The following is in response to Stephanie Kelton’s article, Code Red or Red Herring? Mauldin and Tepper’s Code Red Reviewed , which appeared last week:
Dear Editor,
I hear the argument that sovereign debt is different from household debt in that the state can print money and households can't. So why are Argentina and Venezuela in such trouble? They have control of their own currencies, so why is inflation skyrocketing for both?
Isn't it just the case that the consequences of money printing occur more quickly in smaller economies and that it just takes longer with a larger economy?
We must recognize that defaulting on a bond, as Argentina did, is not a victimless crime. Those bonds, and others like them, are often held by pension funds, mutual funds and endowments. Think about what happens if a public pension fund holds some of the bonds either directly or through some other vehicle. If they can't make the needed return to pay their pensioners, one of two things must happen; the pensioners take a cut or (more likely) taxpayers have to make up the difference.
Argentina removed their peg to the dollar in 2002, which should be enough time to adjust. That argument grows weaker with each passing year. How many decades does it take for a currency to stand on its own?
Mark Basel
Stephanie Kelton responds:
Here are some very quick points about Argentina:
- Its export revenue has been declining significantly in recent periods, particularly due to the soy bean market.
- When it (foolishly) agreed to honor past (mostly) US- dollar denominated foreign debts, it became dependent again on export revenue to earn dollars. Its foreign-exchange reserves have fallen sharply recently.
- Its GDP growth has outstripped its real productive capacity.
- The debt that was restructured was in U.S. dollars and Argentina did not put collective action clauses in the restructured debt. As a result, Elliot Management, a New York-based hedge fund, did not accept the offer to exchange its debt holdings and won an injunction in N.Y. that required full payment on the old debt, which if executed would mean having to pay all the old debt at 100%. It is now before Supreme Court.
My point has never been that countries with a "printing press" cannot get into trouble. My point is that nations that have a sovereign currency (i.e., fiat, non-convertible) cannot become insolvent (i.e., unable to pay) with respect to obligations in their own currency.
Russia, Argentina, Mexico and Venezuela had fixed exchange rates and borrowed in foreign currencies. That is a totally different ballgame. Debt definitely "matters" when it’s denominated in a currency that you don't issue.
The following is in response to Justin Kermond’s article, Harvard’s Post-Crisis Endowment Strategy, which appeared last week:
Dear Editor,
The article states that the policy portfolio Harvard uses " is a theoretical portfolio allocated among asset classes to maximize potential return and minimize risk over the long term."
My impression is that "maximizing return and minimizing risk" is a contradiction in terms. My experience and Harvard Business School education tells me that reaching for higher returns is unwise, at least for individual investors whose time frame is shorter than that of Harvard. As recommended by John Bogle, minimizing trading and management costs in a broadly diversified portfolio is a more fruitful approach.
Moreover, the headlines in the past few years about the legally and morally questionable escapades of hedge fund and private equity operators make the propriety of Harvard investing in them questionable. Why not settle for market returns with index funds?
Sincerely,
Ralph Deeds
MBA 1960
