Laissez Faire in Guate?
ByBanks in Guatemala are notoriously stingy. I suspect that is because they are still controlled by a single person who still thinks like a small businessman instead of a board of directors of a huge corporation whose primary interest is short-term share value rather than profitability in perpetuity. Despite what you Marxists think, this is a good thing because people naturally want to protect their self-interests, and these inclinations are diluted when your ownership is in the form of shares rather than an entity, such as a business.
Everywhere you go you will hear stories of how difficult it is to get a loan here, and often times it comes at a very high rate of interest, especially for small business loans. Clearly the banks have a way to go to maximize velocity of money, but one advantage of tight credit markets is the lack of ‘bubbles’.
If you look at the chart below, you’ll see the foreclosure rate on residential homes in the US represented by various shades of red (for blood, perhaps?). Areas that have seen huge growth in population and home values in recent decades are, naturally, those that are suffering the most. Also suffering is the rust belt, hit hardest by the bankruptcy/nationalization of the auto industry and state policies that have discouraged business development through high taxes and onerous regulation.
It is a basic rule of economics that something which is scarce and difficult to acquire is valued more highly. If virtually anyone can get a loan for a house, then the value of that house is less than if it can only be acquired through years of sacrifice and savings. The person who has deferred gratification in order to acquire an object values it more highly. Just ask a kid who has had to buy his own Playstation versus the kid whose parents simply gave him one.
Guatemala has been criticized for failing to act in response to the global financial crisis, and I hope this is a strategy on the part of the government, rather than simply apathy. You can no more borrow and spend yourself out of a crisis resulting from an excess of borrowing and spending than an alcoholic can overcome his addiction by binge drinking. If Guatemala resists the temptation to use the global crisis and the bad example set by the US and the UK to flood the country with worthless Quetzales, and instead lets the market purge itself of corruption and excess, it could grow from a strong foundation of natural resources and relatively open markets to future prosperity.
Wouldn't Obama blue be more appropriate?
H/T: The Black Box
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9 Comments
June 26th, 2009 at 6:17 pm
Since I plan to retire to Guate in two years I sometimes wonder if it wouldn’t be better to have half my money in Quetzales instead of all my money in dollars. what do you think?
Mike
June 26th, 2009 at 8:04 pm
Quetzales/Dollars: chart them and I think you will find that there is a defacto peg between the two. And Mark: your getting a little out there with the housing/pricing theory. Please keep posting because you do have some good stuff. I have been enjoying your take on human nature.
June 26th, 2009 at 8:41 pm
Mike: Norm is correct to say the currencies seem to be ‘pegged’. If you’re looking for diversification, I’d think gold and silver. Of course, if there is a massive devaluation of the dollar (not out of the realm of possibility given the expansion of the money supply & the move away from it as a reserve currency), then the Q might actually perform better. Keep in mind that if you end up investing in property or a business down here, you have a defacto diversification.
Norm: I’m not sure exactly what you’re referring to; I do lean heavily towards the Austrian school, and while they did predict the current crisis, they are roundly mocked. Feel free to email me if you wish mark AT guateliving DOT com
June 27th, 2009 at 6:54 am
Old joke, but one I’ve always heard around here:
How do you make a small fortune in Guatemala? Bring a large one!
June 27th, 2009 at 7:00 am
Mark: My take on the housing bubbles cause, was the efforts on the part of the US government to keep money cheap when the natural market was pushing money up. Every time the fire died down they threw more gas on it by cutting a quarter point or so, when it got to a negative rate in relation to inflation they ran out of gas. It was a macro problem.
As to a place to stash cash now, I think raw land may be a good bet anywhere, good productive ground seems to be holding up well everywhere I have checked also I am seeing offshore governments buying land for domestic production.
If you look at the dollar’s long term history as a reserve currency, it is still very much in the normal ball park. I think what has protected it in this spending/printing spree is that the other reserve currencies of our money system are weak. The Euro has yet to be trusted because of how the EU is governed. Its confederation system is weak. The pound suffers from the same problems the dollar has and does not have anything like the weight the US can bring to bare on the money market. Japan’s Yen has a very large domestic debt that it has to service that makes it a very scary place to be and the yaun-no real money market there at all, it is worth what the big shots in China says it is worth. So from what I can see the dollar is the best of a bad lot and will be for the next two years, I would hate to predict any farther out than that time span.
June 27th, 2009 at 9:50 am
The banks’ ownership is actually quite broad. Some banks have thousands o shareholders. The currencies are not pegged but the quetzal dollar exchange rate is sensitive to the reserves level in the Central Bank, itself sensitive to the now delining remittances from Guatemalans in the US Canada and Spain.
June 27th, 2009 at 10:12 am
Norm: Regarding the housing crisis, let’s not forget who was buying all those loans in the securities market; the Federal Reserve via the Central Government via Fannie and Freddie. It is a typical boom/bust cycle. Even the Keynesians acknowledge this. So that perversion of the normal cycle of saving and delayed gratification is not so ‘out there’ as some think. Your comment that the dollar is the ‘best of a bad lot’ may be true, but it won’t take much for China, Russia and the oil states to do to move away from the dollar to cause a collapse. After all, the value is based entirely on perception. Consider me one of those that believes an asset-backed currency is the prudent route.
June 27th, 2009 at 10:20 am
The dollar will remain the reserve currency wince there is no interest bearning euro or yen instrument that can be bought and sold in virtually any amount with a few keystrokes. If Europe creates an ECB bond, this may change, but if Eurocrats get access to all that money, Europe will be destroyed by reckless, fruitless social “investments”
June 27th, 2009 at 2:17 pm
Unfortunately, the banking system in Guatemala is not even close to “Laissez Faire” or something similar. It is true that the overall business view is focused in the short term rather than the long run, though the banks are not the property of one person, nevertheless the legal system has been tailored for particular interests and the systematic protection against outside competitors. Scotiabank is a good example; It overcame the kafkian beaureaucracy for some 5 + years until last year when finally took part in the market under Banco de Antigua; also Banco Azteca had its good share of red tape.