Central banks provide about the same social function as a distillery. They lift up moods and lower I.Qs. They increase liquidity and dry up brain cells. As long as the easy credit flows, people feel lucky. But the longer the lucky streak lasts, the dumber people get.
From the buckle of America’s snow-belt comes proof:
Earlier this week, we passed along this report from the N.Y. TIMES:
“By 10 a.m. Saturday, more than 700 people filled a hall in the convention center here for what real estate agents say is the largest auction of foreclosed properties ever in Minnesota… the crowd was standing-room only, with more waiting to enter.”
Housing prices in the US are falling nationwide for the first time since the Great Depression. Prices are just beginning to fall in Britain, Ireland and Spain too. But in the minds of most house buyers, it is still a bull market. They have lived with rising prices and easy credit for so long they can’t imagine anything else.
“The market’s really low right now, so you can get a good price,” said one buyer, a waitress who was not looking for a place to live, but a place she could fix up and sell. “Even if you can’t sell it right away, if you just sit on it and sit on it, it will go up.”
What has happened? The world’s luckiest people seem have drawn the wrong conclusions; the wit seems to have gone out of them. They take even the smallest downturn for a buying opportunity. Still no recession; property prices down less than 10%; stocks near an all-time high; officials say the worst is over – and they believe them!
Down here in the sunny Argentine it is a different story. While creditors compete for a chance to lend money to English speakers, who bothers to offer easy credit south of the Rio Plata? Lenders down here have gotten smart; they ask questions. They know how fast money can move. They wonder if they’ll ever get it back… and what it will be worth when it returns.
The biggest financial innovation of the last half a century occurred on August 15th, 1971. That was the year that the US government put wheels on the US dollar; henceforth, it was 100% gold-free. It could go wherever it wanted.
We put it to you today that that event caused more stupidity than television. With their old rides pimped up with these new, post-’71 dollars, Americans took to the financial highways…and ended up in places they’d never been before. Now, they’ve seen almost everything — from the treacherous swamps of sub-prime ARMs, which were used to sell houses on easy credit to people with no money… to soaring skyscrapers of securitized debt, based on mortgage contracts with no real security in them…to a Mt. Saint Helens at home (an $800 billion US current account deficit)… to the Vesuviuses and Krakatoas of foreign exchange reserves piling up overseas (in the last 4 years, $2.8 trillion has been added– more than in the entire prior history of the United States of America.)
You’d think they would have learned something. Instead, it is as if they – and the entire rest of the world, too – got home, pulled into the garage, closed the garage door, revved up their dollar-fueled motors, and breathed deeply. Pretty soon, they could barely find their car keys, let alone put two and two together.
In Venezuela, Russia and Iran – for example — higher oil prices bring lower public policies. Hugo Chavez would probably have been out of office by now – a coup in 2002 nearly sent him into retirement in Cuba – had it not been for the rising price of petroleum. In Russia, Vladimir Putin seemed to be on the right track when he got into office. Russia’s low cost labor and flat, 13% tax rate, brought about a boom. But then, when oil became dear, property rights became cheap. Now, Putin is using his control of energy resources as a stick to beat up everyone on the supply line. And in Iran too, high oil prices work like foreign aid – helping to keep incompetents in power and dumb policies in place.
In Bolivia, rather than put its gas on the world market, Trotsky admirer Evo Morales proposes to build a pipeline over the Andes, 1,500 km long, in order to sell it to the Argentines. The Argentine national energy company, meanwhile, buys the gas at something close to world prices…and sells it to voters for half as much.
In China…anyone who still believes that prosperity and democracy go hand in hand ought to take a look. Despite the biggest economic boom in the history of mankind, the country is still run by communists. Their economic strategy consists of trying to sell more product to consumers in the West who don’t need the stuff and can’t really afford to pay for it.
In America, judged on the evidence above, the quarter century long easy credit binge must have killed off more brain cells than a presidential address. And in Britain, the yeoman householder is as dim as his American cousin; he thinks he’s going to get rich by grabbing buy-to-let properties at cap rates lower than LIBOR!
Meanwhile, high commodity prices retard the learning process even here in Argentina. The wife of current president Nestor Kirchner won an easy victory on Sunday, not because of her proposals or policies, but because she’s not making any. Instead, “soybeans, wheat and corn are doing the talking,” says colleague Paola Pecora. High commodity prices make Argentines feel lucky too.
But Argentines haven’t had such a long run of good luck as the rest of us. Their wits are not yet as dull.
“Don’t trust anything the government tells you,” said a local cab driver. “They’re all liars. Most of them lie about half the time. If they have an Italian surname, they lie 75% of the time. And if they’re talking about the economy, they’re lying 100% of the time.”
Markets and Money