guest of the conference organizer. It’s been a fabulous event, full of camaraderie and relationship building, all set in one of the Pudong district’s finest hotels.

But beneath the overall good vibe lies a very somber goal. There are no illusions here about what’s going on in the world. No one is trying to spin a good news story about bankrupt, insolvent western nations. And, surprisingly, prominent Chinese economists were even critical of China’s own long-term economic prospects.

The opening speaker yesterday morning railed against China’s quantitative easing measures. As a percentage of GDP, Chinese money printers make their American and European counterparts look like pithy amateurs– trillions have been conjured out of thin air, most of it ending up in the housing sector.

Apparently the Chinese didn’t learn much from the US property bust; they’ve made precisely the same mistakes, and it’s starting to have serious effects on the broader economy.

Meanwhile, speaker after speaker acknowledged the massive insolvency issues that await the United States… and further argued that Greece is just the beginning of Europe’s problems.

Here’s the thing about governments going bust– it’s been happening for centuries. Default is nearly as old as the concept of the sovereign bond itself, and history is generous with examples.

Spain has defaulted 15 times since the 16th century. Greece has defaulted 5 times since the 19th century. Portugal has defaulted 7 times since the 16th century.

What’s happening right now is nothing new. Neither is government response.

You see, when governments get deeper and deeper into debt, their options start to run out. They become desperate, and history shows a common pattern:

First, they impose capital controls. They compel individuals and businesses to repatriate funds from abroad, or prevent them from moving new funds overseas. This is happening in several countries right now.

For example, Argentina’s fascist president Cristina Fernandez just ordered oil, gas, and mining exporters to repatriate all export revenue back to Argentina. This was her very first presidential decree after winning re-election just days ago.

The second thing they’ll do is direct capital into government bonds. Pension funds, central banks, commercial banks, private corporations, and even individual investors will be forced into the ‘safety and security’ of government debt. That means YOU.


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