In the Eye of the Storm

House prices are once again on the rise. London has seen the fastest increases to date with money slowly filtering out towards the rest of the country. Mark Carney, the Bank of England Governor, pays empty lip service to interest rate rises. Even if they were to go up tomorrow the damage is already done. It was done when they bailed out everyone, slashed rates and embarked onwards with Quantitative Easing. Raise interest rates tomorrow and we would be back where we started only worse. However history shows that central banks are always reluctant to raise their rates in a timely manner, even when they are raised they stagger it over months and it then takes months or years for the broader economy to feel the restriction of credit once more and fall back into a recession.

The 21st Century will view the central planning of money as an absolute disaster and free market alternatives will replace the current defunct system, good money always drives out bad and Government money is never good. Many Central Banks are using their faulty inflation rates as guidance as to when interest rates should rise but their metrics are critically flawed. 

Inflation is not just the price of staple goods such as milk, televisions, cheese or oil. If the price of the stock market rises that's inflation. If house prices rise that is inflation. If Gold rises that is inflation. If the price of a Picasso masterpiece rises, its inflation. If we take these items into account, the hard assets, then inflation is rising at increasingly faster rates. Its important to understand that the prices of these items are inflation the Central Banks just choose to ignore them in their indexes.

Another problem facing the planners is that interest rates can't rise or at least not by much. Many Governments don't want them to rise as it impacts on their already woeful deficits. It would hurt their tax receipts. It would ruin the "feel good" feeling in the run up to the UK election. People are beginning to stretch themselves once more and pile up debt on the low rates that are currently on offer. Mark Carney blames everything but loose monetary policy the real fuel to the fire that sparks off an asset price bubble. The same reasons that were cited during the previous boom are once more trumpeted to causing the recent house price rises:

• Too much Demand
• Too little Supply
• Not enough building

The real reason is excess credit. Its loose monetary policies that are causing house prices to rise once more. Demand and supply dynamics have changed no more than back in 2009, the difference is Central Banks have turned on the taps once more to release more credit and banks are once more recklessly lending to anyone with a pulse. Same with Gold. Same with art collectables or with vintage cars, the free market can not produce hard assets to keep up with inflation. Electronics and consumer goods hide real inflation as capitalism does such a wonderful job of providing these services in ever greater quantities at lower prices. We are not building more land. Houses are getting built but its the land they sit on that causes them to rise in value. 

So we are in the eye of the storm and if I'm a betting man it will go on for a few years at least. "Get it on tick" is once more a way of life for people. Once the tanker moves in one direction it generally holds course for longer then people can call it. When will the crash come? No one knows. What format will it take? Again no one can say for sure. All we do know is that the fundamentals are progressively deteriorating. When the 2000 stock market bubble popped the central banks re-leveraged the system, cranking down interest rates to low levels. Then 2007 and interest rates went to zero and monetisation actions were also taken. So once interest rates rise (if they do) then once more they will see-saw back to zero but it will be very hard to get credit moving with all the extra problems. Again monetisation of debt will happen, this time will see even more draconian manoeuvres. We could get "Bail-ins", similar to a Cyprus situation where money is simple taken from the wealthiest account holders (or even across the board) to try and bail out the system; a direct attack on freedom. One thing is for sure, it won't be pretty and it won't be moral.

The asset price bubble is global. This pod-cast with Krassimir Petrov highlights Asias problems and how it is creating reckless bubbles. House prices are rising there even faster than the UK, yet no doubt the same reasons are given, limited supply, too much demand not enough new builds and so forth. As mentioned near the end of the pod-cast central banking really does change the morality of people for the worse. Excessive credit does great harm to us all.

Rationing is taking place in the UK

Do not underestimate the importance of prices in shaping our quality of life. Countries without them do not prosper. Prices are the key component which co-ordinate supply and demand in an unpredictable, ever changing world. Zero percent interest rates sound great to many, just like having a free bread policy or setting its price below the market level. As previously discussed, it can only lead to rationing which is occurring in the UK today with Mortgages. Its not just backward countries that can experience such a phenomenon.

Interest rates are prices. Unfortunately the government tries to set such prices, usually below the real market level. Well we may like to think that our society is above all that rationing nonsense but that's exactly what is happening in a developed Western country today. 

After the financial crash of 2008 the Government took out large stakes in many UK banks. It also propped up the financial system by slashing interest rates in an attempt to pump liquidity into the insolvent system. It did the job - the losses were stemmed and prices began recovering. The problem was bad assets were not liquidated. Bad loans that were made during the credit boom, again engineered by the Governments loose monetary policy by setting interest rates too low, are still present. These bad loans remain on the Banks books, and they know it. In order to cover against such bad loans (and ensure no more are made) banks they need to preserve capital in order to cover such shortfalls. Viewing housing as a dead duck, Banks demand borrowers to stump up larger deposits, deposits they know people can not afford. They are sitting on cheap money supplied by the Government at very low rates but are too aware of the poison within the system. 

A true free market would clear prices, drive savers interest rates up in order to meet the capital supply and demand imbalances while liquidating bad loans. Its similar to wheat shortages. Bread prices in such a situation would rise, forcing demand to tighten and directing economic resources to find new sources of wheat increasing the supply thus solving such market imbalances.

The free market can't do this with mortgages today. During the credit boom people were given 125% mortgages and interest only payment options. So long as the market went north, banks would have the required equity in a house if repossession was necessary. Now with prices falling Banks are driving up interest rates for people with less than a 25% deposit, the banks safety margin. If you wish to take out an interest only mortgage (which few banks offer) then they drive up rates to deter the buyer and cover the risk that less buffer would be created by the buyer. In these times you need at least a 10% deposit, even then the deals are few and sparse with rates on such products far above the Bank of England's base rate. The Bank of England's artificial interest rates keep the whole system in a zombie state, a la Japan. The commercial banks can access cheap money so existing borrowers with large capital can access it and savers have zero percent interest rates on their savings. There is no incentive to save, repair the capital shortage, as Central bank give out money for nothing. Why pay someone to save and accrue genuine capital when you can borrow from the Central bank for nothing (which incidentally is not real capital, it in fact erodes the value of genuine capital within society).

You can't escape the basic laws of supply and demand by artificially manipulating prices. 

As the market rations mortgages people believe we need further Government interference despite the fact that they caused the shortfall in the first instance. The Governments solution is to take taxpayers money and give it to first time buyers to meet the banks deposit demands. Of course this only makes matters worse. The Government merely diverts economic resources from more sustainable lines of production into the dead duck that is housing. It gives this to people who probably can't afford the house in the first place. It also is completely unfair as it becomes a lottery who wins this money. If further losses are incurred then it is the taxpayer that foots the bill thus creating a double negative.

The solution is to allow prices to do their job. Otherwise rationing is the option and that is the last thing we need.

UK Housing Market Crash, Its a Marathon not a sprint

"PricewaterhouseCoopers said there was a 70pc chance that British house prices would be below peak 2007 levels in 2015 in real terms, despite a continued expected recovery in prices in cash terms – in other words any rise in property prices won't keep pace with inflation. ... Even in 2020, after five years of predicted relatively steady growth, the accountants warned there is a 50pc chance that "real" house prices would be below 2007 levels."

A recent PwC report on UK House Prices

The beloved British property bubble has recently looked shaky once more. QE has come to a short term end, political talk of fiscal austerity, interest rates with only one way to go and a Government who are fast running out of money. There are no fundamentals supporting the recent dead cat bounce in the UK's property market. Many still believe that you can't go wrong with property, that its business as usual with never ending positive returns from the value of their land, but the coming decade will smash all those myths with a bear market that will endure for a whole generation. If market forces were allowed to play out we would have had the housing market crash, we would have had the 50-60% falls but with modern Government its never a quick sprint, it always becomes a drawn out marathon.

Over the long term as I have mentioned the value of the land (or houses as people commonly mistake) goes nowhere (Of course the free markets lowering of many consumer goods means assets can indeed buy more consumable goods in the future. It's one of the reasons the rich always get richer with our current monetary system). Its the depreciation of the value of our currency that provides this illusion. Don't believe me? Take a look at the chart of gold to house price ratio in the UK. 

The target area is not my illustration but obviously someone who predicts rising gold prices relative to houses. The chart is probably not quite up to date, but it displays the important historical ratio of how many ounces of gold it takes to buy a house. The chart illustrate some important historical changes notably 1971 when Bretton Woods - the fixing of many Western currencies to the dollar which in turn was pegged to gold - collapsed. Through the 50's and 60's house prices seemed to rise relative to gold, but this is because the fixed price masked the real price a free market would have determined for Gold. After 1971 when the price was liberated the value of houses to gold indeed fell greatly. This is during a time of great inflation, generally rising house prices in Sterling - but the key thing is they may have been rising but not in real terms. Then came the 80's, 90's and 00's - a historical unprecedented credit boom based on pure fiat money with no restraint. Free markets did their job and lowered prices of consumer goods, the authorities reaction - expand the money supply to counteract this based on their flawed central planning metrics. It reached a peak of over 500 ounces of gold to buy the average house, but this is where the illusion stopped and gravity would take hold once more.

Record low interest rates, huge private debt levels, trade and budget deficits, a Government fast running out of money and bullets there is only one way for this asset and thats down. 

The bigger problem I see is - we haven't liquidated any this debt - we haven't de-leveraged! Politicians like to proclaim that our public sector debt is low (however its now exceeding and growing at a faster rate than our peer nations) but forget to mention our private debt levels. They are astronomical compared with other Western Nations. We borrow huge amounts of money from the Russians, the Saudis, the Chinese, or owe it to ourselves and we dig further into debt to buy overpriced assets such as houses in order to fund short term consumption. We kid ourselves into thinking we can do this by becoming a financial centre but in reality it's just a ponzi scheme under the hood. We borrow huge amounts of money, spend this money through the economy, which in turn drives the City of London which packages all this money up and in turn we kid ourselves into thinking we have a sound economy. Of course it will all come crashing down with disastrous consequences. The world will not look kindly on us when we can't pay our way without turning to the printing press. 

These private debts are weighing down on the economy and will stagnate growth for many years to come. Unlike other nations who are in the Euro we have our own currency. Worryingly 99.9% of economists seem to think devaluation and money printing are the way out, but this will only compound the troubles. This will in turn drive interest rates ever higher over the long term, ultimately making it harder to service our debts, that the Government are obsessed with not liquidating just like Japan's politicians 20 years ago. 

People naively think inflation is great for high debts, but again they forget that goods and services rise under such conditions. Serving debt may become more expensive but what happens when the price of energy or food rises beyond pay inflation like what is happening now here in the UK? People struggle further opting for present consumption or living costs over future investments. Inflation erodes our existing capital and savings or drives it out of the country, just like what is happening now with negative saving rates. Society doesn't invest in capital goods (tools, for example computers, machines, roads) as it needs ever more resources in the present time to stand still. Societies prosperity relies on the capital structure, put simply the access each generation has to tools. I have higher living standard than my grandfather as I have more tools at my disposal. University, the Internet, a computer and so forth. When Governments inflate they give people pay cuts instead of allowing the capital structure to adjust. Companies accept this as a solution but in reality we get less productive as tools or innovation are deemed surplus to requirements over the short term. To an Austrian economist all of this makes perfect sense, but to the many it will only become clear once the process occurs. Then it will make perfect sense to all.

The Spanish are another country with similar issues to the UK. They also have a lower public debt compared to others, but their private debts are relatively large. They also try and prop up their zombie banks and prevent liquidation. The US on the other hand leads the western world in this aspect. Who was the nation writing off all these bed debts? People viewed the sub-prime fiasco that the US was becoming the basket case of the world but in fact they are ahead of the curve, indeed ahead of Europe that's for sure. The value of their houses have already fallen around 25-30% but their bubble was no where near as bad as others such as the UK. They don't have as much private debt as the UK. And despite talk of manufacturing decline, who produces some of the most innovative and high tech products in the World? The US. I'm bullish on the US relative to other nations. I'm wouldn't invest there, which tells you the trouble the world is in.

For example Apple is a marketing machine, with a whole fanatical legion of followers. They make their hardware in China buts its in their product design, software, marketing - the creative economy - that provides the real income. The UK would be lucky to have the same clout, but we don't. Sure we have small to mid size innovative companies which I take my hat off to who do a great job, but we have no Googles or Microsofts. All US based with their profits going back to their home country. 

My employment record is great illustration of the UK's problem. I currently work for a large Japanese based firm, prior to that a large American Services Company. I've worked for 3 UK based organisations. A UK government backed learning centre called the Open University, a car sales company called Reg Vardy who sell cars made by companies based in France, Germany, Japan the US - basically anywhere but the UK and a telecommunications company who sold German telephone equipment made by Siemens and photocopying products made by Cannon a Japanese imaging specialist.

Where are the large British companies? This is the problem - I agree with letting foreign companies and expertise come in - this increases all of our living standards. But it can only do so much. We will never be able to maintain the illusion we have made for ourselves under the current framework of more debt, more sales, more jobs based on this debt, rising assets based on this 'prosperity' with the cycle going full loop. It doesn't matter if its tangible or intangible - we only seem to be able to sell others products to ourselves by increasing our short term consumption debts. We make an excellent nation of salesman and people who get into huge debts but at some point in the future others will demand payment and stop lending at which point we will come short. 

The values of these such debts are tied in many places to assets such as houses. The government can not dampen or assist in this rebalancing process, all they can do is make the imbalances worse like they are doing now. By enforcing the cycle listed above. People like to think this is different to the seventies.

Back in the seventies we propped up manufacturing, car makers, our steal works etc. This was despite the fact that others around the globe were doing it cheaper and better. Then Thatcher came in and changed all this. She stopped propping up these type of jobs. Of course unemployment went through the roof as it takes time for the private sector to create sustainable jobs that were competitive in the global marketplace. In our present time replace factory worker or coalminers with estate agents or beauty therapists. Same problems just different unsustainable lines of work.  Sure we may have a need for such people but not on the sheer scale we have them now. That's the simple fact why for example estate agents haven't been hit as hard as they should have been. Low interest rates and printed money have supported the assets that they sell. The government has in fact given many of these lines of work a bailout, by ensuring the debt economy and imbalances can continue. 

People don't understand when you try and put all this into context - the unsustainablity of the debt we amass. Business as usual, I don't know how you will afford to buy if you don't buy now and so forth - as though this exponential debt boom can continue. "Surely the Government will turn to negative interest rates or the Government won't allow the prices to fall". Everyone misses the real crisis to come when the Government has no more bullets, they will no longer have control of circumstances and events will dictate policy. Greece may have been removed from red alert but the solution was just more of the same - more debt for all to bail the Greeks out. Economic gravity will take hold - you can't escape it. 

The illusion still seems real to people. Like a magician Derren Brown or David Blaine who kid people into believe that they are performing an art form or something that is indeed beyond the realms of magic but they are just the same as Paul Daniels - it's a trick that has been handed down through the generations only with their modern twists on such acts. The Gold ratio of house prices illustrates that house prices are just an illusion over history. Its the decline of the purchasing power of our governments monopoly over our money that provides the magic trick. The magic act has many more years to run.

Whats the deal with house prices?

You can't seem to escape news regarding the property market, regardless of how insignificant it is. Both the UK's main indexes, the Nationwide and Halifax, have been putting together recent small upticks. Historically when house prices turn they don't reverse for years. Could it be different this time? It's never different, in fact this is how it always works in history, prices drop a bit, drag a long for a while or show slight upwards movements, then the process repeats for years. The housing market is so illiquid it is always very hard to determine what a market price is.

I have become tired of news regarding house prices. Throughout my adult life I have heard nothing else, the news gives greater coverage to the value of your home then real issues that occur throughout the world.

House prices are one of the most misunderstood asset classes. A while back I said that houses are historically a poor investment (a house is a home, but many believe them to be the best investment you can make) and I think many people would find that hard to believe as we have been continually told for the past 10 years that houses are the best investment. During the boom, pundits and experts were proclaiming that houses had the largest returns, yet also had the least risk associated with them compared with stocks and bonds (in fact many said no risk). This is what happens during a bubble, history is disregarded with risk/reward concepts turned upside down.

However when history is examined prices of homes performed poorly against all other assets. We can run through the numbers to illustrate this. If we take the Dow Jones during its 1980's and 1990's bull market along with the upturn in the current decade, it went from around 850 in 1982 to 14,000 in 2007. This equates to a return of 1657%. The Gold bull market during the seventies, went from around $35 to $850, a return of 2428%. Even if you disregard $850 as a top as this price was only achieved for one day, gold consistently hovered around the $450 mark for years after, a return of 1285%. So what about housing? This is where we come to the relative poor performance of home prices. Using the Nationwide's figures from a low in 1982 of around £67,000 to £186,000 in 2007 - a return of 277%. This was under two of the greatest housing bull markets in history. Even if we take the recent boom it gave around 250% returns on average. So to summarise:

• Stocks - 1657%
• Gold - 1285%
• Housing - 277%

Of course the figures I have used are by no means rigorous, they just illustrate the performance of particular asset classes during their bull market. So what gives the impression that returns on a house are so great? One word, leverage. Most people that buy a house have to take out a mortgage and subsequently only put 10% or so down. Therefore any gains that are made seem all the greater. If you bought a house for £100,000 with £10,000 down, if the house rises 10% in price then you have doubled your money. This is the power of leverage. However in the event that the asset falls in price this is where the story gets a lot more painful. Just as gains are amplified, losses are also increased. The house would only have to fall 10% in value for your deposit to be cleaned out.

Leave it to the professionals to make their living from property, for the rest of us it should always be viewed for its primary function, a home.

With the bull market figures above you can see how people have got it wrong when they talk about the recent 'commodity bubble' or the current 'gold bubble'. Gold in dollars has only gone up around 300% since its low. Its only just above its all time high 30 years ago. History says bull markets in these types of assets have much further to go. Another good indicator is the Dow to Gold ratio. In recent history when stocks are in a bear market and commodities are in a bull market this ratio gets close to around 1:1 meaning an once of gold is the same value in dollars as the Dow Jones index. We are around 9:1 currently, however what happens if the Dow increases over the years to come as the government continues to inflate all asset classes? The gold target moves. 15,000, 20,000, 50,000 Dow? However high it goes, until fundamentals return to the stock market, I'm sure golds price will match it at some point in the future.

When the news reports on house prices, they always make statements like "Good news, house prices are on the rise" or "Bad news, house prices have fallen". Why is it that rising house prices is deemed to be good news? Many would find it odd if the journalist said "Good news, bread has risen again in price", but that's what they are saying with housing. The higher they go, the richer we are? Not at all, it just means there is more domestic currency in circulation and that rising prices are symptom of this action. Not too long ago when I was a teenager I remember being able to buy a good half a dozen sweets and chocolates with a pound. You could buy a mars bar for around 20-25p. I recently went to buy chocolate for my partner and couldn't believe the prices now. It was around 50-55p for the same bar. You would struggle to buy two items with a pound these days. Maybe the media should report this as good news, or if they ever fell in value report it as bad news.

Of course we are hearing all the usual babble as to why house prices will rise forever, the old myth of supply and demand, there is not enough houses. I always forget how we have waiting lists to buy houses as they are rationed out, or like under a Communist regime we form queues to buy our house. I always feel for those poor estate agents, their windows empty, as there no supply to meet demand or people resort to homelessness. Last time I looked there was plenty of houses to buy, in fact I get a paper full of them every week. Its more pounds that pushes prices up, not supply and demand. It becomes supply and demand issues when you start to see some of the above happening.

The recent reported 'rise' in prices will run out of steam at some point. The governments and central banks have declared war on anyone holding cash. Many people have turned to stocks or houses to place their money rather than in a bank earning nothing, but it won't last. QE have enabled the government to buy up bonds with the bailouts they gave to banks used to push up stock prices. The FTSE-100 recently had its largest quarterly gain, larger than during the tech bubble mania. As I've said before, bubbles are not inherent human 'flaws' or greed and so forth. They are caused by the exact expansive monetary polices we see today. Once you understand this, the financial system becomes a whole lot clearer. In fact you start seeing where the next bubbles will occur. There will be great volatility in many asset classes over the years to come as the governments try to inflate everything. This includes the price of our homes.

Riots, Protests and Revolutions

The video above has some interesting comments made by futurist Gerald Celente in the past few years, along with future predictions of what he thinks is to come. I want to expand on some of what he says in this post as there are various topics worthy of discussion.

Inflation Index

The video includes a scathing attack on Americas CPI index and with justification. Statistics are always open to manipulation and to exclude food and energy in peoples living costs is simply not representative of the average persons consumption patterns. The current monetary system we have then uses this index to target what level to set interest rates at, and how expansive monetary policy should be. A centralised monetary planning board, known as central banks, periodically modify this index in an attempt to represent peoples buying habits.

Why do they set targets of 1-2% for these indexes? Why not 5% or 10%? Why not set monetary policy based on population growth? Or on how fast GDP growth is? Why not any random figure. My point is that the current system is no different to Communisms version of centralised quotas, which had no relationship with fundamental market forces, specifically supply and demand.

As I have mentioned in a past post the market should take control of producing money. Karl Marx was right, money was the key, he was just wrong on everything else. Governments monopoly of this product means that people have no choice but to use their national currency. This in turn creates artificial demand, as I can't buy food in Euros or US Dollars here in the UK. Therefore there is no check in the short term on what the government can do, especially if all governments are following the same policies. In a free market of competing currencies they would all compete with one another, based on supply and demand of consumers desires. If people preferred a certain type of money, then the market would increase supply of that currency based on demand. If people chose not to use a currency, then a contraction in the supply would occur in order to match up with consumers needs. If money was oversupplied, as has been the case with the current government monopoly that exists today, then it would cease to exist as there would be no demand.

The above is not experimental either. Before Kings monopolised money (in recent times the government) money was always a spontaneous creation by the free market in order to overcome barter. Money originated from the market, the authorities just mearly copied it's conception. In fact fiat money like the system we use today has only ever existed when it has been enforced on the people by governments.

There are many currencies in danger due to the above supply and demand dynamics. If we take for example the US Dollar the worlds reserve currency, there are currently many overseas holders. The problem over the last couple of decades has been the increasingly amount that has been printed and the existence of deficits. Many major holders have expressed their concern, Brazil, Russia, Japan, China etc. In fact these nations are already moving away from the Dollar for example Brazil and China have discussed conducting trade in RMB, along with Malaysia and various African nations. Indeed China has been shifting its wealth into commodity's, Gold, Oil or companies and nations associated with these assets.

The problem occurs when everyone heads for the exit. This is a situation where all foreigners sell their dollars. Then we come into the supply demand dynamic above, with no buyers but lots of sellers the price of the dollar will obviously decline. With the government in fiscal overstretch it becomes near impossible for them to do anything about it. Over the long term China, Russia or whoever deals with dollars have no interest in the US. They are currently slowly planning their exit strategies exiting first on the trading currencies they use and keeping their reserves for the time being so as not to put too much downward pressure on the dollar.

Latvia is another worthy example of this currency supply and demand dynamic at work. With the recent IMF loan the country has received (fiscal strings attached) the government needs to rapidly cut current spending due to IMF fiscal constraints. With the economy already in a deep depression, this will further hit growth in the short term. This should create strong devaluation conditions as the market has less demand for the currency of an economy that is in a perilous condition compared with other nations (as its prior perceived productivity decreases). The IMF loan is nominated in another currency, and due to the authorities not wishing for the value of the loan to increase if their currency was to devalue along with the further credit rating downgrades which would result from such a devaluation, they have begun trying to defend their currency with their currency reserves by buying up the domestic currency to create artificial demand. Of course the market is placing positions that the authorities attempts will be useless so are putting it under further pressure as the market believes a devaluation has to occur. This is a prime example of how market forces can't be beaten. Latvia will eventually have to devalue and abandon it's peg (they only have so much reserves), it's just the politicians don't want to face the pain. This is what George Soros did when he broke the BoE and made a billion. He was simply getting the government to face reality sooner than they wanted (in the process the UK government wasted billions of taxpayers money for nothing, however it would have been more costly in the long term if the market hadn't forced their hand earlier).

Price Stabilisation

If we come back to the concept of the price index representing a price stabiliser, some economists believe that markets forces can operate better if prices are 'stable', and have chosen a rate between 1-2% as an optimal range to target. We can take two simple items priced in Sterling to illustrate the fallacy behind this 'price stability' concept, houses and DVD players. Ten years ago a DVD would have cost you around £400, now they sell for £20. A house during the boom went up around 200-300% priced in pounds. If you look around there are many other items that either went drastically up in price, or drastically down in the price.

People don't think that if house prices or stock prices rise in price that this is inflation, but it is. It's priced in pounds or whatever the domestic currency is and these new pounds have to be created either from private banks or by the government. Due to the fact that they are usually an asset for many voters this is deemed as good inflation, despite the fact that it is the same as any other type of inflation. You just don't buy these on a daily basis like food and energy, that's the real reason its accepted.

If you look into the data used you have to wonder the reasoning behind what items appear in the CPI/RPI algorithms. If we take the UK index for example, last year they removed Parmesan cheese and put in its place Cheddar cheese (presuming you buy cheese). Why the change? Could it be to do with that we import Parmesan and with the pounds recent devaluation this good has gone up in price? Could it be some Bureaucrat somewhere wishing to look busy so swapped the specific cheese that is used? To take another example they have also substituted DVDs for Blueray discs, "to represent consumers move away to newer technologies". Would this be due to the fact that new technology has greater potential to fall in value, thus creating a lower inflation value for the headline press releases to give the illusion that we have no inflation?

Neither 'price stability' or 'inflation targeting' makes any sense when you start to analyse it and think critically (they have to create inflation in order to combat market forces that increase purchasing power by making goods and services more plentiful). In the years to come I'm sure these statistics will be heavily fudged in order to try and fool members of the public, trying to maintain the illusion of prosperity.

There were a plethora of amusing quotas that Communist Russia used to try and replace the free markets pricing mechanisms, by using measurements of produced materials rather than prices (prices which are determined by supply and demand). An example would be steel production based on measuring tonnage produced per year. The managers aim was to try and produce enough to meet his target (so he didn't get shot or sent to Siberia by under producing) but to not overproduce in case they increased next years quota too much. Due to the fact that it was based on tonnage there was no incentive to produce good quality steel that was of any use to industry.

So then we come onto say the state controlled oil sector, where they would require drilling equipment made from such steel. Due to it's poor quality it would make drilling laborious as the drilling equipment would keep breaking requiring more effort and time to drill into the well (a classic hallmark of state planned economies is where labor intensive techniques are used over productivity improvements). When they eventually got to the oil, there is usually a natural gas cap on the top, as is the case in many oil wells. As they only had a quota for oil production the gas would be burned off, creating huge environmental damage along with the waste of a precious and non-renewable resource.

Can you imagine the above in a capitalist economy? A company burning off millions of pounds worth of natural gas? A company wasting time buying poor quality steel and then continually having to re-drill? Despite the myth that capitalism overuses the planets resources, capitalism actually makes the most effective use of them compared to all other economic systems. Its only that it supplies us with such a luxurious lifestyle that we use more resources. Compare this with a regime such as North Korea where half the population suffer from basic malnutrition, despite the fact that South Korea supplies aid. There we contrast how well free market forces treat us.

Sub Prime

Celentes comments on sub prime are very true, as many people still think this is the cause of the current crisis when it just a symptom of easy monetary policies. There is far more downward pressure than just sub prime to come in housing. The next stage is prime mortgages as people loose their jobs and can't find new incomes. For those in the UK don't feel too smug, we have sub prime too, we are just behind the US curve. In fact UK home delinquencies are now worse than US sub prime. It just takes time for the banks to write these loses off.

In the US there is Alt-A, Option ARM mortgages which will be the next wave of defaults. Mortgages where the person could pay less than the rate of interest on the loan. As more of these deals are worth more than the value of the asset there will be little incentive for these individuals to continue with such arrangements.

What happens when the central banks have to raise interest rates to defend their currencies? Central Banks will be very reluctant to do this which comes to the next issue, the inflation that they will create. When prices of staple goods such as food and energy are rising how will people pay their mortgage. Would you choose to eat or default on your home loan?

Population demographics are another factor, with many looking to retire in the coming decades won't these people be looking to downsize, to supplement their pensions (presuming they have one or that it hasn't closed/collapsed etc).

Still people talk about the next housing boom in the news. The TV and papers are still full of articles. Denial is still all around with many talking about houses as a great long term investment. We will see what these opinions are at the end of this bear market, but we are a long way off.

Tax revolts, Food riots, Crime and Revolution?

California has already experienced a tax revolt as the people chose for state spending to be cut rather than face higher taxes. With inflation down the road, food will always rise in price as money ripples through the economy. It's one of those goods that you can't avoid not to buy. As unemployment rises along with the general disillusionment of people trying to re-enter the workforce, many will resort to crime. Then with the deficits many nations are running up, will there be cuts in crime enforcement? With protests and riots distracting the police will there be enough resources to cope? Ever wonder why the military is returning from Iraq?

We are living in extraordinary times, indeed a revolutionary era. All the conditions are present, government overstretch, money printing, plutocracy as the rich are bailed out, economic instability and so on. Will the traditionally strong liberal democracies such as the US and UK survive? I suspect so, but it will feel like a revolution in the years to come. When the currency and bond bubbles burst, then we will have a real crisis, not the banking crisis last autumn that was just a warm up, as Celente has remarked "The Bailout Bubble". The real crisis is yet to come.

“Every generation needs a new revolution.”
Thomas Jefferson, American 3rd US President

Buying is Dead Money

It has been widely assumed for years now that renting a property is a waste of money, or what has become known as dead money. For years now I have rented, moving from property to property, one end of the country to another, and I have never understood the saying of 'dead money'. How can paying for a living space be dead money? I mean, I pay rent to the owner of the property, who then provides me with a house to live in. He maintains all the upkeep, insurance, wear and tear and I get to live in a fully furnished property. Now that property prices are completely collapsing, along with the overinflated UK economy, I can view the events occurring with no worry or stress, in fact with enjoyment as I watch an interesting chapter in human history unfold. I have no huge debt. If I need to move for another job I can relocate within a month or two. If I wish to move into a larger place I can do so. Renting, during a downturn like the one we are about to go through is anything but dead money. It's money well spent and let me break down some of the 'home ownership' myths that have been falsely put forward in the age of stupidity.

• The first one, and I always enjoy hearing this, which reveals the majority of peoples financial illiteracy, is rental payments are dead money as opposed to paying a mortgage. For the type of properties I rent in order to buy them in the past couple of years the interest payments on the mortgage would have been larger than the rent I paid. Now if I actually wanted some sort of payment plan, then it would have obviously cost a lot more, in fact all my wages pretty much. Then of course if I miss payments on a mortgage persistently I risk having the property repossessed and of course obtaining a terrible credit rating, with the bank chasing me for years to come. If I miss a rental payment persistently, the landlord will eventually be able to evict me, but I have no bad credit rating, no legal proceedings. I just have a bad reference, in which case you just don't use for your next property as most landlords are desperate for tenants.
  
  
• Rents will rise and mortgage costs will drop. This is the complete opposite of what will happen over the next few years. As credit becomes tighter and banks try to repair their balance sheets they will seek to deter borrowing and encourage saving. Therefore mortgages will be more more expensive. If I did buy in the last couple of years I would have needed to get a huge adjustable mortgage which would have been in negative equity by the time re-mortgaging came around therefore I would be paying the much higher adjusted rate. I feel sorry for a lot of people in this position who will have to pay a lot more in the years to come, especially when they see rents falling. Despite what the 'experts' say (the same people that were telling you the sound fundamentals of the economy, when I was telling you they were lying), rents will come down, in fact they already are. People are emigrating, moving back in with relatives as jobs are lost and so on, meaning less demand for rentals. This is how it always works in economic downturns.
  
  
• I have no upkeep costs of the properties I live in. If the boiler breaks down, I don't pay a penny, and its the landlord who is responsible. Washing machine breaks? No worries, my landlords wallet can pick that one up. Fancy a change of decor? Rather than buy a load of tat with the stress of getting it and building it, I can go find a house that is furnished to more of my tastes (if I was interested in that kind of thing).
  
  
• In the event I loose my job, I simply give my landlord two months notice and leave. Go back with the parents what ever I want. I can walk away, intact and with money still in the bank.
  
  
• The savings I have acquired so far I can put into savings accounts that will earn interest. If this money was put into a deposit a couple of years ago, it would have long been eaten away by the price drops of the past year.
  

Point is, I'm comfortable and happy renting, and for some reason for the past decade, in particular in the UK and the US if you rent you are almost seen as a second class citizen. The sad thing is, people are still trying to buy property now, thinking because it has dropped 10-20% it is somehow a bargain. People are still viewing property through the tinted glasses of a way to get rich. In reality the equity they will have will be shortly wiped out in the next few years and will not be recovered for decades. The collapse of Bradford and Bingley should completely topple BTL owners and it will bring about even more drops to come, along with the rising unemployment and government budget deficits. Despite the deteriorating state of the economy people are still talking about a bottom on property. A bottom will appear when everyone stops talking about a bottom. It will happen when people have become weary of debt, governments and banks. It will happen when mortgages are far cheaper than rents, and sizable deposits are required, with banks lending to prudent standards once more. It will happen when people have lost their 'pensions' in BTL and say there is no money in property and only a fool would buy now. It will happen when people say, buying is dead money.


Turning to the Bailout

The situation is quite clearly going from bad to worse. I said that the governments and institutions of the world would try and prop the economy up, and this would only make things worse. It's no suprise that the $700 Billion Bailout package has passed on the second attempt. Since the post war period, Western economists and leaders have become drilled in Keynesian economics, a tragic and false theory whereby governments should become active in fiscal stimulus activities during recessionary periods, with the discouragement of saving and encouragment of consumption. I mean it defies logic when you think about it, and its what is occurring at this very moment. We've just had the biggest consumer boom and spending spree, well ever. According to John Maynard Keynes whose theories our leaders are trying to follow, we should be increasing spending and government intervention, trying to prop up the very excesses that were caused during the boom. House prices are too expensive, therefore we throw money at the problem, which is a waste of resources and goes against the very market forces that demand the correction. What the market at the moment is saying, is that we have too much debt in society too little savings and are not producing any real value in the economy due to all the mal investment that has occurred. Therefore prices in certain areas need to fall and fall fast in order to bring about a normalisation to the economy. All good economists recognise the recession is the good part of the business cycle, and at the end of one the economy is returned to a state of optimal efficiency. The media and mainstream 'experts' however, have made economic contractions into something that should be avoided at all costs, even if it induces a worse recession in the end. Its all scaremongering, just like terrorism, rather than looking at causes and reasoning as to why the terrorism was created in the first place. It's how institutions always control people. Religion, for example Christianity, does this by giving the concept of 'hell', a place where people go if they don't conform with convention and ask questions.

This bailout package won't be the last. It's just the foot in the door. There will be more, with politicians proclaiming it needs to be carried out in order to save the system from collapse, when in reality the problems are compounding further, with the endgame of a worse collapse. Government deficits are increasing along with debts, while savings are being depleted further, thus the fundamentals are continually getting worse. I was hopeful we may let the bust proceed but as ever the powers that be have decided to prolong the bust and ensure that we experience the worst recession any of us have ever seen. We are entering a period of great change, as we pass the opening chapter of many chapters to come.