Asset bubbles are the result of easy credit and a natural human desire to get something for nothing. The long-term increase in all prices and the occasional price explosion for certain assets occurs primarily because there is no standard for the unit we use to measure value. The dollar is an article of faith, undefined, as ethereal as fairy dust. Tinkerbelle, like the dollar, flies only if we believe she can.
The dollar represents no fixed amount of a hard-to-find commodity, like gold or silver. The value of every existing dollar is constantly diluted as more dollars are created to fund government deficits and consumer desires. It is impossible to accurately compare prices from one year to the next without reference to highly suspect statistics produced by the very outfit that benefits most from the dilution, the U.S. government.
It is true there were booms and busts in the 19th century when an international gold standard kept government deficits and reckless consumer spending tightly reined. They were, however, local phenomena, fueled by local credit expansion and speculative dreams. They were torrid flings, rather than life-long affairs. And, like love affairs, the beginnings were always more pleasant than the ends. But recovery was generally swift, the damage not life threatening.
The first of what would become much larger and more destructive bubbles occurred in the 20s, shortly after the Federal Reserve took control of the dollar. The Florida real estate boom of the mid 1920s, the stock market boom that ended in 1929 and the subsequent depression in the 1930s were products of currency manipulation by the Fed. Franklin Roosevelt kept the game going by confiscating America’s gold at $20 an ounce, denying Americans refuge from his plans for a better world. He then promptly devalued gold to $35, adding insult to injury.
But it wasn’t until 1971 that the dancer’s last balloon hit the hot end of the cigar. That is when President Nixon, realizing the U.S. was bankrupt, cut the dollar loose from gold entirely. The world at that point had a choice, admit their biggest customer was busted and go down with him, or keep pretending dollars were as good as gold. They opted for fantasy.
Since then the bubbles have become larger and their bursting more destructive. As the discipline of honest money left the marketplace, so too have the habits of character that make for prosperity in an honest marketplace. Hard work, innovation, and thrift have been driven from the field by speculation, easy money and greed. Why sweat and toil in some dreary occupation, consumed with stress and drudgery when you can become rich beyond dreams of avarice by simply buying things and selling them a little later to someone not quite as smart as you?
The problem is that no real wealth is created by inflationary schemes. As asset value rises on one side of the balance sheet, debt rises on the other. The game is challenging and fun as individuals try to jigger their personal balance sheets and get out of the game before the jiggering comes to a stop. “Musical chairs” comes to mind.
When the dollar came untethered from gold the stage was set for the first global credit and money expansion. A recent visit to the Pacific coast of Costa Rica, where a major land boom is in full cry shows that few places, no matter how remote will escape being swept up in the frenzy that easy money creates.
Costa Rica’s Pacific coast between Ojochal and Dominical is now referred to locally as “The Gold Coast.” Dirt has surely turned to gold for those lucky enough to have bought land there before 2005. Though probably fewer than 2,000 souls live in the area the nicest highway in the country was built there five years ago. It runs up from the south to Dominical, where it turns into a rutted gravel goat track for the next 20 miles. It is the only paved road in the province as far as I could see.
Stunning, jungle-covered mountains descend to a warm, clear sea. In the hills facing the ocean swarms of bulldozers and back hoes carve new roads and building sites into the red dirt under the jungle. On land that was never terribly productive for raising cattle, developers have discovered its real value, the ability to see the ocean from it.
Land that Costa Rican farmers sold for what appeared to them be all the money in the world, has been subdivided, provided with roads, water and electricity and is now being resold. It turns out there is a great deal more money in the world. Enough to raise the price of quarter acre lots to between $100,000 and $200,000. Larger lots cost far more.
There is no doubt that it is indeed beautiful land and they aren’t making any more of it. Everyone thinks rich people will arrive by the thousands as soon as there is an airport and hospital. Everyone is predicting 30% per year increases in land values until the end of time. Maybe both will happen.
Money fleeing the fast draining punch bowls of the North American and European real estate fiestas has found a new party in full swing here in tiny Costa Rica. “The Gold Coast” is an all-real estate economy now. Everyone is in the business or selling land of their own. The similarities to the atmosphere in 2005 Florida are unsettling to one who was there. But for now the market is as hot as a grill ready for the steaks, and the sizzle is for sale.