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Puerto Rico's Default and the Role of the Central Bank's War on Savers

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08/05/2015

The Puerto Rican government has defaulted on its debt. USNews reports

Puerto Rico failed to meet a $58 million debt repayment deadline Monday, triggering one of the most significant municipal bond defaults in U.S. history.

The U.S. territory managed to round up about $628,000 to make a partial interest payment to bondholders, according to The Wall Street Journal, but Puerto Rico's government did not set aside money to meet the debt installment's full value.

Where will the next payment come from? Nobody knows. 

Puerto Rico has been in trouble for years. This wasn't enough to dissuade investors, however.

Mises Daily columnist Brendan Brown has often pointed out that one of the unpleasant side effects of monetary easing is that savers and investors become starved for yield. In a world where one can actually get a decent interest rate on a savings account or more humdrum investments, not many are interested in the riskier stuff. The central bank, however, has made sure we live in a world where saving money in a savings account is a waste of time, and conservative and medium- to low-income savers have few choices. Thus, the investment game begins to favor primarily middle-high to upper-income investors who have access to things like hedge funds and other managed funds that require large amounts to be invested up-front. And of course, when the Fed relentlessly inflates the money supply, getting your money into something that will outpace inflation becomes all the more essential. Poor people just have to sit on cash and watch it devalue. They can't access fancy funds. But, if you can manage it, get your money into the riskier stuff.

So, as Matt Phillips at Quartz points out this week, it should surprise no one that investors have been happy to pour money into Puerto Rican government debt in spite of the high risks involved. Puerto Rico, the WSJ pointed out back in 2012, was a great place to find some yield, even though, as Philips writes "Ratings agencies and bond markets have been screaming about the risks for, literally, years."

The Obama Administration has already said it has no plans for a bailout, but those investors who may lose their money can thank Bush, Bernanke, Obama and Yellen for their war against conservative investing and making Puerto Rican debt look relatively good. Ordinary Puerto Ricans now pay the price for the boom and bust on their island, but in a normal financial world, the PR government would likely not have been able to rack up such enormous debts in the first place. 

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for Mises Wire and The Austrian, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

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