Jeremy Grantham pricked, if not the housing bubble itself, then at least the bubble that property market spruikers live in, with the quip that:
“Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.” (Housing market a ‘time bomb’, says investment legend: The Australian June 16, 2010)
How true that is. Before Japan’s bubble burst in 1990, we heard that Japan was different: the “Rising Sun” was eclipsing the USA and house prices reflected this growing wealth (and—didn’t you know? —there was a land shortage in Tokyo!). Before the USA’s bubble burst, there were land shortages in all the States with price bubbles—especially California. There were probably even Tulip shortages in Amsterdam, four centuries ago.
Those other bubbles duly burst, despite their “unique” characteristics, under the weight of the same force: too much debt was taken on by speculators seduced by the groupthink that house prices always rise. When the rise in house prices made the entry costs for new players prohibitive, debt stopped growing and house prices collapsed.
This is the other thing that all housing bubbles (and share price bubbles, for that matter) have in common: they are all driven by borrowed money, and they can only be sustained so long as rate of growth of debt outpaces incomes. Once that stops, the engine of unearned income that enticed speculators in breaks down—since the only way that we can all appear rich without working is if we spend borrowed money.
Of course, we all know that spending borrowed money is a surefire route to ultimate poverty. The great tragedy of an asset bubble however, is that it’s someone else’s increase in debt that makes us appear wealthier when your house sells for more than you paid for it. In effect, the housing market “launders” the debt money, making it appear real.
Any doubt that borrowed money is what has driven house prices into the stratosphere in Australia is dispelled by the data: despite all the hooey about Australian lenders being more responsible than those in the USA, mortgage debt in Australia rose three times faster since 1990. Having started with a mortgage debt to GDP ratio that was just 40% of America’s, we now have a higher ratio than the USA—and ours is still increasing while theirs is clearly falling.
Notice however that our ratio was lower than the USA’s—and was falling too—before the government brought in the First Home Vendors Boost. As it has always done, that government intervention in the market set off a price bubble—the government in this sense is as responsible for the house price bubble as the banks are.
The government pulls this trick because it makes it look good for a while: the bubble pulls in yet more private sector borrowing, and the spending makes the economy boom. But when the grant ends and the borrowing slows down, things don’t look so rosy.
That’s one way to describe the housing market right now. The boost caused the number of buyers to explode last year, and now the number is fizzing: there were just 46,000 home loans taken out by owner occupiers in April, a cool 25% down on the same month in 2009. Actual demand (and that’s people with cash in their hands to buy now, not the hypothetical future demand concepts touted by the property spruikers) is therefore falling below actual supply.
As the stock of unsold houses mounts up, it is only a matter of time before the bubble bursts.
Glubilee,
First of all, please allow me to clarify that my comment doesn’t target any one, not even Steve. I just want to point out that his model is fault. I spent my first 28 years in China. I am the generation who watched whole progress and changes happened as we grown up. It was truly one of the most wonderful things in my life. However, I am also very much aware the dark side of all these splendid changes.
To understand that, you have to understand the social structure of China, first. There are only two types of people, the rich and the poor. The rich controls the government and has all the power. The poor has no rights. Of course, the rich want to be richer. They setup up factory, enslave the poor and produce goods. However, the poor is unable to consume the goods because they can’t afford it. So export is only way to make money.
You won’t believe that the price of a lot goods China exported actually cheaper than the domestic prices. So why export, if you can get better margin when selling it locally? The answer is simple, because the government (controlled by the rich) subside the exporting by taxing the poor people. This is a vicious cycle. The poor get poorer, so they have to work in the factory as slave labour to produce goods for the rich. Again, this makes goods cheaper and more competitive. There are also many other things, e.g. ignore pollution, use lower quality material, currency manipulate, etc. All of these are to maintain export.
Yes, rich people in China are smart, one hand they enslave poor to produce cheap goods, on the other they use the trade surplus to fund consumption in US and the whole western world, so that they can continue buying the goods produced by the slave labour. As long as there is export, the profit comes.
So now you understand why China won’t demand repayment on the debt. It is in their least interest that US and western world collapse. Actually the clever boys of both US and China are very clear about the situation. But I am not blaming American put China in the slave position, to the most, you just exploit the situation. It is Chinese force its own people becoming slave.
The Chinese worker in the production line has to ask permission to go to toilet. Your prisoner has more freedom. In fact, they might have a toilet in their own cell.
I am sure most of American is honest people who can tell right from wrong. So please tell me which one is the slave.
Just to respond to some of you comments
“While most of the developed world is doing exactly as their banks ask, China’s banks to what they ask”
Yes, of course. The reason is apparent.
“I do not feel China is my slave, I do not feel I am their slave, but I do feel enslave by a crony bank elite that has captured my country’s govt. Whatever GSAcs, JP Morgan wants, they get.”
Take austerity measure and stop buying cheap Chinese imports. Honestly, I only by Chinese imports if there is no Aussie alternative. And I always pay me credit card on time in full and I have no debt.
“If we can’t pay our private debts to them and default, they simply get the money from our govt instead, who then tax us or sell the debt, further making us debt slaves.”
At least you can walk free from your debt, compare it to the Chinese worker in the factory. US government don’t tax you, they print instead (much easier)
God bless America, as you are truly the favorite of the father at least at this point of time.
hq,
I am not convinced. The real reason for this:
“So why export, if you can get better margin when selling it locally? The answer is simple, because the government (controlled by the rich) subside the exporting by taxing the poor people. This is a vicious cycle. The poor get poorer, so they have to work in the factory as slave labour to produce goods for the rich. Again, this makes goods cheaper and more competitive. There are also many other things, e.g. ignore pollution, use lower quality material, currency manipulate, etc. All of these are to maintain export.
Yes, rich people in China are smart, one hand they enslave poor to produce cheap goods, on the other they use the trade surplus to fund consumption in US and the whole western world, so that they can continue buying the goods produced by the slave labour. As long as there is export, the profit comes.”
could be different. The rich could make the same or greater profit feeding internal consumption. This is how the rich people in the West made their money some time ago before the new “post-industrial” era emerged.
Only if you put the whole thing in the context of the global balance of power it starts making sense. Initially export helped to get Western corporations involved and enabled the transfer of technology. Dollars acumulated as a by-product of currency sterilisation might be useful to stabilise the Yuan if there is a repetition of the late 1990-ies type crisis.
But killing the competition in the West is the ultimate goal – you will see in a few years time how well the Americans are going to cope with rising price of oil and the need to reform the economy. How long did it take in China to rebuild the state after the period of colonialism?
The West is decaying. They are so delusioned with the neoliberal way of thinking that they even don’t see the problem. It is not consumption what makes countries strong.
Look at India in the 19th Century. The British destroyed their economy to keep selling stuff manufactured by themselves.
Didn’t you study Marxist economics? What happens in China is a great scale NEP (Novaya Ekonomicheskaya Politika).
In the end it is all about building productive capacities in socialism.
@hq – if the internal politics of China are as you describe them, then it seems we are in league together against elite parasites of all forms but I don’t think that means West will be allowed defy laws of debt gravity. Having seen the abuses first hand of the Chinese worker, you are sensitive to them and I am sure they are horrible, not must in monetary sense, but in dehumanizing sense, better to be poor in a rural community living hand-to-mouth but with community, singing, holidays, family gathering, leisure time, time working together than to be a prisoner cog in a factory that is always well fed but can’t even talk to the person next to them. But your commendable empathy for the Chinese workers may make you less critical of the predatory nature of private central banks and elites in Western world, although you do acknowledge are commonality in that the elite parasites in China and West are to collude against average person.
Westerners have it much better than most, but that does not mean there are not elite parasites sucking life blood out of our economies. Shoot, when German mercenaries showed up to help the Brits try to tame the revolting colonies in America in 1776, they couldn’t figure out what Americans were complaining about as they saw Americans in New York area lived very well compared to average Europeans, had good food sources (farm and hunting), were not serfs to anyone, had nice houses etc (as long as you were not an African slave or an indigenous person being killed so your land could be settled and stolen from you) But America throwing off the parasite of the British crown was the right thing to do for the population..it was not that American colonists were that bad off relative speaking, in the world, but that they could get rid of crony, monopolistic business advantaged by govt edict, they could demand liberties and were in position to make it happen. Their previous success and good middle class lifestyles in the colonies, democratic local communities, the examples of democratic way of indigenous people they interacted with, all lead them to aspire to even more liberty and economic freedom and they were luckily in a geopolitical situation that gave them a decent chance at a successful revolt.
I make no claim that China’s policy has not been very hard on Chinese workers for last generation and has only survived by tyranny and the previous desperate situation of the people. And certainly realize that regular working folks in China have way less democratic rights and personal liberties than Americans and the Western middle class, which, while in a declining state, is still far far better off then 90 percent of the world. And some of this is certainly based on the misery of the rest of world as we took resources for cheap but owned the manufacturing of the world and abused cheap labor for our lifestyle.
I could go off on a whole other track about how really all regular folks that have to get up and work everyday to put food on table around the world all have elite parasites on their back in some form or another and are fighting some degree of tyranny. Sometimes the tyranny is royalty, sometimes the elite are banksters, often it is collusion of a govt captured by big crony businesses, or wealthy. Sometimes it is oligarchs or sometimes it is completely the govt that is the parasite and we all need to get these b@#%!ds off our backs, what ever form they take…but my posts are too long as it is, and this is about debt.
So on the debt front, I do believe that what could happen is the debt to some will never have to be paid, or more truly the situation is, the “wealth” many have in the form of debt to other will never be allowed to be taken from them, so if default is a must, they will find some other way to parasite people for the lifestyle…but debt will collapse…elite parasites may survive just fine, but debt will collapse…
Here is a TED video that gives some global historical statistical animations by Hans Rosling who ends up introducing a tool that allows users to do their own statistical analysis of UN databases.
I would hope that the users of this site might find it useful.
http://www.ted.com/index.php/talks/hans_rosling_shows_the_best_stats_you_ve_ever_seen.html
In US, a debt that can’t be paid, won’t be paid…in spite of our govt many interventions…IMO this will be Aus situation in a few years
Ocne defaulted, mortgages rarely pay:
http://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2010:06:22-mortgages_once_defaulted_will_rarely_pay&source
ak,
Re: # 105
Andy Xie appears to be supporting your perspective on China. BTW excellent analysis for all of the China watchers. If anyone reads this piece I suggest you bear in mind Prof Pettis’ research which indicates that the Chinese increase their spending when interest rates are rising whereas Western consumers tend to decrease theirs when rates rise.
http://english.caing.com/2010-06-23/100154848.html
Sweet Spot for China’s Blue-Collar Revolution
angophera,
I got my copy of the Little Red Book from there:
http://www.amazon.com/Party-Secret-Chinas-Communist-Rulers/dp/0061708771
The book is excellent. It describes the multidimensional social and political reality of changing China. I have read about 1/3 so far.
There are certain things which can only be understood by people who remember the “real socialism” proper. Even McGregor (the author) tends to instinctively grade things from the liberal Western point of view. I would love to be still able to see the world in that way.
Unfortunately I often have flashbacks from the past.
What if “There Is No Alternative” but rather to central planning and tight control over currency, banking sector and enterprises ?
The old and inefficient command economy with top-down micromanagement where people had no property rights at all was converted in China into a mixed model which is still centrally managed by the Communist Party. The individuals have just enough property rights to unleash the entrepreneurial spirit but not enough to push the system into the tailspin of greed, overconsumption, speculation and resource misallocation. The inefficient state owned firms manufacturing obsolete and useless products were replaced or evolved.
China is now the factory of the world.
True, there are very serious social problems mentioned by other bloggers there but there is enough negative feedback in the system and no significant time lags to provide stability. The Party will adjust the system if they are threatened with losing power. The Party is firmly in control.
At the same time the Western capitalism entered the post-industrial phase. People make money mostly by doing things which have nothing to do with anything useful. The government (the state) is derided and hated by a lot of people due to right-wing neoliberal propaganda. People don’t believe in democracy any more. Big banks and corporations control the system and they do not act in the interest of the state. The introduction of intellectual property rights leads us to the new dark age of iFeudalism.
This is exactly what led to the collapse of Poland in the 18th century – magnates and “good neighbours” destroyed the richest and strongest country of Eastern Europe.
The Americans cannot even clamp down on big banks despite talking for more a year about reforms. The health system reform has been watered down as well. The Americans cannot even recapture a small town in Afghanistan from the hands of insurgents. But they have a lot of patents on everything including my DNA which I inherited from my ancestors.
The politicians in the West spend time clinging to power. In China they govern the country. Also – we need to know that they are in general much smarter than average Western politicians. I do not want to quote Senator Conroy here.
Please be aware that even if the West is able to sustain the current lifestyle for a few more decades if commodities and energy are cheap, the system has lost any abilities to self-adjust. We will run out of resources. But the changes will happen much sooner I believe.
If the Chinese export enough inflation the West is finished because of the moronic inflation targeting policy paradigm which can only be explained by the Marxist concept of class warfare and class consciousness. Otherwise there is no explanation for the theory so suicidal to the economy and plainly incorrect as the NAIRU is.
Of course we have been applied enough marketing sleeping pills so that we will not even notice… Everyone thinks about “wealth” that is about money – tokens and IOUs and the share market. We are soo rich… and have so much debt. People forgot about the real world – products, services, technology. We live in the world of iIllusions (manufactured in China anyway). Only sometimes iCoffins arrive.
When China and other rapidly developing countries were exporting deflation (due to the falling prices of products) the interest rates were kept artificially low what led to asset bubbles almost everywhere in the world. Alan Greenspan and the others did not see anything abnormal as CPI inflation was in check.
But we inhabitants of the West are demoralised and de-industrialised enough to be unable to restart manufacturing so all the price increases will be passed on caused the CPI inflation. This combined with the budget deficit reduction mania will inevitably result in killing what remains of the productive sector anywhere in the West by high interest rates and tight fiscal policy – to preserve the wealth of the rich and the income redistributing mechanism. Yes the West may wage another little war against a non-existing enemy to try to mobilise… this will not help.
The damp winter weather makes me depressed. I am too old and dumb to learn Mandarin. Besides that people with my attitude are not tolerated in any authoritarian system. This is what I remember perfectly well from living under the communist regime in the 1980-ties.
Anyway I can adjust and be happy even in the deflationary environment because I do not have any iIllusions…
ak,
Re: # 111
There is so much in your response that resonates with me. I could tie you up in conversation all day. This paragraph made a particularly strong impression on me.
“If the Chinese export enough inflation the West is finished because of the moronic inflation targeting policy paradigm which can only be explained by the Marxist concept of class warfare and class consciousness. Otherwise there is no explanation for the theory so suicidal to the economy and plainly incorrect as the NAIRU is.”
One of the many cruel fallacies of the present economic orthodoxy is the claim that wage demands are the (main?) source of price inflation. In talking with people who think the RBA is somehow a benign force in the economy I pose two questions.
1. When they talk about using interest rates to curb inflation do you realise that they aim to accomplish this by making you unemployed to reduce “demand”?
2. If they were truly seeking to cool overheated sectors through restraining bank lending why do they increase interest rates for every sector? Why not increase the risk weighting for loans to specific sectors?
The answers are pretty obvious to people here but hardly anyone I have put these questions to understand the ‘cui bono’ at work here. Capital vs Labour and Debt Funded Speculators vs Savers/Producers, the real “class” war.
This has been a very interesting post. I am still hopefully we dont have to go down the path of the Chinese. The Swiss in my opinion are in the box seat, the swiss Franc is being seen as the new reserve currency and they will be in a position to continue to buy quality distressed assets throughout Europe and the US and probably Australia. They are also more experienced when it comes to banking than the majority. The only issue is that their Tourism is going to have a rough time.
“Direct inject M0 will stabilize banking system during the accuse period of crisis. However, running large fiscal deficits during crisis actually require creating more M0, because
1. Government won’t be able to borrow much from private sector
2. Increasing Tax is not an option”
hi hq,
well infact it depends on how the spending is done.
the fed, undertaking open market ops, or purchasing privAte sector financial assetts such as commercail paper, or tarp for instance in return for increased balances on reserve accounts, only results in one giant assett swap and a build up of bank reserves. they have no positive impact on the nett assett or equity position of the private sector. so yes a massive build up of base money, that may be theoretically loanable, but not, because of the lack of demand for credit by the private sector.
however, deficit spending by crediting peoples bank accounts, does have a positive impact on the nett assett and equity position of the private sector, which can increase the deposit base and hence the growth of m1. so deficit spending in this way has a direct impact on m1.
as for the government borrowing money from the private sector or increasing taxes, well in a crisis when we have a significant drop off in domestic demand, the government is not revenue constrained, since it can spend first and tax later, or my preferred option never
. because the government isnt revenue constrained, it doesnt need to borrow from the private sector, and it can reduce taxes which like depositing into peoples bank accounts, has a positive effect on the nett assett or equity position of private sector balance sheets.
the government doesnt actually need our taxes for funding anything except to determine how resources are allocated.
things can get complicated though, in that improvements in private sector nett equity, can drive the credit creation mechanism to even higher levels, and once borrowing limits are reached and credit creation starts to decline again, this has a significant impact on domestic demand, thus forcing the government to run even larger deficits to counter act the deleversaging process so eloquently enunciated by steve.
what the australian government whether its going to be headed by julia gillard or tony abbott, are going to find out, is that they are going to have to forget about running surpluses for the next 10 years, unless they want 10% unemployment, and a housing crash. we have too much private sector debt to do anything else but run fairly large government deficits well into the future, and spend that money in a way that allows the private sector to service its debts and improve their nett equity position.
“1. When they talk about using interest rates to curb inflation do you realise that they aim to accomplish this by making you unemployed to reduce “demand”
the problem angophera, is that the rba are using an axe to perform surgery on the economy as oppossed to a scalpel, through this nonsensicle inflation targeting policy.
as if they are in any postition know with any sense of certainty what the risk free rate of interest should be.
the sooner we remove the power of the rba to set interest rates, the better .
the only risk free official rate of interest in my opinion is zero. and under normal circumstances in an economy such as ours where we would run budget deficits as oppossed to this present nonsensicle obsession we have with surpluses, thats where official interest rates would be in the normal course of events if the money markets were left to their own devices in such a deficit environment. well atleast they would be closer to zero than 4%.
mahaish,
This is probably even funnier than the Internet filter offered by Senator Conroy.
“a coalition government would bring “the most experienced and accomplished ministerial team in a generation”
“No amateur hour bungles from us, because we know what a good government looks like, we’ve been in one,”
Mr Abbott declared his plan as “prudent, possible, desirable and doable”.
It begins with a pledge to restore the budget to surplus within three years and start paying Labor’s debt.
http://www.smh.com.au/national/abbott-trumpets-12point-plan-20100626-zapp.html
I can tell everyone from my own experience how living in a country with 10%-20% unemployment looked like. People used to install metal bars in windows but it had been easy and cheap to find an unemployed builder to fit them until most of them migrated to the UK and Ireland .
http://lh6.ggpht.com/_tcq6CDR4oow/Sb0pHjeqdZI/AAAAAAAAAHk/FHzrIZ0psC8/s640/IMGP0313.JPG
(The photo is from the home renovators forum, I haven’t invented the story:
http://forum.muratordom.pl/showthread.php?97836-Mieszkanie-w-starym-domu-i-remont-%28prawie%29-generalny )
mahaish #115,
“the only risk free official rate of interest in my opinion is zero. and under normal circumstances in an economy such as ours where we would run budget deficits as oppossed to this present nonsensicle obsession we have with surpluses, thats where official interest rates would be in the normal course of events if the money markets were left to their own devices in such a deficit environment. well atleast they would be closer to zero than 4%.”
The US has already tried this, ZIRP, money markets in control and lending money to anything with a heart beat and the US govt/s in debt for the last few centuries happily running deficits year in year out with only a few surpluses to mention.
I for one do not think they are the model of the ideal economy.
DrBob127,
Excellent link.
Loved his ‘new insights on poverty’ as well.
Finishing a lecture with a sword swallowing demonstration would be a hard act to follow.
Will We Have Inflation, Deflation, or Hyperinflation? Part 2
(Steve gets an honorable mention)
Angophera,
2. If they were truly seeking to cool overheated sectors through restraining bank lending why do they increase interest rates for every sector? Why not increase the risk weighting for loans to specific sectors?
I think this is another example of something that sounds great in theory but is not practical in reality.
The mechanism of assigning risk capital is pretty complicated from an operational point of view, in other words it is not something simple to implement. As such it is not a mechanism which is flexible enough for the RBA to use it in policy setting. Furthermore it is not the RBA which oversees this area of regulation.
Most importantly however is that this notion demonstrates centrally controlled economic thinking, or it is a move in this direction. The problem with this kind of thinking is that you are giving beaurocrats too much economic power, instead of allocating risk weightings in the most appropriate way, this power would commoditise decision leaving the process open to corruption and lobbying.
Assigning risk weighting is most appropriately left in the hands of the people who are taking on that risk and whose livelihood depends on this decision process being economically viable. Risk management should be used to manage risk not to control the economy.
The reason the RBA uses overnight interest rates to influence the economy is because they can. The overnight RBA account does not exist so that the money supply can be controlled, it exists to help facilitate the daily activities of the banking system. But it does give the RBA an opportunity to control the overnight interest rate in order to act as an economic stabiliser. The approach is a pragmatic one, it is used because it can be used, the approach you propose is what they should be doing but in reality if the mechanism is not there the theoritical reasons for why something should be done are practically meaningless.
Also – the mechanism via which specific sectors can be targeted is tax policy.
Just re my favourite subject the Swiss example they exercise fiscal policy at a cantonment level ie regional. As an example an area such as the Pilbara or Kimberleys they would have lower taxes where they are seeking to develop. Companies could pay lower salary as the after tax income for the workers is still comparrable and the companies either make more money or invest infrasture or maybe pay an RSPT.
Re Mahaish and the MMt , the SWISS have been utilising MMT in that by being a safe haven and making sure that their borrowings have been used for productive purposes and owning stuff like Xstrata etc, they will take this oportunity of putting more money into circulation, probably drop taxes on a domestic front so that they dont suffer to many from the higher SWISS Franc. I daresay the heads of the Chinese Gov have their own Swiss Accounts in the event they need to organise an exit strategy.
So long as MMT was used prudently and for increasing a nations productivity and not by Numbty political leaders after reelection so that they can recieve a lifetime pension, I am all for it.
The Swiss SNB had been battling JP Morgan in trying to stabilize their currency agaisnt the Euro, they are not going to battle the market directly or the Bond market, their economy is sufficently flexible, and I daresay their popolution sufficently pragmatic to suffer a little bit of pain if needed.
Dogfood millionaires
http://money.ninemsn.com.au/article.aspx?id=1078662
apparently we knew in US housing bubble was coming and I and my friends weren’t the only crazy ones seeing it coming and shouting into the wind…case-shiller home price index peake in 2006 in US, many people did not come to grips with lowering cost till 2007, subprime mortgage lending did not blow up til mid/late 2007…but look when the search term “housing bubble” peaked in US (mid 2005)and then change the country in the pull down menu in this link to Australia and look when same search term peaks…we knew, you know, you just don’t really know yet
http://www.google.com/insights/search/#q=housing%20bubble&geo=US&date=1%2F2004%2078m&cmpt=q