For Better or For Worse

The Daily Reckoning PRESENTS: Over the last several years, Nicaragua has gone from banana republic to tourist destination. But is this a good thing? As Bill Bonner explains, ‘good’ is a relative term that often follows the flow of money. Thus it really depends on who you ask. Read on…


“I’ve got to admit, it’s getting better…a little better all the time.”
-The Beatles

Waking up in the tropics is a pleasure. At 5 AM, we open up the double doors to our bedroom and look out at the sea. Already, the sky is lightening. A soft, pink hue surrounds the hills to the east; the beach is still in shadow. The sea remains a dark gray; all we really see are the lines of white foam made by the waves crashing on the shore and advancing up onto the beach. We imagined ourselves watching an attack of foot soldiers from a lookout post, like Robert E. Lee watching the attack on Cemetery Ridge. The white line moved ahead in a jagged formation, some troops making more progress against the enemy than others…but all of them are then driven back as the beach counterattacks and the wave recedes.

Below the crest of the hill and above the line of furthest advance of the white foam is not the quaint village of Gettysburg, but a group of condominiums built in the last couple of years. Walking past in the evening, we found the condos full of norteamericanos – soft, white people sitting on their soft, white plastic chairs enjoying the last soft light of day.

These people seemed to be having a good time. The area must be a paradise to them, as it is to us. The beach is empty. The sun is warm. The beer is cold. What more could they ask for? The most remarkable thing is that they are here at all. This life is now affordable even to a mid-level manager at the Gap or even a union factory worker in Milwaukee; they can live in a way that used to be reserved for the rich.

You may be wondering where this peregrination is headed. Since we are on vacation ourselves, we don’t feel the need to have a particular destination. But as we looked out our door this morning, we had an insight. A trivial one, but still one worth passing on.

In the 1920s, the tycoons and stock jobbers took the train from New York all the way to Palm Beach, where they built their mansions and enjoyed their repose. They were followed by the well-to-do middle classes…and then the not-so-well-to-do lower middle classes. The Venetian-style great houses on Palm Beach were followed by the bungalows two blocks back…and then by the trailers in Central Florida. But all of them found a new way of life in the Sunshine State, a life of leisure and luxury and warmth …a life that they never could have had in the North.

The whole phenomenon was new. It was only in the 20th century that the idea of leisure came into being in a major way. Before that, everyone expected to work from childhood until the end of his days. Then, thanks to the internal combustion engine, assembly lines and electricity, fairly large numbers of people accumulated enough capital so they could live without working at all. And then, later, after the imposition of the Social Security system in the 1930s, everyone came to believe that he deserved a period of rest and ‘retirement’ after the age of 65. Of course, relatively few people reached 65 back then.

Now the dream is ubiquitous. Everyone takes for granted that he can have ‘vacations’ during his working years, and that when his work is finished he can enjoy many more years of retirement – preferably in a warm place. In Europe, this dream is even more elaborate than in America. And among government workers, in both places, it is more extravagant than in the private sector. A government employee in France can count on six weeks of vacation each year…and, depending on his particular work career, he may retire as early as 55 or even 50. Thereafter, he lives entirely at the expense of the rest of the society.

Americans are more niggardly with their vacations…and more long suffering about their work. The typical American worker earns more take home pay, but he has to work a lot more hours to get it. And when he has finally has earned his reward – he is likely to head for the sun. Until recently, he aimed for Florida or Arizona. Now, he is more adventuresome. He may get out the map and find Mexico, Puerto Rico…or even Nicaragua. Coming in large numbers, they are changing the places they come to.

“How do we know when we actually make things better?” we asked Elizabeth.

It was a leading question. We already had our answer. But conversation and cross-examination often work better when questions are put to the witness.

“I guess you just have to look at the results,” was the answer. It was not the answer we were looking for. We’ve found that Elizabeth rarely gives us the answer we want. Which is what makes her an ideal wife; she helps us maintain our humility.

“But how do you know if the results are beneficial…if they are good…if they actually make the world a better place?”

“You have no choice but to apply your own standards…your own aesthetic and moral sense. What else is there?”

“Well, that’s just the problem…

“I was thinking about what we’ve done here. We came here to Nicaragua before anyone else. Now, there are roads, houses, condos…the local people have work. Money is coming in. And the gringos seem to be having a good time.

“But suppose we had decided that what we wanted was simply to buy up land on the coast and keep it for ourselves. We could have had a big house and employed guards to keep others out. That might have been ‘better’ from our point of view…but would it have been better for others? Would it have been better for the world?”

“I don’t know, but I think it might. This was such a lovely place when it was virgin tropical woodlands. It’s not necessarily better because it has condos on the beach. And this idea of ‘better’ is a rather loaded term, don’t you think? It depends on what you mean by it. Better for whom? Better how?”

“Well, of course, it is freighted with all our prejudices, tastes, and desires. Suppose we had done nothing. It would have been better for the people who like virgin tropical woodlands…but we, and the local fishermen, would have been the only ones to appreciate them.

“Or suppose we had decided that we wanted to build a community where everyone had to live in green houses. Would that have been better? Well, yes, if you like green houses.

“What I’m getting at is that the only way to tell if you’ve really made things better or not is by following the money. If you had made more money building green houses than pink houses, it would have told you that more people liked green then pink. And the only measure of what is good…or what makes things better…is what people are willing to pay for, isn’t it? If you disagree with that, aren’t you merely substituting your judgment for the judgment of others? That’s what communists, neoconservatives and central planners do. If they decide that the world would be a better place if everyone lived in pink houses, they force everyone to live in a pink house – whether they want to or not. When you take away the freedom of choice, and the free movement of prices, you no longer know what people really want…and so you don’t know how to make things better.”

“Surely, not everything is reducible to money,” Elizabeth replied. “Paris Hilton might make a fortune producing a sex video. Is that really making the world a better place? You can pander to people’s weaknesses…to their flaws and foibles. You can make money, but it doesn’t necessarily make the world a better place, does it? I guess I would say that the world is always a worse place when you force people to live in pink houses when they don’t want to. But it’s not necessarily a better place when you sell them pink houses either.”

“Yes, that’s it, isn’t it? You can try to make the world a better place by holding a gun to people’s heads…or by stealing their money…or killing them. But it rarely goes well. Because if they are not free to express their own private wishes – even if they are depraved or tacky – you have no way of knowing whether you’re really doing good or not. People express what they want…and what they regard as making their lives better…by how they spend their money. If you over-ride them, by forcing them to do things they wouldn’t otherwise do, you are bound to make a mess of things. Of course, even if you proceed without violence, you can still make a mess of things. But that’s just life. You do your best. Sometimes you succeed and sometimes you don’t.”

We both looked out the door again. There, on the Pacific Coast of Nicaragua…a country that was once a banana republic…then an experiment in mass delusion…and lately, a tourist destination, where plumbers and dentists from North America are enjoying a few days in the sun. They have the ocean in front of them…air-conditioning behind them…and ice-cold drinks inside of them. They bought their condos and their vacations of their own free will. And now, with the sun peaking over the hills, they rise and stretch…and look out their own doors too…

…and who can doubt that it is a better world?


Bill Bonner
The Daily Reckoning
February 23, 2007

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt

“Bubbles Brewing in Shanghai, Tokyo, and London,” writes Gary Dorsch, editor of the Global Money Trends newsletter.

We will hear the evidence in a moment, dear reader, but first we will render judgment: Too much liquidity.

“There is a bubble growing. Investors should be concerned about the risks,” said Cheng Siwei, vice-chairman of China’s National People’s Congress in a February 1st interview with the Financial Times. “But in a bull market, people will invest relatively irrationally. Every investor thinks they can win. But many will end up losing. But that is their risk and their choice,” Cheng warned.

The Shanghai Composite “A” share Index has gone up over 200% in the last 16 months. The market is limited to Chinese nationals, which just goes to show that the Chinese can be as silly as Americans.

“On the smaller Shenzhen market,” Dorsh continues, “three new IPO’s soared into orbit, suggesting that the Chinese stampede into stocks hasn’t run its course. Non-ferrous metals maker Yunnan Luoping Zinc soared to 30.94 yuan, triple its IPO price of 10.08 yuan. Zhejiang Sunwave Communications jumped to 19.65 yuan, double its IPO price of 9.15 yuan. And China Haisun Engineering 002116.SZ surged 178% to 19.16 yuan.

“Investors opened 50,000 retail brokerage accounts a day in December and mutual funds raised a record 389 billion yuan ($50 billion) last year, quadruple the 2005 amount. January turnover was five times early 2006 levels. Beijing is now ordering banks to prevent retail borrowing for stock investments.”

What is the source of this bubbly activity? It is the same ‘tide of liquidity’ that is washing over the rest of the world. As the Chinese sell more and more goods to U.S. consumers, Chinese firms end up with more and more U.S. dollars. These are turned in to the Chinese central bank, which now has foreign currency reserves of more than $1 trillion – the biggest pile ever built up – most of it in U.S. dollars. In return, the bank of China gives out local currency, the yuan. What are the gambling-mad Chinese to do with all that money? Play the stock market!

Meanwhile, in neighboring Japan, the Topix stock market index is at a 15 year high. The much-despised yen has been driven down to such low levels that it has made Japanese exports cheap. Japanese exporters – notably Toyota Motor Company – are having a great time of it.

Dorsch: “Since the BOJ dropped its overnight loan rate to zero percent in March 2001, the Euro has advanced from around 105-yen to as high as 158.70-yen today. Aided by the euro’s strength against the yen, Japanese exports to the European Union nearly doubled to 1.06-trillion yen in December. But on the flip side, European exports to Japan have waffled between stagnation and deterioration.

“Last year, Japan racked up a 18.6 trillion yen ($160 billion) current account surplus, while the Euro zone suffered a 16.8 billion Euro $21.5 billion) deficit. Yet the power of the ‘yen carry’ trade was able to swim against the tide of these trade imbalances, by pushing the Euro 12% higher against the yen last year.”

Just last week, Japan began to ‘normalize’ its interest rates. But it did so in such a weak and waffly way that it merely served to convince speculators that the ‘yen carry trade’ would last a long time.

Dorsh again: “Japan’s interest rates remain abnormally low and far out of alignment with the rest of the world, and the ‘yen carry’ trade lives on.”

Finally, Dorsch looks to another island nation:

“The Bank of England (BOE) delivered a nasty New Year surprise on January 11th, its third quarter-point rise in interest rates in six months…

“But London’s FTSE-100 all but shrugged off the rate hike. It suffered a 30-point fall to as low as 6,140 just after the announcement, but then closed the day 70 points higher. After stabilizing above the 6,200 level, the Footsie-100 tacked on another 5% gain to 6,450 last week.”

While the Bank of England raises rates, it keeps the money flowing. Money supply figures show available liquidity increasing as much as four times faster than the economy last year. As a consequence, house prices in Britain went up more than 10% in 2006 and the stock market reached its highest level in six years.

On Tuesday, the BOE not only read the past, but predicted the future:

“Investors are likely to take advantage of this ample liquidity and the associated easy credit to purchase other assets, driving risk premiums down and asset prices up…In due course, those higher asset prices may be expected to feed through into higher demand for goods and prices, putting upward pressure on the general price level.”

Yes…and then what?

We’ve given up guessing. This liquidity bubble should have blown up a long time ago. That it has not yet doesn’t mean it won’t. It just means that when it does many more people in many more places will hear the loud crashing noise…and feel the walls shake.

More news:


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“As I told you yesterday, Fisher and Yellen will speak today, and both are expected to talk about their uneasiness with rising prices in the United States. But what about talking about money supply? Now that’s a discussion I would love to listen to!”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more views:

*** Did you notice what happened to gold on Wednesday? Up $23. Then, yesterday, it gave up just one of those dollars. Gold is watching this liquidity bubble. It is wondering too…when will it end? And it is getting in position. All this excess liquidity has to go somewhere. Asset prices now. Consumer prices later? Or collapsing asset prices? Anywhere it goes, it is bound to raise the price of gold – because gold has more durable value. Historically, it is the thing to which investors turn when they smell something fishy in all that liquidity. The bull market in gold probably has a lot further to run.

***  “A lack of fanfare from the business media” writes Kevin Kerr, editor of the Resource Trader Alert, suggests that being bullish on gold right now is a very good idea, since “a true bull market often flies under the radar.”

“Gold $1,000 is on the way, ” Kevin wrote in his column this morning.

*** Robert Samuelson, an op/ed columnist for the Washington Post, writes:

“The concerns about ‘excess liquidity’ stem mainly from the low-interest-rate policies adopted by the United States, Europe and Japan after 2000. The aim was to avert a deep recession. The Federal Reserve cut its overnight rate to 1 percent; the European Central Bank got down to 2 percent, and the Bank of Japan actually went to zero. With low short-term rates, investors have poured money into longer-term securities with higher interest rates – government bonds, mortgages, ‘junk’ corporate debt, bonds from emerging market countries – and into stocks. Often, these investments are financed by short-term loans at low interest rates.”

What happens when there is ‘excess liquidity’? “The danger is that a sharp shift in exchange rates (either the borrowing or lending currency), or higher interest rates in the lending country, could make these appealing trades unprofitable. A panic might ensue as investors seek to escape. Historically, ‘excess liquidity’ often evaporates through losses.”

Yes, it evaporates, dear reader. It does not change hands. It simply disappears. If a company issues a billion dollars’ worth of bonds, for example, those bonds are held as assets by their purchasers. The company has the money…the bondholders have the paper. Then, if the company spends the money and goes broke…then what? The money has changed hands. But the bondholders have nothing. The $1 billion they thought they had has disappeared. They will never see it again. If a work of art suddenly declines from $1 million in price to only $500,000…a half a million dollars has disappeared too. No one has it. It is gone. And if the financial industry cuts its bonuses in half…that money too, just no longer exists.

That is how excess liquidity goes…up in vapor. Then, there is no more excess. In fact, there may be a shortage. Something else to look forward to, dear reader.

*** Lent began yesterday. We would have forgotten about it, but we ran into Padre Walter on Tuesday. He reminded us that good Catholics have to observe the Lenten season. Of course, we had forgotten that we were good Catholics too. Since we are in the New World, we thought we might get away with going back to our New World ways. In the old world, we were always Catholics – both before we immigrated to America and after we went back. But in the New World, we’ve always been Episcopalians. Besides, we’re on vacation with a young family headed by an atheist.

“Our children go to the local Presbyterian church in New York. But I told the preacher that I was a practicing atheist,” said our friend. “Religion is a hot subject in our area. Our son came back from school and they had told him evolution was ‘just a theory.’ He also learned about ‘Intelligent Design.’ ”

The discussion began with the pancakes. It grew with the papaya and melon…and finally matured with the coffee. All through breakfast, we discussed the limits of science and the reach of religion.

What surprised us was not evolution…about which people seemed not to care particularly…but global warming. Here, the younger generation is of one mind that global warming threatens the planet.

We confessed that we knew nothing about it; but what makes us so irritating to kin and company is that we suspect that others don’t know much more.

“Are temperatures really rising? Is it unusual? Is it caused by man? Is it a bad thing? Can it be controlled? Would it be worth controlling? There are a lot of question marks between here and having a firm view of this issue,” we offered modestly.

“You can’t just stick your head in the sand. You can’t just say, ‘I can’t know everything…therefore I won’t try to know anything.’ You can’t just deny responsibility for what goes on in the world and how future generations are affected by it,” said Henry.

“Oh, I don’t know,” we replied gamely. “Has any major disaster in history been caused by people who hesitated…by people who wanted to think twice…or even three times? Or by people who decided they should mind their own business…and stick to their own knitting? Wars, pogroms, forced starvation, mass murder, revolutions, murders – they’re always sins of commission, not sins of omission.”

“Yes, but here we’re faced with an unnatural disaster – as if the tsunami in Asia had been caused by a man-made nuclear test underwater in the Pacific. If something like that had been caused by man…or even if it hadn’t been…shouldn’t you still try to warn people…tell them to get off the beach…try to do something to reduce the number of people who will die?”

“Well, yes…but that doesn’t reduce the number of question marks here. We don’t know if there is a tsunami. We don’t know what caused it or how to stop it…or even if there is any reason for trying. If you think the sea level is going to rise, you should definitely move to higher ground. But maybe you don’t want to force people to stop using air-conditioning or stop keeping their milk cold just because you have a theory of how it will affect the world climate 50 years in the future.”

The argument ended badly. There were no victors, only losers. Everyone felt bad about arguing so aggressively about something that none really knew anything about.