Fiscal Cliffs, Nominal GDP Growth, and Jim Rogers
By JC Collins
Perhaps it is time for digression. The world has gone off topic and wandered to the hidden edges of the rye field. Many assume there is a sheer drop on the other side of that edge. The emptiness of the world fills itself with ignorance and the sludge of shallowness. No catcher could ever prevent that world from going over that edge. Let alone hold the weight when caught.
The phoniness of the edge itself is revealed by the endless expanse of rye. What mystery awaits when the edge cannot reveal itself? The catcher could materialize from within the rye. But to what end when the means has been denied.
The catcher could not be a man, as a man could not hold the weight of the world. So Man can seed the rye fields for the world, and watch them grow.
The winter rye has deep roots which prevent soil compaction and create a cover against the forces of wind and water. This cover of rye has extensive roots which improve soil tilth.
Tilth supports new growth.
It was early evening in Canada when I called Jim Rogers in Singapore.
“Okay, let’s get going,” said Jim, faced with the beginnings of a day.
Time has value and pleasantries don’t come cheap. Feeling like a rookie I asked the typical questions about his early success with Quantum Funds and thoughts on the financial environment in China when he traveled there in 1984.
Rogers was first terrified about China, but western propaganda began to crumble when he saw that the country was alive with creativity and hardworking people.
These impressions of China served to re-enforce the core characteristics of independent thinking and not following the crowd. Attributes which Rogers considers integral parts of his success with Quantum Funds.
There was a seed of commonalty on this matter as I also considered myself an original thinker and shared in Jim’s testament of how hard it is to go against the crowd and think independently. This independence allowed Rogers the freedom to invest in China. Investments which he has never sold.
We chatted about things such as the Vietnam War and the American invasion of Iraq, along with the effects of propaganda on the western mind. It was clear that Jim Rogers was a man of purposeful intent and had an innate ability to see through economic and geopolitical propaganda.
Like China before, Rogers realized that despite the propaganda, there are growing opportunities in countries such as Iran, Russia, and North Korea. All three being the target of western propaganda and campaigns to redirect capital investments.
The agricultural cycle has been in lows for decades and Rogers expects commodities, and agricultural specifically, to turn around and see substantial growth in the coming years and decades. Growth which has the potential of increasing domestic GDP of countries strong in agricultural potential, such as the United States, Russia, and even Ukraine.
It has been widely communicated throughout western media that the sovereign debt of the United States could never be paid. Rogers shared in this sentiment and added that the US deficit would also not be reduced. He had been very clear that his dollar position was strong and he didn’t see that changing. The reason for this has more to do with the lack of an alternative as opposed to strong domestic economic fundamentals.
This got me to thinking, with so much talk about countries never being able to pay back their sovereign debts, the question is never asked whether they need too. At least in whole. Such a reframing of the debate is typical of further understanding and education on such matters.
The merits of a debt based fiat system are few. Regardless, the point is not to pay the debt off, but to manage the debt. Governments will never be completely debt free and deficits rise and fall. Governments can, in effect, continue to borrow forever. But that doesn’t mean that the debt burden will increase forever.
After World War Two the United States government decreased its debt-to-GDP ratio from 121% in 1946, to 32% in 1974. This was after record deficit spending during the war years. The following chart captures the rise and fall of deficit spending and debt-to-GDP ratio of the United States since 1790.
It is clear to see that nominal GDP (cash size of the economy) grew faster than the debt. The debt burden and deficit will again eventually decrease as GDP increases, but there will still be debt. This is managing the debt.
As discussed in the article The Secret of the TPP – The Coming Interest Rate Increases and Dollar Depreciation, a devaluation of the USD will stimulate domestic production which will in turn increase GDP and adjust the debt-to-GDP ratio.
This increase in domestic production will also increase American exports which will further help reduce the balance of payments deficits which has existed for decades. The cycle will turn and begin to self-perpetuate towards an improved debt-to-GDP ratio, which will make managing the debt burden more efficient and effective.
Fast nominal GDP growth is the only measurable way that debt ratios can be reduced in this monetary framework. As such, debt and deficits are not the tangible and primary problem. Lack of growth is the challenge. It is wrong to assume that increases in debt burden will cause decreases in growth. It is more probable that decreases in growth causes increases in debt burdens, which expands the debt-to-GDP ratio. Improve nominal GDP growth and the debt ratios, and burdens, begin to decrease, just like in the post WW2 years.
Additional adjustments which can help improve the debt burdens include interest rate increases, which are forthcoming (money can't stay cheap forever), tax increases, which the Republicans will implement in a few years’ time, and spending cuts, or austerity, which will be implemented as a part of a broader multilateral debt restructuring.
In our conversation Jim Rogers made the astute point that there is no viable alternative to the USD at that moment. Perhaps. But I feel the world has begun to recognize the need for alternatives. The reality is that the responsibility assigned to the USD as global unit of account has primarily caused the balance of payments deficits and lack of domestic growth, which further causes an increase in the debt-to-GDP ratio.
The United States needs an alternative to the international dollar just as much as the rest of the world.
Rogers though is expecting turmoil in world markets as the debt burdens increase and a potential dollar crisis could push the world into alternatives eventually, such as the SDR. My original conclusions were similar only a few months ago.
Since that time I was able to digress from my original assumptions and approach the cliff near the edge of the rye field. The catcher was not there.
The SDR, I reckon, could be implemented as a method of stemming a dollar crisis and allowing for a steady progression on adjustments to the balance of payments system. This would allow for a reduction of US Treasuries held by foreign central banks around the world, which will decrease the domestic pressure on the dollar.
The multilateral framework will allow for a reduction in demand for US Treasuries. This can be offset by an increase in nominal GDP growth and an increase in Treasuries used for additional SDR allocations. The position of the dollar will remain strong, though it will be allowed to depreciate to the point where domestic growth and exports are increased, leading to a decrease in debt-to-GDP ratio.
As many readers know, I’m passionate about the SDR and the economic transition from a unipolar USD based system to a multilateral SDR based system. This has led to the formation of SDR Future (SDRF), an investment strategy which replicates the composition of the SDR basket for investors. The SDRF will slowly evolve along with real world events and eventually become an ETF product. The upcoming SDRF University will also help facilitate an increase in understanding and market awareness of the SDR and the dollars place within it. Parallel to the Chinese renminbi.
Perhaps it is now time for a digression from the common belief of fiscal cliffs and dollar collapse. New growth will emerge and accommodate even further soil tilth. A fourth agricultural revolution could very well happen, and be both literal and metaphorical as SDR multilateral liquidity spreads around the globe and increases GDP growth worldwide.
Perhaps a catcher in the winter rye will not be needed as the new crops bring forth abundance. The world titters on the edge of that imaginary cliff. All we need to do is manage the balance. - JC
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