Thursday 16 June 2005

Pic of the day: Since I already used a Boomtown picture 1 year ago, this time my image of horrible destruction will be from the anime Stellvia.

The end of the boom

It seems almost fitting that yesterday my CD from Japan arrived, titled The End of the World, by the gifted and industrious singer Angela. And today The Economist is out with another issue. And boy do they have issues.

The magazine totally vindicates my view on the global housing boom. Basically it says that the last five years have been a disaster masked by fake growth. The "growth" comes from borrowing against homes that are priced steadily higher without gaining actual value. It is purely theoretical growth, but the borrowing is horrifyingly real. The fake growth from pricing up homes & property account for a total of around 100% of GDP for the rich world over the last five years. (Not each year, obviously... it should be somewhere around 20% each year then.) Yes, I hardly believed my eyes either. In the words of The Economist, "it looks like the biggest bubble in history." This means that if we ignore it (as we should, since it is just mascara for the economy) the world is in the throes of a recession the likes of which we have not seen since the Great Depression.

It's not like I haven't pointed this out for a while. If you borrow money, that's not growth. Quite the opposite. Your economy is not improving unless your employer pays you more. They don't. Quite the opposite, again. People work more and more for the same pay, at best. Benefits are withdrawn. People lose better jobs and have to take less attractive ones. But luckily – or so they think – credit is cheap, so even without a really good job you can still buy a home. And then since the home seems to be worth 20% more each year, you can borrow against it, and have the money you would like to earn but cannot. And since you have the money, you are satisfied. Yeah, you will eventually have to pay interest on these loans. But you can just borrow money to pay the interest, right? After all, you grow richer and richer the longer you hold onto your house.

Yeah, until it stops and then goes back down the same way it came up.

***

There is something fundamentally wrong with having low interest rates during economic growth. We have come so far that here in Norway, the government prides itself on the low interest rates as if they had done something heroic to bring it about. The truth is that central banks tend to lower the interest rates when economy crashes. When we now have low interest rates in Norway it is because the whole western world has them, in fact the whole developed world and then some. This again is because we ought to be in a panic right now. A really bad recession.

The USA, the world's consumer of last resort, is buying and buying and buying. Each day about 2 billion dollars of goods flow into the country more than is exported. For borrowed money. Borrowed against imaginary security.

If the day ever comes when a large part of the population – or even a decent minority – have to pay their debts, the dominoes will begin to fall. They have borrowed against their houses, so if worst comes to worst those houses will go under the hammer. Be sold to pay the debt. This is not a problem if it is one or two in each neighborhood. But if something sets off a larger sale, then there won't be buyers at the current prices. First-time home owners are already a much smaller part of the buyer pool than normal. They simply cannot afford it. You cannot afford a home unless you already have another to sell for a similar price. Capitalists still buy, to sell at a profit later. But they also have their limits. Without new buyers, the prices will have to go down. Once the prices start to go down, nobody will continue to pay more for the other houses around, and it will no longer be possible to borrow more to pay off the creditors. More homes will have to be sold. And then it repeats again, over and over. You only need to topple the first to set off the domino effect.

I have been wrong in the past about how far the cover-up would continue before others started to notice that the emperor had no clothes. I was not wrong, however, when I predicted a recession starting in 2000 and continuing for quite a while. It has been here all the time, but it has been covered up by a joint effort of government and private interests, bidding up house prices to levels that have nothing to do with how valuable they really are (that is, how useful it is to own your own house). This is not a conspiracy as in "who shot Kennedy" conspiracy. It is simply that most people very strongly prefer to believe the lie over the truth, so they continue to do so until it all comes crashing down.