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A First Person Account Of How Bernanke's Export Of Inflation Is Fueling Asia's Last Bubble, And The Bonfire Of The Fiaties
Much has been said about how the PPI and the CPI are stuck in deflation mode (despite what everyone is seeing when buying groceries or filling up empty gas tanks). Much less has been discussed about how Bernanke's blunt policy tool of unlimited liquidity is leading to an inflation-driven bubble in Asia (and all Emerging Markets). Luckily, Macro Man Simon Black provides a first person perspective of how this bubble is developing, and how it will soon pop. In some ways this is empirical evidence of what Knight Research said previously: namely that the days of an EM push-pull mechanism are coming to an end. Here is why Knight's conclusion is spot on, paraphrased half way around the world: "when central banks start ratcheting up interest rates (like the Fed did in 2004 and what China is doing now...), buyers and developers no longer have access to cheap credit. Demand drops, and prices fall. When this finally happens, I think the subsequent fallout will serve as another strong argument to abandon the dollar and reset the financial system, especially in the developing world. All they need is a reasonable alternative. China is already allowing its currency to be used for cross-border settlement and limited reserve status, and as this function grows for the renminbi, you can bet that Asian nations will stop importing American monetary inflation and start exporting those dollars back home." A must read note for all those who base their investment decisions based on theoretical musings and thought experiment speculation.
From: Sovereign Man: Notes from the Field
Date: November 17, 2010
Reporting From: Labuan, off the coast of Borneo
Because I travel so much, I have the luxury of being able to compare real estate prices among all the places I've been recently. How does a flat in London compare with an apartment in Bangkok? How does an estate in Cape Town compare with a single family home in Singapore?
I have to say, residential real estate prices in many developing economies are astoundingly high on a value-adjusted basis... and it's because supply and demand fundamentals are being distorted by central bankers and politicians.
Housing demand, for example, should primarily be driven by demographic factors and real wages; rising populations and net migration increase the number of new households, and higher incomes reduce the average size of existing households (kids move out of mom and dad's house and find their own place).
Demand is often twisted by government policy, though. In certain countries like the US and the Netherlands, the tax code incentivizes home ownership by allowing the deduction of mortgage interest. Carrying costs like home repairs and property taxes may also be deducted in many countries.
Perhaps the ultimate demand distortion, though, is easy monetary policy. Interest rates don't generally matter for smaller purchases-- nobody checks the 3-month LIBOR before heading out to the local convenience store for a cup of coffee and a candy bar.
When money is cheap and easy to borrow, though, people have a strong incentive to purchase a home and bid higher prices because they can afford more house for the same (or lower) monthly payment.
On an institutional level, banks have a strong incentive to make loans for property in an environment of loose monetary policy; capital is plentiful, burning a hole in the bankers' pockets, and they're accountable to shareholders to turn that capital into profit.
We all know how this story worked out in the United States and the UK over the last few years; simply put-- not well. I'm seeing similar bubble indicators in several Asian countries right now... and it's a direct result of the so-called currency wars.
Ben Bernanke's successful efforts to reduce the value of the dollar have caused commensurate money printing around the world; foreign central banks are fighting to keep their currencies restrained against the dollar because nobody wants to be the country with the 'expensive' currency-- that would reduce their cheap exports.
A common tactic of foreign central bankers has been to artificially depress interest rates, making a great deal of capital available to local banks. Add to this many hundreds of billions of newly printed dollars that have fled the US seeking higher returns overseas, and it's easy to understand why asset prices are rising so quickly: there's too much new money in the system.
Thailand is a good example. The Thai baht has strengthened over 10% this year against the US dollar because institutions and large investors have abandoned their greenback holdings in favor of greater potential returns in Thailand. Coupled with the low interest rates set by Thailand's central bank, the country is awash with new money.
A substantial portion of this capital is flooding the housing market. Developers can get cheap loans to build their projects, buyers can get cheap mortgages to purchase the end-units, and contractors are able to get cheap credit facilities.
The final result in Thailand has been a significant runup in housing prices, as well as the number of units available. There is a massive bubble forming in the country, and the indicators are everywhere. One of the strongest that I saw was a series advertisements offering teaser mortgage rates at 90% loan-to-value... to foreigners!
(Now, if you've ever bought property overseas, you know how difficult it can be for a foreigner to qualify for a mortgage... yet it's getting to the point where if you have a pulse, you can get a loan. When banks and developers are giving money away, this is a major sign of a liquidity bubble.)
Thailand is just one example; there has been much discussion about mainland China's housing bubble as well.... the People's printing press has been running around the clock to keep up with Bernanke's, and the trillions of renminbi created has given rise to triple-digit housing returns.
Chinese money is also finding its way into regional property markets. Hong Kong is a massive recipient-- interest rates on the island are already near zero, and the combination of cheap money and Chinese capital has spun housing prices out of control.
For property investors, rental income hasn't kept pace with the funny money that's fueling the asset price gains; in fact, many investment properties are cash-flow negative (rents are too low relative to mortgage and other carrying costs). When you can't turn a profit in an environment of historically low interest rates, it's time for the bubble to pop.
We've already seen what happens next-- when central banks start ratcheting up interest rates (like the Fed did in 2004 and what China is doing now...), buyers and developers no longer have access to cheap credit. Demand drops, and prices fall.
When this finally happens, I think the subsequent fallout will serve as another strong argument to abandon the dollar and reset the financial system, especially in the developing world. All they need is a reasonable alternative.
China is already allowing its currency to be used for cross-border settlement and limited reserve status, and as this function grows for the renminbi, you can bet that Asian nations will stop importing American monetary inflation and start exporting those dollars back home.
In the meantime, if you're mulling over a life change and thinking about a move to one of Asia's vibrant, growing economies.... consider renting first.
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I learned that I saw things differently when I was reading a Time Magazine story about Reagan's 1980 budgets and taxation philosophy. I realised it meant that in a few decades the US would be up to its eyeballs in public debt, and unable to raise enough tax revenues, and its budgets would not balance. (an a-political observation not a bias) And everyone was wanting to mimic that prescription.
Just look at the finances of US states today who stuck with that formula (cali ... where it all started) when any stimulus it imparted had already long ago ceased to stimulate, but to wither.
You misheard or misunderstood what Keen was saying. He was not proposing to tax RE 10% per annum. Quite the reverse, he actually wants to encourage landlords not discourage them.
What he proposed was to cap the leverage available to borrowing against RE assets, so that further snowballing of speculation was thus capped, and therefore did not offer the returns that would promote runaway speculation cycles, that lead to unproductive bubbles, that take jobs and real investment out of the real economy.
It's aimed at organised flippers and financials, the 'predator class', as you put it, not at actual home owner-occupiers.
Keen sees speculative leveraged returns as the source of financial power that grows and then actively seeks to supplant functional law and regulation with dysfunctional law and regulation to game the system and the suckers. If you prevent it from growing the levered wealth you defang its power to buy-off politicians and all institutions, and media, and social organisations, etc., etc., to get its way. Thus credit bubbles are not flagrantly and openly encouraged as a 'good thing' (by central bankers) when all these do is weaken accellerate the destruction of the system, so the pigs can plunder assets.
There was no proposal to tax RE @ 10% per annum, which I agree, would be outrageous.
I assume the problems you mention (as discussed by Keen) would vanish in a world that had no fiat-money, debt-money or fractional reserve practices.
To be sure, someone who owned a nice pile of gold could lend his gold to someone to build a house, expand a business, or anything else. However, since that pile of gold is real, physical, valuable, produced savings, the amount of wealth available for lending is inherently limited to the quantity of wealth already produced and saved (not consumed). In the absense of fractional reserve practices, the most "investment" that could lost in any economy would be that wealth that is already "excess" (not needed for immediate living).
Some savers might lose their entire pile of gold savings on a bad investment (or scam artist). But most savers would not, and thus the overall economy could never get so dislocated as it is now, and also there would be no opportunity to create and empower anything like the massive financial predator class we have today.
I am quite certain the only way to prevent the growth and empowerment of a massively powerful financial predator class is to only support real, physical goods (including gold) in trades/exchanges/transactions (in other words, no fractional reserve practices of any kind whatsoever). Unfortunately, honest folks often cannot see this, and thus support various schemes that enable the scams practiced by the financial predator class of today.
So-called "governments", if they're allowed to exist at all (bad idea), should absolutely, positively never be allowed to borrow! That is inherent corruption, and almost sure to lead to endless bad things. I find it simply astonishing that people don't realize how utterly and massively stupid it is for a government to borrow. Ask government-lovers whether the government could provide better services if they had 25%, 40%, 60% or even 100% more money to spend on services. Well, if they didn't need to pay interest on the ever-increasing debt they acquire, they could spend that much more on providing services, because today they spend that much paying interest on previous debt.
To realize this (individuals and government are better off without debt) appears to be a pre-condition to understanding what should happen now... in just about every country on earth. That is, default on the debt, and never again borrow. Hopefully the default would convince the market to never lend to government again, which simply makes the system better (no temptation).
Keen does not believe Fiat paper or plastic will go away, not for long anyway, there are too many people, too much momentum, too many 'non-productive' people, too much blowback.
I agree that's the realistic view. So I looking at things from that perspective and seek a better situation.
Keen wants to limit total leverage available to the owners/landlord to 10-times the average annual market rental value for the RE property. Thus making flipping and outsize wealth gain vastly slower and more manageable and bubbles and the rest of it less likely.
I understand your hardline points of departure from this. And I respect its ideal, but I'm sure even you accept it's extremity, and not the more likely or realisitic outcome, at least not soon.
That could change, I can see it is not impossible, but I don't think it will. Other than this, a real bills type arrangement is not irksome to me. I could certainly get used to it.
Thank you for you views friend.
I thought Knight was looking for parabolic dollar (..."Accordingly, we expect a shockingly powerful rally in the dollar"), as hot money from collapsing emerging markets (due to rising interest rates) is repatriated.
The ultimate and planned end result is regional trading blocs a la 1984. That's what the Euro experiment was all about. It's easier to control the currency of a region rahter than a group of seperate currencies. When we start to come out of the coming crash, the world economy will be far different than today. The NE Asia bloc will star China and Japan as the economic engines, with the Koreas along for the ride. Euro bloc, sub-Sahara Africa bloc-probably dominated by China. Arab bloc, S and N America blocs, etc...
The USA, Canada and Mexico will have something like the Amero and the recovery will include more internal consumption and retooling of the economy. It's going to get uglier and uglier in the world...............