Progress Backwards

On the sun-kissed shores of Nicaragua, your editor enjoys the view…but cannot help but contemplate its cost.

"The mortgage-stones that covered her, by me, removed – the land that was a slave is free…"

– Solon, recorded by Plutarch, boasting of reducing Athens’ debt burden by inflating the currency

"Two years ago, there was nothing on this beach. And nobody. The guy who lived here with his family, he was just a caretaker."

We were sitting on the porch of a beach shack, on a small hill overlooking Los Perros beach. The beach was broad, with white sand stretching out around a point of palm trees and then continuing a mile or two to another clump of hills. The effect of the green trees, white sand and blue water was a bit like a huge flag laid out on the ground before us.

We sat on tree trunks under a rusty tin roof, our backs against the rough boards of the house, enjoying the warm breeze.

"When I was a boy I used to come here to swim. This is the best swimming beach…and there was never anyone on it."

Nicaraguan Real Estate: That’s Progress

But things have changed. Now, your editor is building a house on the hills near the beach. His children played in the surf as he and Antonio talked. And down the beach, right on the high-tide mark, a developer has begun a group of condominiums.

"I don’t know what he was thinking," Antonio remarked. "I tried to tell him. Anyone who knows the ocean can tell that he’s too close. If we get a bad storm, the river will rise on one side and the ocean on the other. He’ll have real problems."

The last real problems came about 10 years ago. A tidal wave washed away one of Antonio’s own houses. The old folks say that such a wave only comes along once every 100 years. The developer must have done the math; he, the buyers, and even the insurers will be long dead before the next one hits.

So progress continues. Now, at least, they put the footings deep in the sand…and hope the building holds together in high water.

All over Nicaragua, or at least everywhere we went, we saw evidence of progress. In Managua, there are new roads, new buildings, new restaurants, and shiny new gas stations on nearly every street corner.

Out in the country, the progress one sees is yesterday’s progress, not tomorrow’s. The invention of corrugated tin roofing changed the look of the place. Where once the traveler only saw graceful old houses with their clay tiled roofs…or hovels covered with palm fronds…he now sees cinder blocks and rusty tin. Everywhere he looks, he sees tin in various stages of decomposition. The tin is meant to be galvanized, of course, resistant to rain and weather. But in this climate, Galvan’s process seems to do little good. Rarely do you see a piece of tin in good condition; it is almost always brown from rust. Perhaps some day, rusty tin will be regarded as quaint or picturesque. But for now, like leprosy in a Siamese brothel, it corrupts the beauty of the tropics all over the world.

Another friend has taken upon himself to become the Freddie Mac of one little corner of Nicaragua.

Nicaraguan Real Estate: Seduced into the Credit Economy

"You ought to require tile roofs," we suggested.

"I put $5,000 into a building fund," he had explained. "I told the staff that it was available to anyone who wanted to build a house. I just did it to try to help these people. I don’t really care if I get paid back or not."

And so, by an act of charity, people who never owed a penny to anyone are seduced into the consumer credit economy. Previously, they might have spent the day fishing…happy to catch only enough for dinner. Or, they might have traded an extra fish with a neighbor and walked home with some rice and beans, too.

But the new mortgagee has no choice; he must work in the money economy in order to make his payments. Soon, he will open an account at the local bank…and get a credit card, too. He will borrow more to buy a car…and to install central air conditioning. In a matter of time, he will not be able to do without them. And then…what joy!…his living standards will rise to those of Americans. He will have all the comforts of modern life…and live paycheck to paycheck to pay for them. His debts may rise to the level of Americans’, too…and like them, he will hope he never has to pay them.

Progress comes in fits and starts…with occasional tempests to carry off mistakes.

Plutarch tells how the debt burden in ancient Athens rose so high that its "mortgage-stones" had begun to crush the city. Solon, a famous politician from the 6th century B.C., found a solution…"for he made a pound, which before had passed for seventy-three drachmas, go for a hundred; so that, though the number of pieces in the payment was equal, the value was less; which proved a considerable benefit to those that were to discharge debts."

The old Solon may or may not have been the first; he was definitely not the last. People build up debts on sunny expectations…and hope some act of God will wash them away. But it is not God, but man, who erases debt. And he does so not by acts of nature…but by acts of fraud, that is, by cheating lenders. Today, Americans put their faith in Alan Greenspan and the Feds, trusting that these modern Solons have mastered the art.

Antonio stood up and leaned against the porch post…looking down the beach.

"If he sells those condos, he’s going to build them all down the beach. I guess we could turn this old place into a bar. Then, at least the people who buy there will have a place to get a cold beer."

"Put some clay tile on the roof," was our advice.

"We could keep it just as it is," Antonio continued. "I think people would like it….they could sit on these stumps…The guy who buys the condo will be able to pay $5 and sit on this porch drinking beer just like the caretaker used to."

The customer will look out on the beach…with its new condos and new visitors. He can sit and wonder how he will make his monthly payments…then, he will drink his beer, served by a bartender with his own monthly payments to make.

He may have paid $150,000 or so for the condo…maybe more. But even if he paid a million, he’ll never be able to enjoy the beach that the caretaker had, all to himself, for free.

Is that progress, or what?

Bill Bonner
The Daily Reckoning
February 27, 2004

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

It’s payback time.

The nation’s huge budget deficits have become such a problem that even Alan Greenspan has noticed. In his latest public discourse, he urged Congress to cut Social Security and Medicare payments as a way to close the budget gap. The only other way would be to raise taxes. Either way, the result will be lower living standards in America. Another way to look at it…the huge credit boom, in which standards of living have been boosted by borrowing from the future, is now coming to an end.

Similarly, America’s gargantuan trade and current account deficits will have to be reduced, too. How? People have to stop spending so much money or the dollar has to collapse. Probably both. Either way, living standards in the U.S. go down.

You will note, dear reader, that despite the drop in the dollar of the last 2 years, the trade deficit is wider than ever. China has kept its currency pegged to the dollar. As the dollar dropped, China’s yuan dropped right along with it. Americans gained no advantage – at least not against China. And since China has become so important to worldwide exports, lower prices on Chinese-made goods tend to drag down prices everywhere.

The latest employment report was discouraging. Initial jobless claims are edging up. And layoffs rose in January. Economists are puzzled. The economy is in full recovery…how come employment is not increasing?

Low rates and tax cuts from the Feds were supposed to light a fire under the economy. And they did – under the Chinese economy! All that caught fire in America was debt, housing and speculation – all hotted up by the Fed’s tinder. Americans go deeper and deeper into debt – lured by low interest rates and EZ credit terms. Speculators go wild on nanotech plays…and, thank God, the Chinese have not yet figured out how to export houses to the U.S.

But as Greenspan looks ahead to what must happen, he sees a world that looks to us like deflation, but deflation of a particularly obnoxious sort. Not only must America’s 50-year credit boom implode into an epochal credit bust, but this must happen at the same time the world’s economic power shifts to Asia. Imports from Asia drive down prices all over the world…as globalized labor markets push down the going rate for American workers. In Nicaragua, for example, you see grown men working all day in the hot sun for $5 a day. Benefits? Health care? Vacations? They hardly exist.

They only way to compete would be to invest massive amounts of money in capital-intensive industries and extensive worker training – similar to what has happened in Switzerland or Singapore. Instead, Americans squander their capital in a spending spree. Wal-Mart replaced General Motors as the nation’s biggest employer…and GM now earns its money not by making and selling cars, but by financing activities. Meanwhile, young Americans leave the hard engineering and science courses to foreigners and concentrate on Gender Studies. The best of them set their sights on Wall Street and hope to retire rich by handling flaky IPOs or maybe starting a hedge fund to speculate in junk bonds.

That is why there has been almost no growth in real earnings of American factory workers over the last 30 years…and why American information-industry wages are now being squeezed…and why it is so hard to add jobs – even with interest rates at 50-year lows.

Greenspan & Co. cannot create jobs by stimulating the economy. The titillation ends up overseas. Nor can they bring prosperity to America by giving consumers more credit; consumers already have far too much of it. Their efforts only make things worse…drawing the nation into bad habits of spending and speculation…and making the pain of adjustment to deflation and a more competitive world much more difficult. In the coming credit deflation, Americans will likely have to pay their debts…while investing in new industries. They will likely find their standards of living falling…as their incomes fall, too. They may find their houses falling in price…while their mortgage payments rise. They should see the price of imports (such as oil) rise…as their dollars falls in value.

Deflation…with rising prices? Think about that a minute. (We would think about it ourselves…except we are still on vacation.)

Payback time will be the time when the Best of Worlds becomes the Worst of Worlds…when the economy that seems Too Good to be True becomes one that seems too bad to be true…and when things that ‘Couldn’t Get Any Better’ can’t get any worse…

*** Addison is enjoying his time in the sun…at the Supper Club meeting in Puerto Vallarta. And so we are the sole bearer of news for today, dear reader.

Here in France, it is cold. We arrived from the tropics and found it snowing in Paris. Out here in the country, it froze last night. The house is as cold and dark as a tax collector’s tomb.

*** A quick perusal of yesterday’s market action yields mixed results. Blue chips lost a little, while tech stocks firmed – the Dow shaved 21 points from its tally to 10,580; the Nasdaq drifted 9 points higher to 2,032.

*** And what’s this? The GUDD trend – gold up, dollar down – reversed for another day. As "anticipation grows for an interest rate cut in Europe," says CBSMarketwatch, the dollar continued its impressive bear market rally. The Esperanto currency fell 0.5 percent to $1.2440 against the greenback, while the dollar rose 0.6 percent to 109.62 against the yen.

But not everyone is convinced that the ECB will lower rates. "All this weakness is tied to political pressure being applied to the ECB to cut rates," offers Chuck Butler over at Everbank.

"Wednesday it was German Chancellor Schroeder, yesterday it was the French Prime Minister, Raffarin…Look, I don’t care who they are and what title they have before or after their respective name, the ECB is not going to bow to political pressure. In fact, I think that all this political pressure more or less seals the lid on Pandora’s box of rate cuts, as now the ECB would be seen as weak if they cut rates…So, let the dollar bulls have their day in the sun, but come next Thursday when the ECB meets, and leaves rates unchanged, we’ll all be able to kick sand in the dollar bulls’ faces!"

*** The dollar’s sprightliness put a damper on the yellow metal…but only a small one. April gold closed just 60 cents lower, at $395.50. Buy.

*** "Warren is selling," writes colleague Dan Ferris.

"During the fourth quarter, Buffett sold his entire stake in Duke Energy, Dun & Bradstreet, Great Lakes Chemical and Level 3 Communications. Berkshire Hathaway sold 5 million shares of The Gap (clothing retailer), lowering its stake to 15 million shares.

"Buffett also sold big chunks of holdings in health-care company HCA Inc., H&R Block, and industrial manufacturing company Dover Corp.

"Buffett bought only one stock in the fourth quarter: Cadbury Schweppes PLC."

Warren is selling something else, too – the U.S. dollar, for the first time in his life.

*** "Hey. Peak Oil [the hypothesis that the world really is running out of oil] is on the front page of the N.Y. Times," writes Byron King, "except that [the author,] Jeff Gerth does not use the term in so many words. Still, for several years the decline in Saudi production has been the subject of inside discussion, certainly foretold by the distant drumbeats coming out of the oil patch. Now, for whatever reason (and what do you think that might be?), the Saudis are willing to discuss it publicly.

"The West, particularly the U.S., does not have much time during which to get its house in order. National debt, industrial decline, problematic demographics and resource depletion. All these horsemen are on the horizon, riding our way.

"I remember the bumper sticker from when I was working for Gulf Oil Company down in Texas in the 1970s: "If you don’t have an oil well, get one." Cute, back then. But it kind of has a whole new ring to it, now that Saudi Arabia is coming clean on its inability to serve as the world’s swing-producer in the future."

*** And now this about "Lucky Jack Kerry" from a source we’re not sure we can reveal, said to be a retired Rear Admiral:

"I was in the Delta shortly after he [Kerry] left. I know that area well. I know the operations he was involved in well. I know the tactics and the doctrine used. I know the equipment. Although I was attached to CTF-116 (PBRs) I spent a fair amount of time with CTF-115 (swift boats), Kerry’s command.

"Here are my problems and suspicions:

(1) Kerry was in-country less than four months and collected, a Bronze Star, a Silver Star and three purple hearts. I never heard of anybody with any outfit I worked with (including SEAL One, the Sea Wolves, Riverines and the River Patrol Force) collecting that much hardware so fast, and for such pedestrian actions. The Swifts did a commendable job. But that duty wasn’t the worst you could draw. They operated only along the coast and in the major rivers (Bassac and Mekong). The rough stuff in the hot areas was mainly handled by the smaller, faster PBRs.

(2) Three Purple Hearts but no limp. All injuries so minor that he lost no time from duty. Amazing luck. Or he was putting himself in for medals every time he bumped his head on the wheel house hatch? Combat on the boats was almost always at close range. You didn’t have minor wounds. At least not often. Not three times in a row. Then he used the three purple hearts to request a trip home eight months before the end of his tour. Fishy.

(3) The details of the event for which he was given the Silver Star make no sense at all. Supposedly, a B-40 was fired at the boat and missed. Charlie jumps up with the launcher in his hand, the bow gunner knocks him down with the twin .50, Kerry beaches the boat, jumps off, shoots Charlie, and retrieves the launcher. If true, he did everything wrong.

(a) Standard procedure when you took rocket fire was to put your stern to the action and go balls to the wall. A B-40 has the ballistic integrity of a Frisbee after about 25 yards, so you put 50 yards or so between you and the beach and begin raking it with your .50’s.
(b) Did you ever see anybody get knocked down with a .50 caliber round and get up? The guy was dead or dying. The rocket launcher was empty. There was no reason to go after him (except if you knew he was no danger to you just flopping around in the dust during his last few seconds on earth, and you wanted some daring do in your after-action report). And we didn’t shoot wounded people. We had rules against that, too.
(c) Kerry got off the boat. This was a major breach of standing procedures. Nobody on a boat crew ever got off a boat in a hot area. EVER! The reason was simple. If you had somebody on the beach your boat was defenseless. It couldn’t run and it couldn’t return fire. It was stupid and it put his crew in danger. He should have been relieved and reprimanded. I never heard of any boat crewman ever leaving a boat during or after a firefight.

"Something is fishy.

"Here we have a JFK wannabe (the guy Halsey wanted to court martial for carelessly losing his boat and getting a couple people killed by running across the bow of a Jap destroyer) who is hardly in Vietnam long enough to get a good tan, collects medals faster than Audie Murphy in a job where lots of medals weren’t common, gets sent home eight months early, requests separation from active duty a few months after that so he can run for Congress, finds out war heroes don’t sell well in Massachusetts in 1970 so reinvents himself as Jane Fonda, throws his ribbons in the dirt with the cameras running to jump start his political career, gets Stillborn Pell to invite him to address Congress and Bobby Kennedy’s speechwriter to do the heavy lifting, winds up in the Senate himself a few years later, votes against every major defense bill, says the CIA is irrelevant after the Wall came down, votes against the Gulf War, a big mistake since that turned out well, decides not to make the same mistake twice so votes for invading Iraq, but oops, that didn’t turn out so well so he now says he really didn’t mean for Bush to go to war when he voted to allow him to go to war.

"I’m real glad you or I never had this guy covering out flanks in Vietnam. I sure don’t want him as Commander in Chief. I hope that somebody from CTF-115 shows up with some facts challenging Kerry’s Vietnam record. I know in my gut it’s wildly inflated. And fishy."

*** "We hiked over through the jungle," Jules explained, when we met him and his brothers at Los Perros beach. Los Perros is separated from Santana by a range of hills that juts out into the Pacific. While we drove around them, the boys took an old dirt road through the forest.

"We saw a couple monkeys. Edward started making monkey noises at them. They must have recognized one of their own….because pretty soon there were lots of them. There must have been 50 or so. And they were getting closer to us. Edward got scared and ran down the mountain."

The Daily Reckoning