About Potholes and Bikes

New York, Wednesday January 12, 2011.


Playa Del Carmen, on the Riviera Maya, claims to be the fastest growing city in Latin America.

It sure looks like it.

Fortunately the village 40 miles down the road we were returning to has not changed much.


To get to our condo we had to drive the same sandy and bumpy road.

Like three years ago, four workers were actively filling potholes.

They were, it seems, the same workers.

The number of potholes had not changed either.

Keynesian economics at work!


The road is still the way we remembered it.

People are still paid to fill up holes.

To apply Keynes’ theory a la lettre, the workers should be paid to dig the holes before filling them.

Their salaries are then expected to fuel the economy.

And so the economy keeps growing.

No matter the level of value added.

No matter the source of financing, which we can assume is not generated by profits.

Profits and value added do not matter in such an economy.


This economic thinking has always puzzled me.

Forget the fact that the longer such activity lasts, the more the economy becomes addicted to it.

More importantly, it is just not sustainable.

Borrowing money to pay people to perform useless functions cannot go on forever.

Even Keynesians will admit this.


So, it is sold as a temporary measure.

The purpose is limited to keeping the economy going during a major slump.

A bit like a biker that needs to keep moving in order not to fall.

A little push helps the biker in motion.

Eventually, the theory goes, the biker will be able to sustain the speed on his own.

That’s indeed how I taught my son to ride a bike.

The problem I see is when the biker is old, exhausted and drugged.

Remember Tom Simpson?


Since Americans only got interested in the Tour de France once Greg Lemond started winning it, here is a reminder from Wikipedia:

Tom Simpson (30 November 1937–13 July 1967) was an English road racing cyclist who died of exhaustion on the slopes of Mont Ventoux during the 13th stage of the Tour de France in 1967. The post mortem found that he had taken amphetamines and alcohol, a diuretic combination which proved fatal when combined with the heat, the hard climb of the Ventoux and a stomach complaint.

The fans can be seen on YouTube pushing the poor Simpson until he drops dead.


Travelling in Mexico also helps putting the emerging markets’ fad in perspective.

There is growth in Mexico and in emerging countries, no doubt.

But how much of this is due to the commodities bubble?

Is Mexico, Russia or even Brazil able to sustain the coming bubble pop?


As emerging markets attract new capital, one needs to wonder if this new miracle is sustainable.

Already pundits predict that the 7 largest emerging economies will overtake the G7 within 20 years or so.

These global experts have the audacity to reinforce mainstream opinions.

To give their original opinions more weight, they travel around the world.

But they never leave their 5 star hotel and talk only to Harvard educated locals who talk the talk.


What I see unfolding is quite different.

I may be wrong – it would not be the first time – but things look amazingly simple to me.

Mature economies do not want the pain of an economic slowdown.

They throw Schumpeter’s books out the window and keep failed companies alive.

They then borrow money to stimulate the economy (filling holes).

The debt becomes unmanageable, so they monetize it.

Add to this the Chinese panic-like money printing and we have yet another bubble.

This time in commodities.

Emerging markets from Latin America to Africa benefit and the whole process creates the illusion of growth.

But illusion it is as all it is really creating is global inflation.


This is now unfolding quickly.

Already the four BRIC countries have started to raise interest rates.

North African countries are seeing inflation related riots.

Even the UK and Euroland are struggling to keep inflation below their stated targets.

And the US is not immune.

For years, we imported deflation from overseas’ markets – mainly China.

Today, this has reversed itself.

Import prices in 2010 were already up 4.8%.


After the housing market, the dotcoms, the credit market and the bond market explosion, and now commodities, the world is running out of bubbles.

When the music stops, many emerging countries will be left wondering about the Dutch disease.





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  • Gerry Moran  On January 12, 2011 at 9:33 pm

    this is all most depressing. Are not the bulk of people in the emerging markets better off than they were a decade or two ago?
    Don’t we have to shift to an inflationary bias to atone for our excesses.

  • caloen  On January 12, 2011 at 11:24 pm

    Thanks for your comments, Gerry.
    No doubt that the end of communism/socialism has unleached a lot of energy in Europe, China and India. Many countries have also adopted more market economies and it has created a lot of wealth.
    I believe, however, that we are at a turning point. A lot of emerging markets – especially Asian countries – have based their economic growth on exports to the US. With the US consumer in a deleveraging mood, this economic model is now in jeopardy. Emerging countries’ growth have since had a second wind from the bubble I discuss in the article. That’s the major problem I see on the horizon. I wish I could be less depressing…

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