The Critical Importance of International Diversification

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I’ve spent
the last few days at a Chinese offshore strategies symposium here
in Shanghai as a guest of the conference organizer. It’s been
a fabulous event, full of camaraderie and relationship building,
all set in one of the Pudong district’s finest hotels.

But beneath
the overall good vibe lies a very somber goal. There are no illusions
here about what’s going on in the world. No one is trying to
spin a good news story about bankrupt, insolvent western nations.
And, surprisingly, prominent Chinese economists were even critical
of China’s own long-term economic prospects.

The opening
speaker yesterday morning railed against China’s quantitative
easing measures. As a percentage of GDP, Chinese money printers
make their American and European counterparts look like pithy amateurs
– trillions have been conjured out of thin air, most of it
ending up in the housing sector.

Apparently
the Chinese didn’t learn much from the US property bust; they’ve
made precisely the same mistakes, and it’s starting to have
serious effects on the broader economy.

Meanwhile,
speaker after speaker acknowledged the massive insolvency issues
that await the United States… and further argued that Greece
is just the beginning of Europe’s problems.

Here’s
the thing about governments going bust – it’s been happening
for centuries. Default is nearly as old as the concept of the sovereign
bond itself, and history is generous with examples.

Spain has defaulted
15 times since the 16th century. Greece has defaulted 5 times since
the 19th century. Portugal has defaulted 7 times since the 16th
century.

What’s
happening right now is nothing new. Neither is government response.

You see, when
governments get deeper and deeper into debt, their options start
to run out. They become desperate, and history shows a common pattern:

First, they
impose capital controls. They compel individuals and businesses
to repatriate funds from abroad, or prevent them from moving new
funds overseas. This is happening in several countries right now.

For example,
Argentina’s fascist president Cristina Fernandez just ordered
oil, gas, and mining exporters to repatriate all export revenue
back to Argentina. This was her very first presidential decree after
winning re-election just days ago.

The second
thing they’ll do is direct capital into government bonds. Pension
funds, central banks, commercial banks, private corporations, and
even individual investors will be forced into the ‘safety and
security’ of government debt. That means YOU.

This is also
happening all over the world right now – Hungary, Ireland,
Argentina, etc.

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