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Central banks provide the same social function as a distillery. They lift moods and lower IQs. As long as the credit flows, people feel lucky. But the longer the luck lasts, the dumber people get. The New York Times reports: “By 10am 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.” US house prices are falling nationwide for the first time since the Great Depression.
Prices are starting to fall in Ireland and Spain too, while Britain is looking peaky. But most house buyers still think it’s a bull market. They’ve lived with rising prices for so long they can’t imagine anything else. “The market’s really low right now, so you can get a good price,” said a waitress who was looking for a place to fix up and sell. “Even if you can’t sell it right away, if you just sit on it, it will go up.”
The world’s luckiest people seem to have drawn the wrong conclusions; the wit seems to have gone out of them. Every downturn is a buying opportunity. I’m currently in Argentina, and here it’s a different story. While creditors compete for a chance to lend money to Americans and Englishmen, who offers credit south of the Rio Plata? Lenders down here have become smart; they ask questions. They know how footloose money can be. They wonder how they’ll get it back, and what it will be worth when, and if, it returns.
The biggest financial innovation of the last 50 years was on August 15th, 1971. That was when the US government put wheels on the US dollar; henceforth, it was 100% gold-free. It could go wherever it wanted. That event caused more stupidity than television. You can draw a straight line from it to the use of sub-prime ARMs in order to sell houses to people with no money; to securitisation of mortgage contracts in which there was almost no inherent security; to an $800bn US current-account deficit; and to more foreign-exchange reserves piling up in the last four years – $2.8 trn – than in the entire prior history of America.
And then, with the dollar-fuelled motor racing, it was as if the whole world closed the garage door and breathed deeply. Soon, they could barely tie their shoelaces, 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 had it not been for the rising price of petroleum. In Russia, Vladimir Putin seemed to be on the right track when he took office. Russia’s low-cost labour and flat 13% tax rate brought about a boom. But when oil became dear, property rights became cheap. Now, Putin uses energy resources as a stick to beat up everyone on the supply line. And in Iran too, high oil prices work like foreign aid – keeping incompetents in power and dumb policies in place. In Bolivia, rather than put its gas on the world market, Trotsky admirer Evo Morales plans to build a pipeline over the Andes, 1,500 km long, to sell it to the Argentines. The Argentine national energy firm, meanwhile, buys the gas at something close to world prices – and sells it to voters for half as much. In China, anyone who believes 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 it.
In America, judged on the evidence above, the quarter-century-long credit binge must have killed off more brain cells than a presidential address. And in Britain, the yeoman householder is even dimmer than his American cousin; he thinks he’s going to get rich by grabbing buy-to-let properties with rental yields lower than LIBOR! Meanwhile, high commodity prices retard the learning process even here in Argentina. The wife of current president Nestor Kircher is expected to win 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. High commodity prices make Argentines feel lucky too. But they haven’t had such a long run of good luck as the rest of us. Their wits aren’t 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.”
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Bill Bonner
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