Thursday, March 5, 2009

Polish hookers don’t cost too much

Once I wrote a post about Swedbank and Latvia.  The title was “Hookers that cost too much, flash German cars and insolvent banks”.  Roughly I predicted a disaster in Latvia based on – you guessed it – the price of hookers.  I was right.  Latvia's economy has now entered a true depression.

The logic was that Latvia was running an unsustainable current account deficit and borrowing in a currency which was not its own (it was borrowing in Euro intermediated by Swedish banks – notably Swedbank). 

The normal solution to an unsustainable current account situation is to devalue – but if you have a lot of foreign currency borrowings that solution too becomes difficult as the domestic currency amount of your foreign currency borrowings goes up as your currency goes down.  You become competitive and simultaneously go desperately bankrupt.

If all that is required to restore competitiveness to your domestic industry is a small devaluation then that is just fine.  Sure the notional value of your debt goes up – but 15% is still manageable – especially as the devaluation should drive domestic incomes up. 

But if the amount of devaluation needed for domestic competitiveness is large and the foreign debt is large then there is a true disaster in the making.  Devalue enough and you bankrupt almost everyone.

Now how do I measure the competitiveness?  Well I want a reasonable cross-border comparison of labour costs of labour of roughly equal skill.  I guess I could use the price of an electrician – but I don’t know how to find that.

So instead I use the price of prostitutes.  Sure Latvians might be better looking than most – but the prostitutes were frightfully expensive (at least by Eastern European standards) and (according to several comments I received on the blog and by email) were also providing poor service.  [Honestly I don’t know.]

This brings me to Poland.  Poland is the subject of the latest Eastern Europe scare mongering.  Its a large part of the GE/Eastern Europe story for instance.

A large proportion of domestic mortgages are priced in Swiss Francs – and the Zloty has devalued sharply against the Franc.  It is bad in Poland.  But it would be far worse if Poland had started with high cost structures. 

Now I have not tried to manufacture anything in Poland – but using my usual index (the price of prostitutes) it appears that Poland is now quite reasonably priced.  Sure it is not Thailand – but hey – they look to be offering the best deal in Eastern Europe.  Get your Ryan Air flight now.

I will thus make a prediction.  It is not going to be as bad in Poland as Latvia.  And whilst GE will lose money in Poland (possibly a lot of money) it will not lose as much as some of the more vehement bears are arguing.






Anonymous said...

now my obvious question is: where do I find the data on global hooker prices?
i'm reasonably bullish my currency (BRL). but this would be a nice cross-check on that view...

Anonymous said...

My work involves travelling Ukraine, and hookers there are quite pricey even relative to the same Ukrainian hookers in London.

But a large part of the cost is the bribes/police protection costs due to their illegality. The hookers themselves get very little. So it is limited supply vs. fairly hefty demand.

(despite being anonymous, I still have to add that I did not use the hookers, but was approached by quite a few during my business trips)

John Hempton said...

You do detail the problem with the index - which is that the price has something to do with social attitudes...

But the Poland being cheap is also a cliche - it is why the low-wage person who cleans your hotel in London is likely to be Polish.

Anonymous said...

OK its better than Latvia but thats not much of a prediction.
Problem is that the forex lending leads to your customers being massively under water on their houses with no tested legal process for foreclosure.

Anonymous said...

All said - hookers in China are still likely the cheapest ($20) and thus that proves China is still a smart place to put money over the long run.

Anonymous said...

the currant price of a J.I.B. graded electrician is £13.50 per hour. The price of a graded (self employed) electrician is £14-15 p/h. plus traveling time. For more detailed information call the J.I.B h/q on 0207-302-0031

Unknown said... I saw this and thought of you, Strippers and Cocaine John Tsk, tsk, I suspect more likely he has been ripping you off, an acknowledgement would have been nice.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.