President Trump, who knows a thing or two about bankruptcy, says Puerto Rico’s public debt should be wiped out. We agree.
The commonwealth owes bondholders somewhere on the order of $70 billion, with most of that debt tied to general-obligation bonds, revenue bonds and bonds issued by the Puerto Rico Electric Power Authority (PREPA).
Ahead of the wide devastation wrought by Hurricanes Irma and Maria, we were of the view that the commonwealth could manage perhaps 20 to 30 percent of its general-obligation and revenue-bond debt and that PREPA could pay off perhaps 30 percent of its debt.
Now, as the island and its economy reel from the carnage of the hurricanes, we see the only viable way forward as a zeroing-out of the bonds in question and an immediate cessation of interest payments. Puerto Rico’s badly-crippled economy must rebuild, and the only way for that to happen is for legacy governmental debt to be handled in a way that won’t impair the restoration of markets and physical development.
This is a necessary remedy that will affect three sets of bondholders.
First, the large investment houses like Franklin Templeton, Oppenheimer, Citi and JP Morgan, which own large chunks of bonds. These investment houses, however, have vast and diverse holdings in the trillions of dollars that are hedged against just about every eventuality.
Second, a host of hedge funds that bought into the Puerto Rico bond market at a discount. These hedge funds have made extraordinary gains on this debt by way of interest-rate payments on the face value of the discounted bonds.
Third, small investors who live in Puerto Rico and elsewhere who stand to suffer the most. These investors have no hedges against these losses, and (unlike hedge funds) have not reaped extraordinary gains on Puerto Rican debt.
The way out of this is not pretty but there is ample precedent.
Puerto Rico’s badly-crippled economy must rebuild, and the only way for that to happen is for legacy governmental debt to be zeroed out.
That will fuel r, but it will also teach lenders not to lend, and that will constrict resources and ultimately bring about K.
I was watching Rick Steve’s travel show on Venice a while back. Back when they were an empire, they had an industrial center there where the Venetians would assemble a fully-armed warship per day:
When France’s King Henry III dropped by the Arsenale, Venice entertained him with a shipbuilding spectacle, from ribs to finished product in four hours.
It was a much a message as entertainment. It said, “Screw with us, and we will destroy you because we are this awesome.”
What struck me about Venice was the perfection. The art, the architecture, the bridges, the canal systems, the buildings, the ships, it was all so perfect. Everything was designed to be produced with arduous effort up front, but to last forever, and vastly reduce the needed expenditures of effort in the future. Even today, woodworkers from the mountains labored away in small back-alley shops arduously carving the perfectly shaped oar-cradles for lone gondoliers to maximize their mechanical advantage as they drive their gondolas. Everything was about quality, investments in the future, and pride in purpose.
What was shown was so clearly the product of a K-society it was amygdala-relaxing to just look at. I visualized an army of ship builders working like a seamless team for the good of king and country, before walking along perfectly cobblestoned streets, walking over perfectly built bridges, and gazing up at beautifully constructed buildings while heading home to beloved wives and children, in a society where children could run around and play freely with no fear of being preyed upon. I saw a disciplined, moral society that could only have been forged through the hardships endured by their ancestors.
Hardships are what produce that.
The outcome with Puerto Rico is preordained. We are still r enough that even though the forgiving of the debt is morally wrong by K-standards, the force of the K-moral principle will not overwhelm the immediacy of the amygdala that is happening there.
I think that is the path. Puerto Rico will get its debt forgiven and free resource influxes until reality intrudes to the point that the resources are cut by force. You cannot force K when things are still capable of being r, because the amygdala will always drive the average man away from the rigors of K – it is how it is designed. The environment must force the shift to K, and in so doing acclimate the amygdala to that from which it would otherwise flee.
What will happen when that K-forcing environment comes will make the hurricane’s aftermath look like paradise, especially down there. Corruption, criminal savages, and an island that needs to be provisioned will meld together into its own apocalypse.
And that will recreate the K-strategy, until the K produces enough resources to fuel a new descent into r.