Simon Black, edited
Waterloo and the end of Napoleon
On the evening of June 18, 1815, in the Belgian hamlet of Mont-Saint-Jean, nearly 70,000 troops under the command of the Duke of Wellington, alongside 50,000 allied Prussian soldiers, fought against the French forces of Napoleon Bonaparte in the historic Battle of Waterloo.
Waterloo was a bloody affair, with heavy casualties on both sides. But the Anglo-Prussian alliance won the fight, and Napoleon was forced to abdicate his throne just a few days later.
The Napoleonic Wars– more than 12 years of constant conflict– were over, and Europe was finally at peace.
Now, legend has it that famed banker Nathan Mayer Rothschild was present at Waterloo and witnessed the battle himself. He then braved a massive storm over the English Channel to reach London as quickly as possible where he bought up all the government bonds before news of the victory had reached Britain.
In another version of the story, Rothschild was in London during the battle. But his private intelligence network quickly passed the news of Napoleon’s defeat, giving Rothschild the opportunity to buy up British government bonds on the cheap before anyone else heard the news.
And in yet another version of the story– personally endorsed in 1940 by Nazi Propaganda Minister Joseph Goebbels– Rothschild bribed a French general to deliberately lose the battle so that he could make a fortune on British government bonds.
None of these stories is remotely true. In fact, most people don’t realize that Rothschild almost lost his fortune because of Waterloo… and that he personally played a vital role that helped Britain win the war.
Rothschild was essentially given a secret mission in January 1814 by the Chancellor of the Exchequer, who commissioned Rothschild to smuggle gold to British generals in Europe.
Britain didn’t have the gold; fighting against Napoleon for so long was extremely expensive and had drained the British treasury. So, government had to issue tons of debt to pay for the conflict.
Rothschild’s job was to turn those government bonds– which were just pieces of paper– into real money, i.e., gold, that British generals could use to pay and feed their troops.
This was an enormous challenge; Rothschild not only had to procure vast sums of gold, but he had to transport it all through French blockades and checkpoints.
Fortunately for Britain, Rothschild was incredibly good at his job. And both the Duke of Wellington as well as one of the most senior officials at the British Treasury praised him for his skill and discretion.
But Rothschild did make one huge mistake: he assumed the war would drag on for years.
And in anticipation of the British government having to go deeper into debt to pay for it all, Rothschild used all his profits to buy more gold that he could then send to the troops.
By the summer of 1815, Rothschild was sitting on a mountain of gold.
But then came Napoleon’s defeat at Waterloo… and Rothschild knew instantly that the price of gold would plummet because of the peace. He also knew the losses he would suffer would potentially wipe out his entire fortune.
So, Rothschild made a risky bet and used his gold to buy up British government bonds, which were still quite cheap. He believed that, with Napoleon defeated, Britain’s economy would grow dramatically, and the bonds would increase in value.
He was right. And over the next two years, Rothschild realized a 40% return on the bonds, minting him a profit of roughly $1 billion in today’s money.
What’s interesting about this story is that, on July 20, 1815, the evening edition of the London Courier newspaper reported that Rothschild had made “great purchases” of British government bonds.
While Rothschild didn’t formally intend to ‘rate’ the quality of the bonds, news of Rothschild’s investment was received as almost an endorsement… or even a recommendation.
People thought that if someone as sophisticated as Rothschild saw value in the bonds, then they must be worth buying.
Rothschild had essentially put his gold seal of approval on Britain’s national debt. And his analysis proved to be true.
Sovereign Ratings Today
More than two centuries later, this business of analyzing and rating a sovereign government’s bonds has grown into a highly formalized industry. And it’s primarily controlled by three companies: S&P, Moody’s, and Fitch.
Similar to Rothschild’s unintentional endorsement back in 1815, these agencies formally grade the creditworthiness of governments, with the highest rating generally being ‘AAA’.
The United States government has long enjoyed this pristine AAA rating. Until, that is, S&P downgraded the federal government’s credit rating on August 5, 2011.
Back then, S&P said they were “pessimistic” that Congress would be able to “stabilize the government’s debt dynamics anytime soon”. And the agency projected the government’s debt burden would reach an unbelievable $20.1 trillion by 2021.
It turns out that S&P was wildly optimistic; US government debt reached $20.1 trillion on September 8, 2017, more than four years ahead of their forecast.
The Treasury Department was furious about the downgrade. And according to the Chairman of S&P’s parent company, then-Treasury Secretary Tim Geithner called to make threats against the company, claiming that he had just spoken to President Obama about the downgrade.
And to absolutely no one’s surprise, the Justice Department filed a lawsuit against S&P shortly after, alleging that the company engaged in fraud. (The case dragged on for years until S&P finally settled for a $1 billion fine.)
That was enough to scare the entire ratings industry into submission. No matter how high the debt burden became, how incompetent the Congress, how outrageous the budget, how ridiculous the legislation… the rating agencies refused to downgrade the US government.
Until this year.
A few months ago, Fitch made the first move and downgraded the United States; in their report, Fitch cited the government’s inability to solve problems and compromise, such as waiting until the last minute to fix the debt ceiling fiasco earlier this year.
(The Biden administration responded with genuine confusion, calling Fitch’s downgrade “strange” and “bizarre”.)
Now comes Moody’s, the last of the big three credit rating agencies, which on Friday downgraded the US outlook from ‘stable’ to ‘negative’.
Moody’s cited obvious risks like rising interest rates and the explosion in the national debt, which have “increased pre-existing pressure on US debt affordability.”
In other words, the US government won’t be able to afford to make payments on the national debt for much longer.
I’ve written about this before: the government’s own projections show that interest payments on the national debt, plus mandatory spending like Social Security, will consume 100% of tax revenue by 2031.
Then Social Security’s primary trust fund will run out of money two years later. It’s an enormous problem.
Continued Political Polarization
But it’s not just the fiscal mess. Moody’s also cited “continued political polarization” that prevents the government from tackling any of America’s big problems.
Ironically, almost as if to prove Moody’s point about political polarization, the White House blamed the downgrade on “Congressional Republican extremism and dysfunction”.
Unbelievable. These people really can’t solve problems. They can’t even acknowledge problems. They only know how to fight and argue and create more problems.
Today this view is officially mainstream; all three major rating agencies cite these clear and obvious risks. They’re finally stating what everyone already knows to be true.
I’ve written before that, technically, America’s enormous fiscal challenges are still fixable. But there’s only a very narrow window of opportunity remaining to do so.
Sadly, it’s pretty clear that the people in charge don’t seem to care in the slightest. They’re not moving in the direction of solutions… rather they’re creating more problems.
And this is really why it’s so important to have a Plan B– to acknowledge obvious risks and take sensible steps to reduce their impact on your family.
What is Your Plan B?
There are countless permutations and no one-size-fits-all solution; a Plan B might include diversifying your finances, having another place to go, owning real assets, taking legal steps to reduce your taxes, protecting your assets, guaranteeing your income, and more.
Having a Plan B doesn’t make you unpatriotic. It doesn’t make you a pessimist. And it doesn’t make you a conspiracy theorist.
It means you are a rational, independent-minded person who takes obvious risks seriously; essentially, it’s what we hope our politicians would be.