The rich seek shelter while the wise predict a collapse.
When’s the next recession? Are you ready for it?
We condense three 2007 articles and a classic from 2005 published by MoneyWeek, “Bust will follow boom - but when?” (August 26) by Fred Harrison, author of Boom, Bust: House Prices, Banking and the Depression of 2010 (2005); the 2007 trio are “Fed Pumps $41B Into US Financial System” by AP Economics Writer Jeannine Aversa (Nov 1), “Dollar hovers near record low vs euro” by Reuters (Nov 5), and “Gold closes at highest level since 1980” by Polya Lesova of MarketWatch (Nov 6).
by Jeffery J. SmithHarrison: There is a big difference between this bubble and past bubbles. In the past, national economies operated with a degree of independence. Today, we all sink or swim together: the major economies of the world are synchronized into a single business cycle.
In China as prices soar, erstwhile Communists are flipping properties all along the coast. In the US, house prices have doubled in the past five years. In the UK, the value of the housing stock reached £3.3trn in 2004, triple the value of ten years earlier. In all the developed countries put together, real estate prices have risen by more than $30trn over the past five years. That’s equivalent to 100% of their combined annual GDPs. This eclipses the 1990s stock market bubble (an increase over five years of 80% of GDP), and Wall Street’s bubble of the late 1920s (55%).
Economic models are overly focused on labor and capital rather than on land; property prices are what drive economies. While we talk about real estate, it is the plot underneath the house that makes the difference. In fact, the price of land is the best indicator of the state of the economy.
Based on the property cycle of the last 300 years, it appears housing booms precede recessions. When the average man can’t buy the average house, prices have to fall. This tends to work in 18-year cycles. There are usually 14 years of rising prices followed by four years of recession across the broader economy. As people struggle to meet mortgage payments, they have to slash their spending on products. Irrespective of the distinct characteristics of each economy, it seems that this 18-year cycle occurs across the globe.
The last bubble burst in 1990 so things will start to collapse in 2008 (1990 + 18) but not before. Government spending is still very high, stimulating the economy into 2008. In 2010, property prices around the world will start to fall and as consumer consumption collapses a global economic depression will follow.
The commercial property sector also has an ominous feel about it. Speculative skyscrapers are going up, tying up capital in real estate rather than in research and development. Money that should be funding the factories and infrastructure that would raise productivity is instead seeking out windfall gains in real estate.
Can anything be done to head off the depression of 2010? Not by a central bank. If it lowers interest rates, as unemployment rises and sales drop, sellers merely add that savings onto the price of houses. And lower lending rates keep up borrowing; the volume of loans swells the money supply which fuels inflation.
Forgetting interest rates, government could re-balance the economy by shifting taxes. Cut taxes on people’s wages and savings to reward enterprise. Collect public revenue from the rents of land to deter land speculation and drive efficient land use.
In the meantime, the best thing investors can do for themselves is to shift their portfolios into assets that can quickly be liquidated. Don’t believe anyone who says that the property market is going to recover strongly from here. The effect of housing on the wider economy is absolutely key to the health of the global economy.
JJS: Though dwarfed by government spending, central banks also pour fuel on the fire, worried as they are about the credit crunch. Citigroup chairman and chief executive Charles Prince stepped down. The company may write off $11 billion of subprime mortgage losses, on top of a $6.5 billion write-down last quarter.
AP: Since August, the Federal Reserve has been pumping cash into the financial system and cut its lending rate to banks three times. November, the Fed pumped another $41 billion into the US financial system, the largest cash infusion since 2001 9/11, and sliced the federal funds rate by .25% to 4.5%, after cutting it .5% in September. The funds rate affects many other interest rates charged to millions of individuals and businesses and is the Fed's most potent tool for influencing economic activity.
Reuters: Like clockwork, as the bank accepted more inflation, reducing the buying power of the dollar, investors then unloaded more of their dollars, flooding currency exchanges, reducing the dollar’s value. The euro remained near its recent all-time high of $1.4528, the highest since its launch in 1999. The Canadian dollar hit US$1.0729 or 93.20 Canadian cents, a modern-day record high. The dollar index, which charts the greenback against a basket of six major currencies, was at 76.362, off a recent low of 76.220, its lowest level in its 30+ year history.
Worried about further fallout from the credit market crisis, investors turned to the safety of government debt; as sales of US Treasuries rose, the yield from the US benchmark 10-year Treasury notes hovered near two-year lows.
MarketWatch: Investors are sheltering their fortunes from the coming storm. Propelled by the dollar's tumble to yet another record low and by surging crude-oil prices, gold futures rallied to their highest level since 1980, ending at $823.40 an ounce on the New York Mercantile Exchange. Earlier, the contract reached an intraday high of $828, a level not seen since 1980.
Jeffery J. Smith runs the Forum on Geonomics.
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