Read Business Day for after-the-fact misdiagnosis

Arthur Gillis: Stop blaming the greedy banksters china! The problem lies with the state and greedy Hotel owners.

As usual the know-nothings in the mainstream media remain content to rehash old tired theories well after the fact to explain phenomena they didn’t even see coming in the first place.  Such must be the tedious task of being a journo: always boring, and always wrong.

Today we have Mr. Arthur Gillis over the Business Day telling us that there is a hotel slump in SA and that, yes, it’s the greedy bankers who are to blame!! Gillis is the CEO of the Protea Group, so he’s clearly not happy with the ways things are panning out in his chosen industry.

Hotels are closing down.  The industry is over-bedded.  Too many rooms, too few tourists.  You get the picture.

But to blame this on the greedy banksters is like saying your dog is naughty to chew on a delicious bone you’ve just shoved in its face. What hooey.  Gillis’ scapegoat is the banksters, but it’s the governmentsters and their hotel industry cheerleaders that are really to blame.

The road to a malinvestment boom cycle is paved with wide-eyed politicians and their all-too-compliant, even wider-eyed, business minions.  I suspect Mr. Gillis was a cheerleader for the FIFA event.  Probably event put together presentations showing how much it would ‘benefit’ the SA economy.

Hey, here’s a tip for free: if the state has to run it, it means it’s not good for the economy. If the FIFA world cup was good for the economy then the state wouldn’t have needed to steal taxpayer money to pay for it.  Private companies would have bid for it on a profit/loss basis.  But these large consortia knew they had a guaranteed buyer for their malinvested sludge at the end of it all: the state.  Now the hoteliers will want some state assistance…

Alas, ’tis no surprise to see hotels reeling.  Amid all the blind/deaf/dumb FIFAphoria, we repeatedly warned in late 2009 and early 2010 of the bubble/ malinvestment/ coming hotel crisis, here, here, here and here.

In Feb 2010 in “The FIFA 2010 Bubble” we said,

“…the world cup is going to be a bit like a small economic bubble that will pop and leave a lot of entrepreneurs ruing their decisions. 

I’ll give just one example to illustrate the broader point.  You own a bed and breakfast in Kempton Park.  Good location right near the O.R. Tambo airport and easy access to Ellis Park and Soccer City.  So you decide to build 2 extra rooms in anticipation of the surge in demand for one month of 2010, for which you know you can charge triple your normal fee because a) accommodation will be scarce during the tournament and b) foreigners can afford it. 

You do great business during the world cup, but then it ends, people go home and the fanfare becomes a distant memory.  Now you’re sitting with 2 rooms you may never need again.  Wasted sunk capital is now sitting dormant and cannot be liquidated.  It is a microcosm of a classic bubble – investment in capital for profit in anticipation of demand that cannot be sustained. 

And so not only have we sunk billions of valuable capital into white-elephant stadiums, forgoing the opportunity to invest that capital into something actually productive, but the event is also going to entice many entrepreneurs in the hospitality and tourism industries to invest in capacity that simply will not last beyond July.  Yes there will be windfall profits for some, but because the spending is fleeting it does not represent genuinely new wealth created in the domestic economic system. 

The “experts” will tell you that the world cup will add 1% to GDP growth in 2010.  This is simply dishonest.  The event, on balance, is a net economic negative for SA, and by wasting scarce capital on unproductive endeavours, we’re putting obstacles in the path of real growth instead of making way for genuine wealth creation.

This is an unashamed I-told-you-so post.  Apologies for this.  I’m sure it comes over pretty arrogant.  But c’mon!! Are we really surprised folks?

Austrian Business Cycle Theory (ABCT) predicted the slump in the hotel and hospitality industry without all the indepth, mind-bending nonsense all the ‘economic impact studies’ fed us prior to the event.

Isn’t it time to learn your ABCTs?