I have to work 10% harder this year

The man who destroyed my previous employer (or at least he spearheaded the destruction) invented this illusion of 10% earnings growth every year. That kind of corporate BS is NOT what I’m talking about here. In my case, it’s a plain and simple truth: if I want to have about equal income every year that I’m in Peru, I have to work a good bit harder every year.

The reason is that most of my work as a contract pilot or consultant is paid in US dollars, but my groceries are paid in Peruvian Nuevos Soles.

And here’s how the US dollar has been fairing against the Nuevo Sol this year:

US$ vs Peruvian Nuevo Sol - 1 year chart

US$ vs Peruvian Nuevo Sol - 1 year chart

And 5 years:

US$ vs Peruvian Nuevo Sol - 5 year chart

US$ vs Peruvian Nuevo Sol - 5 year chart

View charts at XE.com.

Here’s an article about Peru’s central bank as well as the central banks of other so-called developing economies taking measures to prevent their currencies from rising too much:

And here are Peru’s foreign currency reserves over the past 10 years, standing at around $40 billion at this moment. Chart shamelessly robbed from IKN:

Peru foreign currency reserves

Peru foreign currency reserves

Now foreign currency rate swings are nothing new and I am not predicting the demise of the US dollar or the end of the world here. But it should come as no surprise that consistent near-zero interest rates and monetary easing (printing money) in the US will erode its currency’s value.

When I was a young boy in the early 1980s and Belgium developed large budget deficits and high unemployment, I could not understand why the government just didn’t put all the unemployed people to work printing more money, kill 2 birds with 1 stone.

No matter what the guys in stuffed suits tell you, how they saved the world and you owe them eternal gratitude all that, the fact remains that some future generation in the US (mostly) will have to deliver $40 billion of goods and services to future generations of Peruvians.

News of the day

In the US, seems that people don’t want to make wawas anymore. I don’t know what the birth rate is here in Peru, but I sure see a lot of wawas every day.

It makes sense, people have more babies when their outlook on life is more optimistic. The only issue I have with the article is this:

“The downward trend invites worrisome comparisons to Japan and its lost decade…”

A lot of English language news refers to Japan in terms of “lost decade”, but this so called “lost decade” has lasted from the late 1980s until today.

But have no fear USA, Bernanke sez he’ll just print up more money. Printing money has sustained the US economy for 30 years, why stop now?

Words fail me, take it away Bruce…

The so-called economic growth in the so-called developed world will continue somehow or other because the old guys in suits that run the place will find a way to spin it that way. They’re desperate for you to believe that you need their whizdumb and leadership. They need you to build up their ego, so they can sip their expensive wine and eat their caviar at Davos every year.

Look, I’m really not pessimistic. I’m happy with my life, my family, my wawa. Rant over 🙂

Peruvian economists

It’s really a shame this should be a headline in Peru’s newspaper of record, El Comercio.

“Economists: continued growth is not possible unless poverty is reduced”.

Peruvian economists

Just saying, that one is right up there with “the sky is blue” and “Bill Gates not hurting for money this week”.

But such is the dilemma that is Peru: for the suits in Lima economic growth has long been detached from quality of life for ordinary Peruvians, especially in the provinces. Take for example this chart from official INEI statistics, during a period where GDP grew at a 9% annual clip.

Peru quality of life

Chullo tip to IKN.

Now I’m not pretending to have an easy solution for the quality of life issues in Peru, but hopefully some of the suits in Lima will start to seriously look beyond the neo-liberal dogma that “what’s good for business is good for everyone”.

I’ll propose a new ideology for economists in Peru: “do what’s good for the people and economic growth will follow”.

  • Stimulate the economy in the provinces
  • Improve the infrastructure in Lima’s slums and in the provinces
  • Respect labor and environmental protections
  • Reduce bureaucracy and hold the bureaucrats accountable
  • ….

The economy in Peru is too dependent on tourism and export of base metals. While those are great sources of revenue, the suits who run Peru should look at adding technology, manufacturing and quality services, the types of employment that would raise the standard of living of the average Peruvian worker.

At the end of the day, the Peruvian economy is the total of what the average Peruvian worker contributes to it, and expects to receive from it. Not in monetary “funny printed paper” terms, but in terms of products and services. It’s a no-brainer, focus on the quality of life of ordinary Peruvians and economic growth must follow.

Funny printed paper

2 cool charts I copied from Rolfe Winkler at Reuters. To illustrate my point that money’s just funny printed paper.

US public debt outstanding

US public debt outstanding

US public debt, doesn’t include unfunded healthcare and Social Security oblications. Original here.

Dow Jones historical chart valued in gold

Dow Jones historical chart valued in gold

Dow Jones historical chart as valued in gold. Original here.

Peruvians should pay attention to these, since Peru historically has very close ties to the US and gold is a major part of Peru’s foreign exports. To stay up to date on all things gold and Peruvian economy, head over to IKN.

Read ’em and weep

The real-estate classifieds for Cusco, that is. Here’s a few examples:

We’ve started looking to buy a house or apartment in Cusco, because the apartment we’ve been renting is becoming too small, especially since baby got a new swing 😉

Brianna in her new swing

Brianna in her new swing

Real estate here in Cusco is very expensive compared to the rest of Peru, since the area is thriving with so much tourist money. Asking prices for some nice apartments we’ve looked at range from $60,000 to $120,000, and mortgage interest rates range between 9-14%. This in a country where the per capita GDP is $8,500. If I worked full-time at my teaching job, my entire income would be spent on the $500 mortgage payment if we bought a $60,000 apartment with 20% downpayment 😦

I’m really on the fence about this… to get a nice place that we can afford we may have to look outside the city. I actually prefer the quiet areas outside the city, but then we’d be further away from family, friends, etc.

In terms of real-estate value, I’m worried that much of the increase in Cusco in the past years is speculative and that prices appear to be wildly out of line with personal incomes. On the other hand, I think long-term demographics, conservative lending standards and the mountainous terrain could put a floor under real-estate prices in Cusco, plus we’d be buying something to live in, not as an investment to “flip” in a few months or years.

So if any readers have a rich aunt or uncle… tell ’em to help out a poor gringo in Cusco 😉

Unconventional

In the comments to this recent post I somewhat defended my ideas around business and geopolitics as unconventional. I happen to think it’s necessary to challenge the ways of the 20th century and the groupthink of the rich old men in suits who run the world.

Take for example this US government mortgage calculator, it won’t accept a negative value for home value increase. Hmm…

idiot mortgage calculator

idiot mortgage calculator

Chullo tip to the always excellent Rolfe Winkler.

BTW – I think home values in Peru are a bit safer than in the US, since banks in Peru have stuck to conservative loan values (typically requiring 20% down on mortgages) and the demographics in Peru bode well for economic growth in the long term. That said, in areas such as Cusco real estate prices have skyrocketed in recent years, and home prices are entirely out of line with personal incomes.

Otto agrees

Adding on to my recent post about LatAm media coverage, where I said:

“…Hugo and Evo are hugely popular in Latin America because they’re good for Latin America”

Apparently Otto agrees in his recent post about the Bolivian economy, saying:

“A once and future coca leaf grower runs countries better than teams of dumbasses in suits (you know them by the name ‘economists’) with multisquillon dollar eddycations…”

My only issue with that is that Otto narrowed it down to economists, instead of the more general rich old guys in suits. Whether it’s Alan Garcia or Jack Welch or Al Gore, be leary of rich old guys in suits who profess to know what’s good for average Joe. Far too often said rich old guys in suits have made big bucks robbing said average Joe blind.

Tim Geithner related to Alan Garcia??

I’m beginning to think Tim Geithner and Alan Garcia are drinking the same Kool-Aid. In the news today:

Geithner sees ‘durable’ signs of stability “Probably why I’m doing this (tour) is to make sure we keep working with governments around the world to continue to provide enough support to lift this global economy back to a sustained pattern of growth,” he told reporters.

And in other news:

Geithner’s rhetoric is like that of Alan Garcia, who keeps claiming Peru is on track for strong GDP growth and has an iron-clad, recession-proof economy. The numbers, souped up to begin with, show otherwise (courtesy IKN) :

Chile and Peru GDP

Chile and Peru GDP

The root of the problem in the US, put simply, is that people bought houses they couldn’t afford. Without steep wage inflation, the foreclosure crisis and falling home prices may continue for some time (see Japan). For all the monetary easing (printing money) Geithner et al are doing, the only thing that achieves is to temporarily prop up the feeble balance sheets of overleveraged banks.

Tim Geithner and Alan Garcia both use optimistic rhetoric to appease the general public but sadly their policies serve rich old guys in suits before the general public.

GM, Peru interest rates and 2-party communism

Random thoughts on some of the day’s main business news:

GM exits bankruptcy. CEO Fritz Henderson said

“…the new GM will be faster and more responsive to customers than the old one and it will make money and repay government loans faster than required.”

Yeah, right. Why don’t I have warm fuzzies about this? When was the last time a company majority owned by the US government and the UAW became faster and more responsive? The company even brought back Bob Lutz, one of the old rich guys who was at the helm of the ship when it went under. Sure GM dumped a bunch of liabilities, but with revolutionaries like the US government, the UAW and Bob Lutz in the driver’s seat I doubt they made a lot of structural changes to the problems that got them in trouble to begin with.

Perhaps the biggest thing I question about GM’s reorganization plan is the sale of Saturn, which essentially becomes an independent dealer network. If you’ve never heard of Chery, JAC, SsangYong or Mahindra, you may soon enough at a Saturn dealer near you. In 5 or 10 years, GM will be relegated to selling trucks, Suburbans and Corvettes, no mas.

New Chery cars at a Peruvian dealership

New Chery cars at a Peruvian dealership

In other news, Peru lowers interest rates. Interest rates are near zero practically all over the world. How’s that been working out for Japan in the last 2 decades or so? I’m with the camp that says the whole financial mess was caused by too much leverage, lending more money is not the solution.

By the way, since interest rates in the US are near zero, how much should you be paying on your credit cards? And if you’re paying 5% on your mortgage, isn’t that about 4.5% too much? Exactly where does that 4.5% go? Once again, if you believe the well-being of the big banks on Wall Street – at the taxpayers expense – is in the best interest of middle class America, I’ve got a mountain in Peru I’d love to sell you 😉

More news this simple mind doesn’t understand… Timmy Geithner says derivatives should be regulated. Creo que no. Regulation isn’t the answer. What would have been better is if the government had simply let AIG fail, this way most of the derivatives would have gone away and perhaps, just maybe, the bankers on Wall Street might have gotten a lesson in morality. Not to mention, taxpayers would have been saved some $180 billion that now went to such needy institutions as Goldman Sachs and Deutsche Bank. Let the market adjust itself, stop bailing out old rich guys in suits.

2-party communism

All this brings me to my main point, the US effectively is a 2-party communist state now. Sure you have individual freedoms, so I don’t mean to imply communism like in the old Soviet Union. But realistically, business and government have become institutionalized and joined at the hip. GM, Chrysler, untold number of banks have been deemed “too big too fail” and are without a doubt taking advantage of that status. Treasury and the Fed prefer regulation over allowing the markets to correct. Bernanke, Geithner, et al are printing up money to distribute as they see fit, practically reducing competitive advantage to where you stand in your ability to tap into government funds. In Washington and New York, decision makers move seemlessly between government and private positions. Henry Paulson was at Goldman before he came to Treasury, wanna take bets where Timmy Geithner will be in 2 years?

All this of course is bad for innovation and real value creation – ever driven an old Lada? Businesses that have become institutions of government have little incentive to make or do better things, yet they wield tremendous competitive advantage over independent companies.

I’m not too worried about any of this though. I believe you have to make your own luck, no matter what the big wigs in Washington, New York or Lima say or do. And the pendulum will eventually swing back in the opposite direction, as it always does. But for now we are “kicking the proverbial can down the road” too much, and future generations will be paying for our excesses. Better get ready to work, Brianna 🙂

Boleta de Pago – Peruvian paycheck

Here’s my paycheck for teaching ESL part-time for the month of May.

Boleta de pago

Boleta de pago

“Read ’em and weep boys” That’s what an instructor I used to know would say as he handed back his students’ graded exams. Same could be said for paychecks in Peru.

I only taught 2 classes, or about 4 hours a day, 18 days per month. The grand total is S/.800 (~ $280). Notice how S/.104 (~$35) is deducted for my retirement and my employer generously chips in S/.72 (~$25) for EsSalud health insurance. I take home S/.696 (~$250) at the end of the month.

That’s less than what the taxes on my WEEKLY paychecks at GE used to be 😦

Not that I’m an ungrateful gringo, I just do the teaching job for fun, it’s a nice way to meet local people and get out of the house for a few hours. For a single person who wants to spend a few months in Latin America teaching ESL is actually a good gig. If you work full time (4 classes ~ 8 hrs / day) you can make about S/. 1,500 (~$500) per month, enough to cover your living expenses down here.

At ICPNA my pay is actually better than average for Peru. The minimum wage in Peru is around S/.550 (~$180) per month, average starting wages in Cusco for respectable jobs like drivers, nurses or teachers are around S/.800 (~$280) per month – full time.

If you ask me, the way to make money in Peru, start your own business. That’s what I tell all my students, “Make your own luck, don’t work slave labor for a bunch of old rich guys…”