The Fields of Winter Rye (FREEPOM)

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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

Also reference the following:

Learn Why the US Dollar Will Not Collapse

Announcing the SDR Futures Account

The Sovereign Debt Complex

Subscribe to POM for detailed analysis on macroeconomic trends.


All 3 month and 1 year subscriptions receive access to the epublication series The Economic Transition Papers.

33 Comments on “The Fields of Winter Rye (FREEPOM)”

  1. Great - thank you.

    That seems all fine and dandy, in the tertiary economy. But what about the primary economy - the biosphere?

    How can playing around with figures bring back the species loss and the diversity we once had? More economic development along the silk road means using up more resources?

    How can we `invent` more resources?

  2. Thank you Mr Collins. I see now. I see very well.

    You never did answer my question about the laws of physics, and achieving balance, and here you're telling us that we just have to put our faith in the utterly, utterly ruthless people who made the world turn out this way.

    It did NOT have to be this way, and you avoid some difficult topics:

    Maybe you were 'got at'? Either way, I consider your optimism disingenuous.

    1. Pretty impatient there Susan. Sometimes it takes me a while to read and respond to comments. And some times a few slip through the cracks and I forget to get back to them. I'm glad you now see though.

      My focus is mainly on macroeconomics and some esoteric philosophy. Of course the environment is extremely important and any future growth would have to be handled with responsibility towards that end.

      And my approach is neither optimistic or pessimistic. It is factual. Sorry you feel the way you do.

  3. I appreciate JC's factual content. To me, nothing is black and white. Facts are facts; this is how I approach things. I am happy there is someone out there who is giving us the facts. There aren't a lot doing so..many are just selling gold.:)

  4. Yes, we are losing a number of species because of man's assault on the environment. The arrogance of those that are controlling the weather is beyond my comprehension. What motivates them; I have no idea. But instead of attacking someone who is trying to get to the facts of the economic situation of the world I think we really need to take a look at who imo is responsible for the assault on the environment. I know many folks may not know what is going on as far as weather control is concerned, but I don't take that as an excuse. You have eyes and you can look up. There is tons of information on that out there and it is readily available to read by anyone out there who takes the time to do so. Of course, you have to be able to disseminate between fact and sensationalism. Are the people themselves doing anything or are they sitting and watching the newest reality show or wondering why Bruce Jenner decided to become a woman. Do you know that is all that is in the news? We have serious issues and people will ignore them and get caught up such things are Kim Kardashian and the fact she is expecting a baby again and Bruce Jenner who decided he would rather be a woman. What is wrong with the people in this nation? And here we have someone who wants to give people a service such as JC is doing and we expect him to take on every problem that exists in the world. Where are the masses in this? And quite frankly why would you not expect a scientist or someone in that field to not be leading the charge in this? I am just perplexed and frustrated with people.

    And JC just keep doing what you are doing.

  5. Mr. Collins:

    The raw material resources within the USA have been sold off at an accelerated for the past two decades to numerous foreign owners. China has been purchasing massive amounts of agricultural lands and municipal assets west of the Mississippi River. The west regions of the USA are replete with “Duty Free Zones” to get access to cheap electrical energy, cheap water, and cheap lands without paying one $0.01USD in taxes or local infrastructure cost. Therefore, I am intrigued to know from where will the resources originate in order for there to be an "increase in nominal GDP growth" within the USA economy to offset the tens of trillions in $USD debt?
    Best Regards,

    1. The increase in nominal GDP growth doesn't have to offset trillions of debt. It is a balance of debt-to-GDP ratio, as explained in the article. Any production within the US will contribute to an increase in GDP.

    2. What happened when American money went to other countries to outsource labor? Didn't they use the raw materials in the country where the cheap labor was obtained? An old saying comes to mind something about paybacks.

      Take a look at this article referencing the top 10 American corporations who avoid taxes.

      "The west regions of the USA are replete with “Duty Free Zones” to get access to cheap electrical energy, cheap water, and cheap lands without paying one $0.01USD in taxes or local infrastructure cost."

      If you check this link going down the page you will see a whole list of countries with free trade zones.

      I recall watching a news report with Diane Sawyer who was interviewing a Chinese business owner who was running business in Detroit. He expressed that the corporate budget for US taxes was 45%!

      To this day I have not found a large US company doing the same.

      But I was able to find this article talking about China rolling back similar tax breaks promised to US companies for land purchases and the like. The probe in this case was with Microsoft. Sure you could take off running with OMG now whats going to happen but the intent is to show that US companies are no better than any other.

      "China pulls back tax breaks for foreign companies"

  6. JC did you see the article in Zero Hedge. I can certainly understand the debt-to-GDP ratio, but when exactly does that become out of control..when crisis happens and the growth plummets.. is that where the mechanics of engineering come into play? I am just an inquiring mind that is a bit puzzled if it could get to a point where it doesn't work anymore? Am I missing something here that enables it to never fail or am I not understanding which is very possible..:)

    1. The whole mechanics is really based on confidence. The dollar can be printed forever as long as there is still confidence. The challenge America has is that the dollar will not be the only game in town soon. Confidence will remain but it will be spread further, and some of that confidence will come indirectly through the SDR. The debt doesn't need to be eliminated. The balance between debt and GDP just needs to be more balanced. The logical mind tells us that debt is bad. And it is. But as long as we have this form of monetary system, the debt will continue. It just needs to stay in balance with growth. Sustainable debt is different than unsustainable debt. Since the USD is the global unit of account, and the US can print as much as they want, the debt would always be sustainable, because the rest of the world would carry it. But the SDR and the rise of Regional Currency Units will change that and force the US to make their debt more sustainable again, based on multiple units of account and one large unit of account, the SDR. They did it after WW2 and can do it again. Does this help?

  7. The "balance" got way out of hand with the US printing as much as they want (mostly to finance proxy wars since we have nothing else to show for it really) and forcing the emerging markets to absorb this debt to make it become "sustainable". It just took this long for Russia, China, India et al. to get a foot hold in the global market so they could stand together and implement a different system whether the US likes it or not. Somebody had to take the credit card away from the spoiled child, eventually. Hopefully this tightening of the monetary policy will speed up the rise of the philosophical class in the US.

  8. Thanks again, JC. I have a mind that just seems to think up questions all the time, so I hope I am not too much of a pain. Yes, this does make sense. And keeping things in balance is something that will be a big change for the US for sure. The USD being the global unit of account was the part of the equation I had not put in, and the most important part of the equation. Hopefully through all of this it will also create a sense of competition in the US.

  9. You are correct. However, will it not take a staggering amount of growth in GDP in order to have any appreciable impact and inprovement in the USA's debt-to-GDP ratio?

      1. Ah, but there were no pension obligations private or public at that time and not the credit derivatives of today and not the lack of human market makers.

        Bill Holter hits it out the park here:

        "... There is also another aspect. Since "debt" underlies everything, as interest rates do rise, bond "prices" (values) drop. What do you think lower debt values will do to bank portfolios, pension plans, insurance programs etc.? You got it! More and more "assets" become "unfunded"! Obviously, starkly higher interest rates in a very short time also blow up ALL derivative's interest rate assumptions. "

        This is where gold's true function will manifest. Why do CBs hold it? Just in case....of...debt deflation. It's not going to be the man on the street buying gold coins en masse, nor pension plans rushing to the gold sector that will revalue gold. Ultimately it will be creditor central banks that will reset the equilibrium bid so that their balance sheets aren't a complete joke.

  10. JC would an influx of tax paying citizens in the US raise its GDP? If so, its very possible that it can happen rather quickly. The US has been trying to legalize a bunch of illegal resident aliens already living in the US. So if there is a way to get this to make them all tax paying citizens would this be sufficient to bring the debt to GDP into balance?

    On the other side of that coin we can also see a debt relief in the form of cuts to illegal alien budgets perhaps.

    When it would happen this would also put a lot of new working class people into the Affordable Healthcare Act or if they didn't want that they could pay the tax penalty. Either way this portion would be a tax revenue increase above and beyond the regular taxation of money earned from personal time and labor added to the taxable US work force.

    An article I read yesterday said that China either is or is considering making Chinese citizens pay Chinese taxes for their wages regardless of where they lived and worked in the world. This would lead me to think that the US is not the only region in town trying to increase tax revenue.

    Also China is rolling back tax breaks to US companies doing business in China so it seems they are looking for ways of increasing their tax revenue as well.

    But going back to your interview with Jim Rogers and him speaking of agriculture both literally and metaphorically then people could be the crop...well taxation of the people could be the crop I guess and for that crop to be lucrative it would take tax paying people right? Those tax paying citizens literal product would be crops which would be an increase in agricultural output.

    Is this somewhat plausible?

    1. Yes Dane, I believe it could be. As the rest of the world modernizes and emerging economies become developed, there will be a large demand for growth in agriculture. Some countries will become food superpowers.

      1. If there is a gentle trend towards increased exports partially thru agriculture, why are "they" (sorry) engineering super-draughts and record cold temperatures in the highest growth producing states? Just a question...

        1. Perhaps it will be a regional effort as opposed to an individual country effort.

          Mexico could be a fairly decent place to grow crops. To move the resisting business there a drought might work. A form of coerced compliance perhaps.

        2. Heres an answer to some of the reasoning behind drying up California. To save fish.

          "California’s water storage and transportation system designed by federal and state governments includes 1,200 miles of canals and nearly 50 reservoirs that provide water to about 22 million people and irrigate about four million acres of land throughout the state.

          In May 2007, a Federal District Court Judge ruled that increased amounts of water had to be re-allocated towards protecting the Delta smelt – a three-inch fish on the Endangered Species List.

          Because of this ruling, in 2009 and 2010 more than 300 billion gallons (or 1 million acre-feet) of water were diverted away from farmers in the Central Valley and into the San Francisco Bay – eventually going out into the Pacific Ocean."

          1. Great research, Dane...makes a lot of sense.
            I suppose the weather could be changed back to more stable patterns in a fairly short time frame as well? And I suppose this is a small part of the macro picture.
            Interesting stuff, though.

  11. Here is my hypothetical conversation as Treasury secretary with Lagarde,..."Well yes I know why you want the RMB included in the SDR to that degree because it immediately strengthens your playing hand throughout the world. You know we believe in the SDR as a reserve and it has to include the RMB but they have been riding our coat tails this whole time not to mention all the pollution and human rights violations to get here. If they want to be with the big boys let the RMB stand on its own. They aren't faking their way to the top on our watch. if those mercantilists want to play hardball so be it. Get ready for a strong dollar, our boys in Japan weakening the yen to compete and fluffy economic data so we can raise rates. If they start to buck then we will send a couple of warships over. That should cut them loose. Bye bye bloated export sector. Bye bye inflated GDP numbers. After they adjust their economy then we will see to what degree the RMB is included. Until then as Bernanke said you are on your own."

  12. JC-

    I appreciate your thoughtful analysis of SDRs. Thanks.

    I will say that I am not as optimistic as you that growth is a likely path through the current economic mess. I believe that the current (bad) debt in the system needs to clear, that the marginal utility of debt, which has been declining for years and which turned negative in 2010-2011 (I believe) needs to have a cleaner path to a positive turn. I have no doubt that the USG will try to manage it, but I don't think it's possible to manage something so complex.

    I'm also not sure that the post-WWII period is a good parallel with today. The debt to GDP was higher then, no question, but with the rest of the world in shambles, the US was the only country left with the manufacturing base to support needed rebuilding. Plus, we were occupying most of the world, and could largely name terms. That's not the case today. Plus, the metrics were more honest post WWII, but that's a discussion for a different day.

    There is the chance that we will see some technology emerge that can drive higher productivity and thus boost GDP (think computers in the 90s), but I don't see it at present. Robotics could certainly be a technological revolution, but widespread adoption would also be a job crusher for blue collar workers and would perpetuate a 2 tiered economy and be a negative for the country.

    A managed US Dollar devaluation event is likely, with the upshot that people with savings will take a hit, and our exports will become more competitive...assuming there is demand in the rest of the world. And other countries will, of course, adjust.

    The USG will not default - we can always print $ - but clearing the bad debt appears to me to be a train on the tracks. All it will take is a catalyst...perhaps an event in the 1.2 quadrillion derivatives market that blows holes in European Banks?

    Thanks again.

  13. Jim Rogers is a legend.

    I've read Street Smarts and Hot Commodities & I follow his market commentary.

    Jim's thesis differs slightly from JC's in that he believes the next reserve currency will be the Renminbi.

    Wouldn't it be fascinating to discuss the multilateral transition & reserve SDR thesis with Jim now.

    Did you mention when you spoke?


    1. It was assumed he had heard of POM because he knew who I was. Jim felt the shift into SDR would be forced because of a lack of alternative to the USD.

      1. Interesting, well his understanding of the intricacies of the global economy must go far beyond what he lets off during media appearances.

        It must be hugely validating to know that the great Jim Rogers takes an interest in your ongoing thesis.

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