How to protect against future US government expropriation

After having abruptly shut down the U.S. economy for several weeks due to the spread of the insidious coronavirus, Americans are waking up to the reality that their livelihoods and businesses are being destroyed by the government’s cure. Whether out of necessity or not, state and federal governments have effectively expropriated most of the American economy, disregarding legal rights, contracts and traditions and thereby causing the same instability and disastrous economic outcomes witnessed in third world countries from Venezuela to Zimbabwe.

Perhaps an important risk mitigation tool used in third world countries to protect investment against the capricious actions of their governments will become popular in the U.S. going forward?

The government, well intentioned though it may be, has forced most businesses to close even where the numbers of infected are modest, thereby laying off tens of millions of employees.  Rent and mortgage payments have been set aside for select portions of the population with no remedy for landlords or lenders except preventing them from enforcing legally binding contracts. These arbitrary actions have effectively expropriated and nationalized much of the American economy well beyond the president enacting the Defense Production Act. It is interesting that less affluent Americans involved in “essential businesses” beyond healthcare such as distribution, food, utilities and construction, to name a few, have generally been allowed to continue working in spite of the dire call to close everything down to save lives.

The federal government has now stepped in to try and smooth over a gaping economic chasm, but inefficiency, political agendas and the sheer size of the collapse leaves it with absolute power to pick winners and losers based on politics and favoritism and not on merit or the law.

Given that the world economy is built on ever growing mountains of debt, the government’s de facto expropriation will no doubt result in cascading defaults that will likely overwhelm banks, then weak governments, followed by the U.S. government — plunging us into chaos similar to the financial crisis of 2008 or the Great Depression.

Infamous dictators — such as Hugo Chavez in the once prosperous country of Venezuela, where food and toilet paper are now scarce, and Robert Mugabe in Zimbabwe, once the breadbasket of Africa where people are now starving — learned this predictable outcome when implementing their own well-intentioned takeovers of their respective dysfunctional economies to solve the ills of poverty and inequality. Their citizens also found the cures far more disastrous than the underlying problems they presumed to address.

To protect against government takeovers, development finance institutions such as the World Bank and U.S. government’s own Development Finance Corporation (formerly OPIC) have long insured investors for billions of dollars of risky investments in power, roads, railroads, telecom, ports, affordable housing, etc. to induce much needed capital to flow into poorer countries with unstable governments, corruption and questionable adherence to the rule of law. This type of insurance protects against political unrest and expropriation — the latter occurs when governments outright takeover companies or carry out actions that effectively deny investors the economic benefit of their investment based on the subjective application of the law.

Unfortunately, it is now too late for Americans to obtain this type of insurance coverage to protect against the current actions of the U.S. government to cover the trillions of dollars of losses — both realized and expected. A month ago, nobody (except shrewd hedge fund managers such as Bill Ackman who made $2.6 billion shorting the U.S. markets) would have ever believed there was a need to take out political risk insurance for investment in the U.S. or Western Europe. Yet the truth is most governments in the developed world have acted every bit as irrationally and arbitrarily during the coronavirus as many of the irresponsible governments in the developing world have done in the past.

Now that the precedent has been set in the developed world with the coronavirus, it becomes much easier for governments to tackle other intractable and serious threats facing us — such as climate change, the tens of millions of undocumented workers in the underclass of America, gun control, the opioid epidemic, or whatever those in power deem important enough to ignore inconvenient laws and civil rights for the sake of the greater good. Under this new approach to governing, perhaps Americans will need to add political risk coverage to their life, auto and home insurance policies in post-coronavirus America where the threat of expropriation is no longer theoretical?

Alan Beard is managing director of Interlink Capital Strategies, a Washington, D.C.-based financial advisory firm and fund manager focused on arranging structured and project financing in emerging markets. He has written several books and articles on international finance, been an adjunct professor at Georgetown University and advised various government agencies on international finance issues.