Puerto Rico Destroyed-New Boss in Town

Last week President Trump Tweeted, “...The fact is that Puerto Rico has been destroyed by two hurricanes. Big decisions will have to be made as to the cost of its rebuilding!”

The “big decisions” to which Trump referred was the subject of my commentary two weeks ago, in an article entitled, “The Dollars and Sense of Disaster Relief.” In that piece, we looked at the actual dollars in circulation that are available to repair the damage from the two major hurricanes, Harvey and Irma.    We noted that even the US Government does not have those kinds of dollars ready and available for repairs, normally carrying only $50 to $60 billion in the cash accounts of the US Treasury at any particular time.  And those dollars are spoken for.

And so we concluded that the only way enough dollars might ever come available to pay the hundreds of billions of dollars of damages would be for new dollars to be created for that purpose and spent into circulation-thus enlarging the money supply by the amount needed.  And who is in charge of money creation in our country?  Not the government.  No, the private banks of the Federal Reserve System, mainly those on Wall Street, create the money Supply.  And those banks don’t just spend dollars into circulation.  The loan them, at interest.  Obviously, Wall Street banks will profit from the suffering related to this major storm damage.

But it’s not like Wall Street banks have some big pile of dollars stashed somewhere, which they earned, and which they will generously place at risk to help the storm victims.  No, to repair the damage, the money these banks will loan to insurance companies and the US Government, will be created on computer screens.  No one will have earned those dollars and subsequently loan them at risk.  Wall Street banks really have no downside, only an upside, when they loan money they never had or earned in the first place.

And that brings us to the latest round of hurricane destruction, specifically the island of Puerto Rico, which from all accounts has been virtually destroyed.  Coincidentally, four months ago, Puerto Rico, a territory of the US, filed for the largest single municipal bankruptcy in history.  For several years the Puerto Rican Government has been presiding over a dwindling economy and a declining population resulting in ever-diminishing tax revenues to pay for itself and essential services.  Accounts of corruption, as we have come to expect, abound.

But other island economies, such as the Bahamas and Bermuda, are doing comparatively well.  What is the difference?

The difference is that the Bahaman and Bermudan economies create their own currency, pegged to the US dollar.  What one creates, one can never run out of.  Puerto Rico, on the other hand, uses US dollars, and thus has no means to create more of them.  For Puerto Rico to remain solvent, more dollars must be attracted to the island economy, than leave it.  A net negative cash flow for an island economy, having no means to create its own medium of exchange, means ultimate insolvency.  That is where Puerto Rico was four months ago, insolvent due to negative cash flow.

Furthering their problems, now many areas of the island are virtually destroyed, leaving a bankrupt economy, completely dependent upon the infusion of hundreds of billions of US dollars to initiate repairs, and no way to pay for them.

Well…there is one way.

The island of Puerto Rico is about to be privatized.  Its government will have no choice.  The island has sustained catastrophic damage and is solely dependent on US dollars to make repairs. Puerto Rico has no way to bargain short of selling potentially income-producing portions of the island, its infrastructure and port authorities, to private investors, international financing agencies and corporate opportunists, along with its present-day creditors.  And the infusion capital necessary to restore the island will all come from, you guessed it, Wall Street banks.  Those banks will simply print new dollars out of thin air and loan them to the various private parties who will effectively take over the island.  The Fed has been looking for a way to inflate the US dollar…well there you go.  Funny how that worked.

The economic remedy I just described has precedent.  Faced with negative cash flow for several years, the bankrupt government of Greece was forced to take the same deal.  In exchange for a bailout, a committee of three, some call the “Troika,” comprised of the International Monetary Fund, the European Central Bank and the European Commission, took ownership and control of Grecian infrastructure and port authorities. That is how Puerto Rico will be repaired.  

Ironically, taking the only real option available, the island of “Puerto Rico” will soon live up to its name again, making its new “port” owners exceedingly “rich.”  At that point I can’t help wondering whether the new island bosses might find it appropriate to rebrand their Caribbean island investment property.  

How does “Banco Rico” sound?