Puerto Rico’s economy is in shambles…
Justin Spittler interviews Doug Casey
It’s been this way for years. But the situation went from bad to catastrophic when Hurricane Maria rocked the tiny island in late September.
The situation is now so bad that President Donald Trump recently talked about wiping out Puerto Rico’s debt. That would be unprecedented.
To figure out what this means for Puerto Rico and its investors, Justin Spittler called legendary natural resource speculator Doug Casey…
Justin: Doug, what do you make of Trump’s suggestion? Could he really wipe out Puerto Rico’s debt?
Doug: I don’t know about the legality of Trump – as opposed to the Puerto Rico legislature – defaulting on the debt. But it’s not just a reasonable suggestion, but a good idea, and probably inevitable. I mean this tiny island of 3 million people owes more than $100 billion – about $70 billion in balance sheet debt plus another $30 billion of off-balance sheet pension liabilities. And probably a lot more in contingent liabilities, guarantees, and what have you. How are they supposed to pay that back?
Let’s do the math on this. Divide 3 million into $100 billion, and you come up with around $33,000 per person.
But that’s sugarcoating it… because only a million people on the island work – being very liberal with the concept of employment. If you use this figure, the debt comes to about $100,000 per person.
It’s completely impossible for them to pay off this debt. Especially since it’s the poorest and most socialist-leaning part of the U.S. So, yes. Puerto Rico will default, one way or another. And it should default.
Justin: What about Puerto Rican bondholders? Are you sympathetic toward them?
Doug: These people were paid handsomely to subsidize the Puerto Rican government in a co-dependent relationship for many years. And they were very well paid with high tax-free income for years to facilitate San Juan politicians bribing local voters to re-elect them.
They assumed that the U.S. government would step in and bail them out, rather than allow sovereign default.
So these bondholders should be punished for subsidizing the stupidity of the Puerto Rican government for all these years. I have zero sympathy for them.
So yeah, default on the bonds. Because if you don’t, you’re absolutely putting an albatross – it’s an anvil, actually – around the neck of the productive part of that economy to pay off those bonds.
But that’s just one reason to default. Another is that all that debt guarantees that future generations of Puerto Rican residents will be turned into indentured servants to pay it off.
A third reason is that it should ruin the Puerto Rican government’s credit rating for a while, which will preclude them from borrowing again. That’s a good thing. Government spending is almost all consumption – it siphons capital from the productive private sector, dissipates capital, and lowers the standard of living.
Justin: And a default would be in Puerto Rico’s best interest?
Doug: Yes, for the reasons I mentioned. The moral and economically intelligent thing to do is to default on the bonds. There should be no aid from the U.S. to Puerto Rico. It would mostly go to putting in new infrastructure. Which means the electricity and water would work again, and favored contractors would get rich. But that wouldn’t solve any of the island’s real problems – bureaucracy, corruption, high taxes, and a socialist mentality.
Tourists will come back to the waterlogged and mildewed hotels at some point, I suppose. But the island isn’t cheap even in good times, since everything is imported. The only reason to be there is to take advantage of those provisions in their tax code – Acts 20 and 22, that may let an American live there tax-free.
There’s no real economic activity on the island besides tourism. Even the drug companies – which were quite big employers for many years – are leaving. So, there are going to be scores of unemployed waiters, maids, and taxi drivers for quite a while.
Justin: But Doug, Puerto Rico is a U.S. territory. Shouldn’t the federal government have its back?
Doug: No. Puerto Rico should actually be an independent country. Historically, that’s what Puerto Ricans have always wanted, since we took the island from the Spaniards as a spoil of war in 1898. Although in recent years, Puerto Ricans have gotten so used to the welfare benefits and convenience of being part of the U.S. that few want independence anymore. Half of them now live in the continental U.S. A pity. It could become the most prosperous country in the Western Hemisphere if they pursued the right policies. It could turn itself into the next Hong Kong or Singapore.
But that won’t happen. That’s because the island’s ethos is very welfare-oriented. It’s been totally corrupted by being owned and treated as a U.S. colony for the last 100 years. At least as far back as West Side Story, which was done in the 1950s, the place was a laughing stock. I love that song that Maria’s friend sings. She says, “Puerto Rico, my heart’s devotion, let it sink back in the ocean.”
Most of the smart and entrepreneurial Puerto Ricans have long since hightailed it to New York or Miami.
The island is culturally, linguistically, and ethnically different from the rest of the U.S. – it makes no more sense to be part of the U.S. than would other Caribbean or Latin countries. That sort of thing is what signals the difference between a cohesive country, and an empire. The U.S. resembles an empire more and more as time goes by.
I’d love to see them become independent and wealthy, in the manner of Hong Kong or Singapore. But they’ll probably devolve into just another Latin American money pit. I don’t know what the answer is – in fact, there is no answer. The place has been corrupted by over a century of welfare. It’s got to change its culture, and that isn’t easy. But it shouldn’t be your problem, my problem, or the problem of other Americans.
Justin: I hate to say it, but you’re probably right. The chances of Puerto Rico becoming the next Hong Kong or Singapore are slim to none.
But let’s pretend you’re in charge of Puerto Rico. How would you start the rebuilding process? How would you turn it into the next Hong Kong?
Doug: After defaulting on all the government debt to clear the deck? I would then abolish all welfare programs, of whatever nature, for both individuals and corporations. I’d get rid of their local income tax and all regulations of whatever description.
If you want it to boom like Hong Kong or Singapore, you have to put the same conditions that those places have in place. And those are the conditions.
It’s necessary to totally free marketize the place. That would attract companies and entrepreneurs from all over the world. Institute gold as money. Going even further, I’d take all the government’s assets – of any type, including national sovereignty – and put them in a corporation, distributing publicly listed shares to the citizens.
Theoretically, the people own the government and its assets. But that’s a meaningless concept, unless you can take that dead capital public in major stock markets.
The government wouldn’t do anything but provide police and a court system. But, perversely, those two things are too important to leave to the type of people that wind up working for the government – they always become centers of corruption. They should be privatized, too.
There’s a lot more to say about this plan – it’s something I’ve been trying to sell to failing states for many years now. It would be a total non-starter in Puerto Rico, simply because it’s part of the U.S.
The place doesn’t need some changes around the edges… It needs total and radical reform, top to bottom. And it could become – very quickly – the leading edge of the entire world’s economy. It could be turned into Dubai on steroids. But it won’t be. Well, as Einstein said, after hydrogen, stupidity is the most common thing in the universe.
Justin: You tried this sort of thing in Haiti and a few other Third World countries. How’d those trips go? Do the leaders of these places actually follow your advice?
Doug: They always listen, if only because they’re desperate. This has long been one of my hobbies – going to backward, worthless, dystopian Third World countries, places much worse off than Puerto Rico.
Most recently, I tried this in Haiti, which I’ve been to numerous times over the last 40 years. But these places are all the same in that they’re kleptocracies, where people use the government as a formal, organized vehicle for enriching themselves. They’re uninterested in change. Except the Haitians, like the Puerto Ricans, would also like to become a U.S. state.
But sure, I’ve had very entertaining experiences in many countries around the world. That would be a subject for another conversation, for a book actually. I should write a book about these adventures before I forget all the details.
Justin: I can’t imagine Haiti’s actually trying any of this. Are they?
Doug: No. Forget about it. I mean the individuals, the guys that I actually talked to in the president’s office, weren’t stupid. They could understand this.
But they’re making so much money stealing now… change is the last thing they want. Even offering them the opportunity to make 10 times as much legitimately doesn’t entice them – the idea of possibly losing what they are stealing now and breaking a bunch of other people’s rice bowls scared them too much.
Although, I thought I came close in a couple of places…
Justin: Do you plan to try this in any other countries? If so, what might be your next stop?
Doug: Will I try to do this again? I don’t know. If somebody gives me a good introduction to a president somewhere I suppose I’ll get on a plane. Can’t help myself when I see a neat adventure.
If I did, it’ll probably be someplace in Africa. But frankly, I’ve kind of been there and done that. I’ve pitched this idea to the governments of a dozen countries around the world. It’s been a fun hobby. But after a while, you see one hellhole, you’ve seen them all.
Justin Spittler is the editor of the Casey Daily Dispatch, a daily letter with news, an overview of the market, and important investment themes. Subscribe for free here.
Doug Casey is a true contrarian investor. The founder of Casey Research and one of the most successful natural resource speculators in the world, Doug also recently began publishing the ”High Ground” series of books – absolutely thrilling and provoking stories about speculation, morality, and libertarian ideas.