American Consequences - August 2020

The Debt Jubilee Is Going Global

the U.S. dollar. But on the streets of Buenos Aires right now, you’ll need around 135 pesos to get a single greenback. That reflects how desperate people are to get out of pesos, because they expect it to fall even further. Inflation has been relatively contained in recent months because people haven’t been buying much while in lockdown. And price controls on some consumer items have helped keep inflation under control for the time being. The country's government recently came to terms with creditors to stave off another default, but that’s like putting a Band-Aid on a patient who's suffering a heart attack, broken leg, and concussion all at once. Inflation is still forecast to hit around 40% for the year. And that estimate is going to rise sharply in coming months. Argentina won’t be the first debt jubilee that you help fund... particularly if you hold emerging-market bonds somewhere in your portfolio. And it probably won’t be the last. “Hyperinflation is on its way,” Tomas told me. In Argentina, inflation hit close to 5,000% in 1989. When Argentines talk about high inflation, they’re not kidding.

What’s Next for You? Argentina won’t be the first debt jubilee that you help fund... particularly if you hold emerging-market bonds somewhere in your portfolio. And it probably won’t be the last. In the meantime, the stronger emerging markets will continue to pull away from the rest. (Strangely, South Korea and Taiwan – highly developed economies – are still considered emerging markets.) And China is in a different universe from the countries of the developing world that are going hat in hand to the IMF. But today, investors should be sure to look under the hood of their emerging-market bond funds to see what’s really inside. We suggest you make this a regular practice with every investment you have... whether it’s stocks, pension funds, or ETFs. ETFs, in particular, sometimes either don’t reflect what their titles suggest or may include assets that you’re not aware of – such as emerging-market debt. Finally, don’t get me wrong, all of this matters a lot now... as currencies in places like Argentina and Brazil drop in value relative to the U.S. dollar and as poor countries struggle. But if and when the debt jubilee starts in earnest and that entire $258 trillion global debt tab comes due, then emerging markets might be the least of our problems.

70

August 2020

Made with FlippingBook Ebook Creator