Justin’s note: In yesterday’s Dispatch, I showed you how Italy’s debt crisis could ultimately end Europe as we know it. Today, we talk with Crisis Investing chief analyst Nick Giambruno for a closer look at the situation.
Nick’s been warning his readers about the crisis brewing in Italy. In our conversation below, he explains what’s really happening… why Italy could turn into “the next Venezuela”… and most importantly, what you need to do today to make sure your wealth is safe…
Justin Spittler: You first wrote about the crisis brewing in Italy in your Crisis Investing advisory two years ago. But folks on Wall Street… and in the mainstream press… are only starting to wake up to the crisis there. Why has it taken them so long to see the danger Italy poses to the global financial system?
Nick Giambruno: I’m an Italian citizen. So I have a fairly good grasp on the country. Back in the summer of 2016, the country was plunged into a political crisis. Folks started questioning whether it would stay in the European Union [EU] or leave, like Britain had just voted to do. I stayed there for several weeks—in Rome and Milan—figuring out what was going on.
It was abundantly clear to me then that Italy was a systemic risk to the global financial system… and that it had unsolvable problems that were going to come to the fore sooner or later.
It was also clear that Italy’s “Euroskeptic” populist political parties were going to come to power… and that they would try to steer the country out of the euro.
It took Wall Street and the Establishment too long to connect the dots. But that all changed this past March, when the Italian populists took the reins of the government, as I had predicted.
Justin Spittler: Why is Italy a risk to the global financial system?
Nick Giambruno: We had a European sovereign debt crisis, focused on Greece, a couple of years back. That sent shockwaves through global financial markets.
But Italy is not Greece. Greece is a marginal economy. Its annual GDP is $200 billion. Italy has the ninth-largest economy in the world, with an annual GDP of about $2 trillion.
Even more important, the value of Italian debt dwarfs Greece’s debt pile. Italian governments have run up the equivalent of about $2.6 trillion in debt—or about 130% of Italian GDP.
And remember, Italy uses the euro. It can’t print money to pay off its debt, like the U.S. can. Rome has to take the money out of taxpayers’ pockets to cover the interest costs on the debt.
Add in the new, populist, “Euroskeptic” government running the show in Italy, and you’ve got a highly combustible situation.
These people are not reading Ludwig von Mises or Ron Paul. They don’t have sound economics. They’re not talking about balancing the budget and going back to sound money principles. The combination of extra spending and tax cutting they’re proposing is completely unsustainable.
When you understand this, you’ll also understand the inevitability of an Italian debt crisis. It’s just a matter of connecting the dots to see that this is where the next major crisis is likely to start.
Justin Spittler: Doesn’t that put Italy on a collision course with the EU?
Nick Giambruno: That’s the point. Italy’s new government wants to leave the euro so it can finance its budget by going back to the old Italian currency, the lira, and printing money.
That’s how it’s going to pay for its universal basic income and its extravagant pensions. It’s not going to pay for them with economic growth… or by making government spending cuts elsewhere. It’s going to pay for them by printing money. This is as clear as day.
The reason the Italian government has floated the idea of breaking free from the euro is so that it can print a bunch of lira to pay for its stupid social programs. If these kinds of policies are implemented, it could eventually turn Italy into the next Venezuela.
Justin Spittler: What evidence do you have that Italy could ditch the euro and go back to the lira?
Nick Giambruno: Italy’s new government is on a collision course with the powers that be in the EU. Its spending plans are completely at odds with the EU’s rules on deficits. And it’s already called on the European Central Bank [ECB] to forgive €250 billion in Italian debt. The ECB owns €341 billion worth of Italian bonds, which it has been buying under its own version of quantitative easing [QE], or more accurately, its currency printing program.
And Rome’s demands are going to get even more shrill. It knows a blowup of Italy’s $2.6 trillion debt pile would make the fallout from the Lehman Brothers collapse look like a picnic. And folks in Brussels understand all too well that this would be a mortal blow to the EU.
The EU has a choice to make. It can accept Italy’s demands and create a moral hazard that will eventually unravel the euro and the EU… or it can reject them, at which point Italy’s government will have no choice but to leave the euro. And if Italy leaves, it’s unlikely the whole project would survive.
Justin Spittler: But don’t Italians know that? Why would they press ahead with a plan that could blow up their economy?
Nick Giambruno: What’s going on in Italy is a stark example of how central banks pervert the free market at their own peril. Just like the Fed bought up $3.6 trillion worth of U.S. government bonds under its QE program, the ECB is on course to buy more than €2.5 trillion under its QE program. That includes purchasing €3 billion worth of Italian government bonds a month.
This has perverted Italians’ understanding of risk. As recently as the start of last month, two-year Italian government bonds traded on a negative yield. That’s insane. A bond costs you to own it if its yield is negative. It makes no sense.
This happened because the ECB is printing euros to buy Italian debt. This is keeping bond yields artificially low… and bond prices artificially high. [Bond prices move inversely to yields.] Italians have gotten used to the idea that they can run up an ever-growing debt pile and the ECB will always be there to scoop it up.
Justin Spittler: After Japan and Greece, Italy has the highest debt-to-GDP ratio of any major developed nation in the world. How did Italians run up so much debt?
Nick Giambruno: Italy’s debt-to-GDP ratio stands at over 130%. But GDP isn’t a worthwhile measure—especially in Italy’s case.
Government spending—no matter how wasteful or counterproductive—is counted as a positive in the calculation of GDP. And trust me, Italian government spending is not having a positive impact on the productive part of its economy.
Italians, generally speaking, love big government. You still have remnants of fascism in Italy. You have the remnants of communism, too. You have big government on the right and big government on the left.
If you want a more honest reflection of the indebtedness of the Italian economy, strip out government spending. It accounts for about half of Italy’s GDP. Do that, and Italy’s debt-to-GDP ratio doubles. It’s really 260%, not 130%.
There’s no way Italy can ever repay its bondholders in the purchasing power that they borrowed in. It would take almost three years of using Italians’ taxes to only pay back bondholders. It’s ludicrous to believe that that’s possible.
Italy is a prime example of how unsound money perverts a culture. It teaches people to be financially irresponsible. It teaches people that the magic money machine is always going to save their bacon.
Justin Spittler: What can readers do to make sure their wealth is safe?
Nick Giambruno: The next big crunch will be when the Italian government unveils its new budget. And it’s almost certainly going to be at odds with EU spending rules.
So we’re talking about a crisis—that would dwarf the 2008 global financial crisis—happening as soon as later this year. The EU is in an impossible situation. No matter which way it goes, it’s in trouble. I certainly wouldn’t recommend holding any European stocks or bonds right now.
But it’s also bullish for gold. Gold is a “crisis currency.” It’s what you want to own when there’s a panic in financial assets. In a crisis, people want the assurance of gold. There’s zero default risk when you own gold bars or gold coins.
I also recommend holding some bitcoin. Bitcoin is starting to behave like a crisis currency. If we see the euro come apart, bitcoin could go exponentially higher.
It’s not that bitcoin is without risk. We’ve seen the price bounce around a lot. But it is a way to get your wealth outside of the mainstream financial system. And that’s where you want to be when the financial system is plunged into a crisis.
Justin Spittler: Thanks for chatting with me today, Nick.
Nick Giambruno: No problem, Justin.
Justin’s note: As Nick says, three steps you can take today are avoiding European stocks and bonds… owning gold… and holding some bitcoin. But there’s another way you can make a fortune while this crisis plays out… and Nick shares all the details in his Crisis Investing newsletter. If you’re not a subscriber, click here to see how you can join today.
P.S. In a few weeks, Nick will be speaking in Bermuda at our first-ever Legacy Investment Summit. He’ll be revealing the six reasons why Trump will legalize cannabis… and how to make life-changing profits. And you’re invited.
It’s a great opportunity for you to meet Nick, along with Doug Casey and all of our gurus, in what will be the most action-packed event in our company’s history. You can learn more about it by clicking here.
On Monday, we asked if you were investing in cryptocurrencies… Here are some of the responses we received…
Hello Justin, I’m a 61-year-old woman who has never invested a dime in her life until now. Last month, I did my research and decided that cryptocurrencies are the future of global financials.
Then I invested some money in bitcoin and ether. I intend to buy more each time the prices drop on these cryptocurrencies and to buy others as well. I’m very certain the prices of these cryptocurrencies are going to explode by the end of the year. So, every time the price of cryptos drops, I’m happy to buy more and am not the least bit worried about my investments. Why else would big institutions like JPMorgan be investing heavily in cryptos? Have a marvelous day!
Cryptocurrencies are going to fly!
I have been averaging into four cryptocurrencies over the past few months. These holdings are all down about 25% to 30% right now. I don’t care! My goal is to accumulate positions in these at whatever price they happen to be.
As always, you can send any questions or suggestions for the Dispatch right here.