- Money Morning Australia

Government and Economy Decline In Tandem


Written on 07 July 2010 by MoneyMorning

I did not hear it, but I read that Ben Bernanke, chairman of the satanic Federal Reserve, admitted that “Our nation’s fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession.”

Well, neither he nor the Federal Reserve are going to take any of the blame, even though they are solely responsible, and he says that the problem is the government’s fiscal position, as “The exceptional increase in the deficit has in large part reflected the effects of the weak economy on tax revenues and spending, along with the necessary policy actions taken to ease the recession and steady financial markets.”

No mention, of course, of the crucial role of the Federal Reserve, which was to create the money to create the boom, which created the bust, and now to create the money to bail everybody out so that we, as a nation, would have time to leisurely wait for some miracle to happen, sort of like at the end of old Grecian dramas where the plot has become so impossibly and hopelessly tangled up that the only solution was to resort to a “deus ex machina,” which is when a supernatural power comes roaring in and magically fixes everything, applause, applause, applause, curtain comes down, the actors take a bow and everybody goes home happy.

As if waiting for a deus ex machina was not enough, Bernanke then contradicts himself. In the first paragraph when he said that the fiscal position of the nation has “appreciably deteriorated,” which is code for “We’re Freaking Doomed In Spades (WFDIS)” because the American system of governments IS the economy!

In fact, the incestuous conglomeration of local, county, state and federal government is now so large that it, literally, is the economy when you combine local government spending and county government spending and state government spending and federal government spending, which collectively now spends slightly more than half of GDP! Half! And taxpayers pay them to employ 1-out-of-6 workers! And government supports half of the population consisting of the old, young, infirm and needy or greedy in some way or another.

Therefore, I postulate that since government, and those who depend on government spending, is the majority of the population, if the government is not doing well, then the economy is not doing well.

This is like when you were a kid and you learned that when mom isn’t happy, then nobody is going to be happy, or, if you are an adult, when the boss isn’t happy, then nobody is going to be happy, which happened to me just last week when my boss was waiting for me, in my office, when I dragged myself back from lunch two hours late, stinking of beer and pizza, mostly because I had dribbled a lot of each down the front of my shirt and pants.

For some strange reason, probably indicating drunkenness and/or mental illness, I decided, on the spot, that a good offense was preferable to a good defense. So I said to her, “What in the hell are YOU looking at?”

Well, it made her unhappy, and she subsequently made me unhappy. And while I am always ready to use things like this to prove, as if any more proof is needed, that people are naturally hateful to me and they are all out to get me, in this case I will merely use the point to prove that when the government is not happy, the economy is not happy, although this is immediately contradicted by that moron Ben Bernanke, of the Federal Reserve, who says that the economy is recovering! Hahaha!

In fact, he said that not only is the economy recovering, but it will continue to recover! Just listen to this: He actually said, “As the economy and financial markets continue to recover, and as the actions taken to provide economic stimulus and promote financial stability are phased out, the budget deficit should narrow over the next few years”! Hahahaha!

This makes me laugh out loud – hahahaha! – at the humorous, “Theater of the Absurd” quality of saying such a thing, sort of like Pollyanna on steroids and antidepressants! Hahaha!

Then he goes on “Even after economic and financial conditions have returned to normal,” which is a point in his remarks where I just couldn’t take any more of that crap, and my mind leapt to add “In your freaking dreams, Bernanke! Show me one time in all of history where some dirtbag government and its half-witted populace bankrupted themselves with printing, and then borrowing and spending, too much fiat money, for too long, and how printing, and then borrowing, more fiat money fixed everything! Just one! Hahahaha!”

Naturally, he does not acknowledge my rude interruption, and goes on, as if I was not even there, ignoring my rude taunting, by saying that it is still the government’s fault for borrowing and spending all the money that the Federal Reserve created, and that “in the absence of further policy actions, the federal budget appears to be on an unsustainable path. A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show a structural budget gap that is both large relative to the size of the economy and increasing over time.”

And what he will do is print the money the government needs, which will cause terrifying, bankrupting inflation in consumer prices, which should lead me to say that buying gold, silver and oil are the only things that will let you keep up, and probably make you a fortune in the process.

And sure enough, it did lead me there! Whee! This investing stuff is easy!

The Mogambo Guru
For Money Morning Australia

 


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64 Comments For This Post

  1. Drew Says:

    Great article – very funny!

  2. peter fraser Says:

    “Real estate, though, unless it’s a world-class cluster-storm like the U.S. subprime crisis, rarely blows up. It unwinds over many years. Buyers are generally not forced to sell and the market can remain illiquid for many years until a market clearing price emerges. In real terms, house prices stagnate.”

    Thanks Dan – nice quote.

  3. cb Says:

    PF – Who said that? Who are you quoting? Danning? Would you have the link?

  4. cb Says:

    The Race to Debase – or is it a coincidence? With evidence like this, would the likes of Joye and Robertson game to go short gold?
    http://goldsilver.com/newsletters/newsID/8580/ref/1

  5. peter fraser Says:

    hi cb – remember I did say the Denning Rory Robertson debate would be conducted at a sound academic level (or words to that effect)

    Link here – http://www.dailyreckoning.com.au/the-platypus-exception/2010/07/07/

    The other quote I enjoyed was “We’ll leave it others to decide who won last night’s debate. To be fair to Rory, most of the time, anyone making the orthodox, steady-as-she-goes, keep doing what you’re doing argument is right. Most of the time, the extremists are wrong.”

    Of course Dan said more than that, but nice to see a sensible debate rather than an emotion charged blue.

    I have to commend both Dan and Rory on that.

    Cheers cb…

  6. bb Says:

    But there is the disclaimer “unless its a world class cluster storm like the US”. Might we add Spain, Japan, UK to the list? Many suggest that residential property prices in Australia’s capital cities would not only fit the bill neatly they are likely to head the list of indicators of a cluster storm crash rather than a gentle plateau of prices. Stable and ongoing working incomes are the fundamental key and the building construction/materials industry is the biggest local economic driver. As the BER stuff eventually winds down watch unemployment go large and that is the cluster event trigger. The property spruikers last lament “but it’s different here in Australia” will be seen to be a rather optimistic hope than a reliable fact.

  7. peter fraser Says:

    bb – he didn’t add Spain, the UK, Japan or any other nation – why don’t you throw in Mars and Venus if your going to add thinsg that don’t exist to Dans words.
    Why does it offend you that he is not expecting a crash but a slow unwind instead? How does that change the end result?

  8. cb Says:

    bb = maybe so, but isn’t the point exactly that, that it is not different here, that given the spare capacity of our public balance sheet, and the eagerness with which the robber barrons stand ready to load it up like they have done in the US and Europe, we might be still a long way off before our economy will run out of puff, and when it does, it will not be stimulated again, if that will also serve the inclinations and interests of those in charge?

    The logic of an argument that it is not different here, in ot her words, can take you just as plausibly in the other direction, at least as far as the short to medium term outlook is concerned. And, might I add, if somewhat glibly, who, today, is still concerned with the long term?

  9. bb Says:

    PF. Put your glass down and your glasses on. I said ‘we’ not ‘he’. It’s my view. I wasn’t quoting him. Merely suggesting that there is commonality in a house price crash that has occured in other western economies – not just the United States.
    cb. He went on to conclude that Australia may be unique and used a very good example (platypus) and a very bad one (meat pies). Our egg laying monotreme is most unique. Meat pies – not quite so. I just have an opinion that I don’t think our perceived ‘uniqueness’ will generate an economic shield in respect of a more rapid residential dwelling price correction when unemployment eventually escalates in Oz.

  10. Drew Says:

    The Wolf, peter fraser, cb,

    A few threads ago, it was suggested that low unemployment in Australia is a key factor in supporting house prices. The Wolf said: “the more telling reason why property in the US is in the toilet is because the unemployment rate is (reported) around 10%”.

    But I wonder if high unemployment is the RESULT of falling house prices rather than the CAUSE.

    Because with falling house prices:
    1) People feel poorer and therefore spend less.
    2) They focus on paying back their mortgage to retain positive equity and so have less to spend on other things.
    3) With fewer people buying a place of their own, there are fewer people to fill their new home with new furniture.
    4) People’s ability to borrow against their equity is diminished.

    What do ya reckon?

  11. michael francis Says:

    Drew

    Good point.

    We must also remind ourselves that building houses and value adding (renovations-landcaping-DIY to improve resale value) is a major industry as well as a big employer. Architects, engineers, trademan, construction workers all the way down to the shop assistants at Bunnings , Mitre10, Harvey Norman etc. are directly dependant on people spending money on their house building-backyard- renovation project on the belief that for every dollar spent will add 5 to the resale price. Indirectly that supports the jobs of truck drivers delivering the goods, importers etc.

    When the music stops, demand will slump and many of these jobs will be at first cut back then lost. However ,when this happens, many won’t show up in the unemployment figures because of the way we define unemployment.

  12. michael francis Says:

    CB

    Remember about 2 weeks ago I mentioned the number of “For Lease” and ‘To Let” signs that were going up in a suburb that I am working in.

    I was back there today and the number of “For Lease” signs that have gone up since then has doubled in number.

    Just an observation.

  13. cb Says:

    Thanks, MF, and a valuable observation at that. It is good to know that nobody is sleeping rough for want of enough houses to buy and/or rent.

    Drew – Yes, as MF explained, it works in both directions. Through the virtuous cycle where money is plentiful, everybody is making money, either through healthy cashflows, or through so-called asset price appreciation, and these two tend to keep reinforcing each other, supported by an abundance of fresh money hitting the economy through more and more lending.

    The virtuous cycle then can turn into a vicious cycle, where money dries up with hardly any notice, asset prices fall, people pull their heads in and keep their hands and their wallets firmly in their pockets, which further reduces cash flow, which leads to more and more trouble with loan servicing, further asset price falls, unemployment, and so on in a vicious corkscrew of a circle down into the drink.

    So, the critical question is this: who and what turns on, and off, money creation and the money supply. And here your time will be most productive if you turn your attention to the money masters, the people who have the licence to print and burn money, and expand and contract credit.

    For what it’s worth, in a world where money and credit, which are the principal means of exchange in commerce and most economic activity, are created and destroyed at will by a select group of special interests, drastic expansions and contractions in the supply of money and credit, and thereby what these expansions and contractions translate to in terms of economic activity, are no coincidence. That’s my view, anyhow.

  14. Drew Says:

    Great question cb regarding what turns the tap off and triggers that switch from good times to bad times. But I think you might be giving too much credit to the money masters if you think that is the answer. The US and Japan has shown that no matter how much money you print or how low interest rates go, if people don’t want to spend, they are not going to spend.

    As to what the answer is, I suspect that there may not be one. As far as I understand, it’s still not clear what triggered the 1987 stock market crash.

    It could be something drastic or it could be nothing at all. But when the herd changes direction, it’s very difficult to get in their way

  15. GB Says:

    This article basically states property is in a bubble without actually saying it

    “Over the past four decades, Melbourne home prices have risen by 1.21 per cent a quarter in the year before a federal election, compared to 0.84 per cent a quarter in the year after…”

    So historically property in Melbourne has grown between 4 and 5 percent per year. So the double digit growth seen over the last 10 years is 2 to 3 times faster than normal.

    And Joye and Robertson think gold is in a bubble

    http://theage.domain.com.au/real-estate-news/home-prices-growth-slows-after-elections-report-20100707-zzmr.html

  16. cb Says:

    I know I have argued this before, but the concept of a bubble to me is just too vague and imprecise to be of much practical use. Recall the example of a mining town. Valuable ore is found and a willing investor who says they will pour millions and billions into developing a mine. Property prices quickly double, then tripple, and more within months. Is it a bubble? Well, maybe it is. And maybe it isn’t. The truth is that it will depend on what comes next, on whether investment inflows and mine development go ahead as planned and expected.

    If they do, then prices will continue to double many times more yet, as the town grows, infrastructure added, good roads, a new swimming pool, school, doctor’s surgery, and a brand new hospital, etc., etc. So, clearly, if things pan out this way, the initial doubling and trippling of the land price was nowhere near what anyone would consider to be a bubble.

    But then change the assumptions, and suppose that the ore tests are revealed to have been inaccurate and misleading, or that the greenies mount a successful campaign against mining the area. Consequently, there will not be any investment money flowing into the town, there will be no new school, and you can forget about the swimming pool, let alone a hospital. Property prices quickly collapse, as people relocate to areas that do offer facilities and employment. Under such circumstances, was the initial doubling and trippling of the land price an unsustainable bubble? It would seem so.

    Hence, if it is the future that will determine whether some asset is currently in a bubble, then the concept might be all right as a lose reference in post-hoc explanations, but it is eminently useless as to the market’s future direction. That direction will be influenced and determined by various factors, to be sure, but as far as I can tell, the concept of a bubble does not meaningfully attach itself to any of them by way of contributing something useful for predictive purposes. So, for most intents and purposes, when I hear talk of bubbles, I hear little more useful than just more useless noise.

  17. cb Says:

    July 7, 2010
    BP Says Oil in Gulf Must be Changed Every Six Months
    Bad Situation Gets Worse

    GULF OF MEXICO (The Borowitz Report) � At a time when many thought that news out of the Gulf of Mexico couldn’t get any worse, BP announced today that the oil in the Gulf needs to be changed every six months.

    “The oil will need to be changed every six months or every 15,000 lies,” said the BP spokesman. “Whatever comes sooner.”

    http://www.borowitzreport.com/

  18. The Wolf Says:

    Drew, et al…I don’t think it is the (primary) cause, but certainly adds kerosene onto it once it has started burning and creates a cycle that fulfils itself.

  19. Drew Says:

    I’d agree with that The Wolf.

  20. peter fraser Says:

    Drew @ 10 – Yes falling house prices have caused the GFC. Everything else is a symptom of that. If the US housing market has simply stagnated for a decade we wouldn’t be having this conversation. Prices deviating above or below mean have occurred many times, but on this occasion we had sub-prime delinquent lending to detonate an otherwise benign phenomena.

    Hence the stimulus.

  21. bb Says:

    PF. I don’t believe falling house prices were the cause of the GFC. Irrational exuberance across many markets, consumer greed, low interest rates, inadequate lending regulations and almost non-existant borrowing capacity standards were probably the primary causes of the GFC. Falling house prices were the manifestation of the above.
    But say you are correct. Here in ‘We’re Different Land’ why did Rudd et al pump over $16.7 billion into a construction project aka building school halls and canteens? The arse didn’t fall out of our ‘different’ housing market did it? It’s no secret. Gillard and Swan are only too happy to explain away the wasted hundreds of millions being ripped out of the public purse by the seven major contractors awarded the BER project as being insignificant compared to saving jobs of the ‘working orstraaaalyan faamlees’ as Gillard often states. The government is almost singlehandedly propping up the building construction industry jobs sector. Mining and civil projects whilst very big in scale and dollars don’t really engage huge workforce participation and their flow on effects seems to be mostly concentrated within mining regions. General building construction is the big generator of expansive micro economic wealth and stability in this country and when it ends and the private sector remains as dead as a dodo we will get the cyclical downturn that is absolutely charachteristic of this sectors boom and bust history. Trouble is that this time almost everyone is in debt up to their eyeballs. Just like the US we have become too comfortable with excess private and business debt levels. Ask your local tradies how they will keep up with the payments on that nice shiny ute, new tools and equipment let alone his home mortgage and investment loan when the music stops. Hope he has a good plan – apart from slashing their charge out rates – because all the companies that have extended credit and expect their cash flow to remain positive are looking pretty worried about now.
    Where’s PuntPal? I ‘m getting tired of carrying the fight!

  22. peter fraser Says:

    bb – I care little about the BER – it is not the centreplank of our economy, and $16.7B is just a spit in the ocean. Our stimulus package has been modest and can be ramped up many times if necessary.

    Cheers…

  23. peter fraser Says:

    bb – quote “Where’s PuntPal? I ‘m getting tired of carrying the fight! ”

    Puntpal is likely busy with his NRL betting business.

    I didn’t realise we were fighting – I thought that this was just a civil discussion between people who had different views.

  24. GTO Says:

    Austalian property wont crash. It may stagnate, but it wont crash. Look at history and you will see the future. Our history, not the seppo’s. Property is not as flaky as shares due to its illiquidity and the fact it is primarily the family home. The emotional attachment is valuable. Hence it will ride out the next few years better than shares.
    As for the property spruilkers, if you believe they are a small number of parasites feeding off a healthy investment asset.
    Current property values are at similiar levels to household income as they have been since 1960. We may have to have a dual income to get there, but the fact remains. And while some may point to the fact that we need dual incomes to maintain the same level of affordability, it should be remembered that house sizes have more than doubled since then. Yes land has shrunk, but house size has at least doubled.
    Anecdotally, I would say that the status quo has remained.
    Oz property values wont crash.

  25. Drew Says:

    Hi GTO,
    Re: “It may stagnate, but it wont crash. Look at history and you will see the future..”
    We’ve had an unprecedented boom in property in the last 20 years. I’d say an unprecedented bust is not out of the question. Are you saying there is a zero % chance of a crash?

    Re: “Current property values are at similar levels to household income as they have been since 1960.”
    Where are you getting your facts from? Do you have a link?

  26. Drew Says:

    Cb @ 16,
    The examples you gave re house prices rising and falling are due to changes in actual or expected fundamentals of the town.

    I reckon a bubble is when fundamentals are ignored and prices are rising simply because prices are rising. How far prices escape from fundamentals equates to how big the bubble is.

    The question is, what portion of the current house prices boom is attributable to fundamentals (population growth, rental returns, household income, broader inflation etc) and what portion is attributable to sentiment, the herd mentally and the feedback loop of higher prices?

  27. Abby Says:

    pf @ 2 & 5
    nothing like context hey Pete! or lack thereof in this case.

  28. Abby Says:

    cb @ 16
    nice example. for the example you gave for conditions under which house prices would keep increasing – you forgot to mention the added requirement that wages/income kept pace with house prices.
    if this did not happen, the bubble would pop!
    it’s elementary mathematics.

  29. Abby Says:

    pf @ 22
    spoken like a true /insane Keynesian!

    you guys sure are slow to catch on ….

  30. Abby Says:

    GTO
    mate – you’re a couple of cans short of a sixpack …

  31. cb Says:

    Abby, Drew, et. al. – Ah, yes, the good old fundamentals. How can we forget about them! The problem is that the very notion of fundamentals itself is vague, and nigh impossible to usefully pin down. For predictive purposes, that is, as opposed to writing a post-mortem report on why something died. Allow me to illustrate:

    In the example where the town was gearing up for a new mine, the fundamentals, you might say, were looking rather good. What, with people of all trades coming to live in town with incomes double the national average, what could possibly go wrong? For the sake of the argument we can rule out speculation and assume instead that land prices had doubled and trippled because existing employers of the mining giants were told by the company to start making arrangements to relocate to the new mine site, so these people started to buy up the available houses for sale, not out of specualtion, but out of a genuine need to relocate their families to be near the new mine, meaning that prices rose on fundamentals, because of a sudden increase in demand against the existing limited supply, and the demand came from people with above average spending power, etc., etc.

    And, yet, when the plans were canned, prices collapsed and worse than they were before the plan, because the demand, based on fundamentals, suddenly disappeared, and the market was flooded, not only by existing homes being put on the market, but also all those recently released blocks of land with half-built houses on them. Along with the evaporating demand, jobs for the local tradies also dry up, hitting existing households, etc., etc.

    So, this boom and the subsequent bust was based on very solid fundamentals, which first mandated the boom, and when they changed, caused a spectacular bust. The challenge for bubble theory is to isolate and differentiate such genuine, fundamentals-based boom-bust scenarios from non-fundamentals-based cases of boom and bust, and not through some post-hoc rationalisations after the event, but through the identification of pre-crash initial conditions that will inevitably lead to a bust.

    In other words, if bubble theory is to be more than bubble babble, it must identify symptoms and features of an economic situation that create booms and busts of a different kind from the one given in the above example, which is the familiar, and you would say, normal and inevitable consequence of changing, fundamental economic conditions in a given area, country or jurisdiction.

    So, what are the critical differences between fundamental and non-fundamental economic, initial conditions for the supposedly bubble-based and non-bubble based booms and busts? Is it debt? Is it speculation? Or is it money printing? Or is it some combination of these or other factors, the presence or absence of which would make a relevant distinction between bubble-based and fundamentals-based booms and busts?

  32. OREO-ruddxpin-BASHER-BUMMER Says:

    listen to this man benjamin-fulford here CB etc he seems quite qued in wats happening

    http://geraldcelentechannel.blogspot.com/2010/07/benjamin-fulford-oil-spill-deliberate.html

  33. bb Says:

    PF @ 23. It’s a friendly fight – like State of Origin. We shake hands after its over. And congrats on your state Qld making a clean sweep. They certainly deserved it but we cockroach supporters saw a glimmer of hope in last nights display.

  34. Drew Says:

    cb, your last post is the definition of bubble babble. :)

  35. Abby Says:

    cb
    Have you authored any books?
    I dont mean it sarcastically – you certainly know your stuff! although i dont always agree with your conclusions

  36. cb Says:

    lol, Drew – I am willing to suck that up as a babble about bubble babble.

    Abby – thank you for asking, I have, in a previous life, as an academic. Alas, I escaped the world of clever d!ck academics for a life of self-employment in desktop publishing and printing. But the world of ideas is harder to leave behind, and I remain a sucker for ferretting out conspiracies, not to mention a good debate. No doubt you have noticed. :-)

  37. GTO Says:

    Drew,

    Info drawn from two places –
    1) I sat down with my dad and his good mate. They are both 70 odd, and we worked out prices etc for thier first houses in 1960/61 and the average income at the time. Yes its anecdotal, but it is a real life fact. Plus I then did some more sums based on figures I knew around 20 yo.
    2) Heres a link to a reputable pro-property site, discussing this very thing.

    http://www.jenman.com.au/news_subscriber_item.php?id=25&Section=Reports

    As for you Abby, no need to be insulting. You know what they say about those that hurl abuse. Read on.

  38. GTO Says:

    Abby
    A couple of cans short eh?
    I’d love to get my hands on those cans I am missing.
    Years ago, girls like you were my six pack.

  39. Abby Says:

    GTO

    good to see you have a good sense of humour – besides your view on property.

    so you compared property price:income ratios for the period 1960 to that when you were 2o? how long ago was that?
    did you compare those ratios with the ratio that it is today?
    i seriously doubt that the ratio was 6 to 9 times back then as it currently is…

  40. GTO Says:

    My view on property is that is the C21 version of what gold was to the ancients – a safe way to count your wealth. Now? well gold is really nothing more than a useful metal. Besides, the average aussie ties their income to property prices subconciously. When land booms, so do the expectations of wage rises.
    Comparing apples to apples- you have to take into account house size and dual v single incomes. Its not simple.
    Lo, the HIA affordability index from 1986-2006
    http://economics.hia.com.au/media/affordability_index.pdf

    Yes, things are probably tight now, but we are not in uncharted territory, and it WILL even back out of the next few years as prices slow or stagnate due to interest rates. But there will be no huge POP.

  41. The Wolf Says:

    I love the terms that get bandied around because the concept of Australian Residential Property prices falling is simply not believable:

    * Neutral Growth
    * Price Stagnation
    * Price Consolidation
    * One of my favourites from some years back… a state RE Institute Kermit discussing appallingly low yields on ResProp invesment talking up that (para) “incomes and rents simply need rise to match up to house prices”… sorry, I forgot where I left my pixie dust ?

    The folly of comparing “average incomes” to “median house prices” from any period, coupled with the veracity of the data source, is well documented… employment…or lack thereof will be a prime determinant in what happens to house prices…

  42. cb Says:

    GTO – I would not be surprised if things actually worked out the way you are predicting, at least in the short to medium terms. In any event, I would consider it the most compelling and likely scenario, and for all the reasons you have listed, and others we have discussed here at verious times.

    However, and this is the however we must always keep firmly in mind, there are a couple of critical assumptions built into such expectations, and if these should turn out to be wrong, then expecations would have to be modified accordingly. One of these assumptions is that property investors are not going to be hit with punitive changes to tax treatment, including negative gearing concessions, capital gains, land tax, and other state or local government taxes on property owners. A third one is that our banks are not going to shut shop and that creditworthy borrowers will be able to borrow. If lending into the property market collapsed, so would prices, sooner or later, at least around the margins where they are being set, even though sales volume would largely dry up. A fourth assumption is that we are not going to be hit with double digit unemployment rates and such nasties, which would make it impossible for masses of people to keep servicing their loans.

    These assumptions and factors, in turn, depend on a range of other assumptions and factors, the width and depth of which would be hard, if not impossible, to predict and foresee. However, unless we have specific reasons to believe that a party is about to end, the most sensible assumption has to be that it will continue for a while yet.

    And, let’s face it, when world population is growing and along with it the aspiration of fresh millions and billions to live a Western lifestyle like we do, and in pursuit of that dream are willing to work hard and pay good money for our dirt, this country appears to be sitting quite pretty.

    Still, the obligatory, cynical, and mildly mocking question must be asked: What, possibly, could go wrong?

  43. Drew Says:

    GTO @ 37 and 40,

    Thanks for the reply.

    I’m not sure if your dad and his friend’s experience is enough of a sample to be reliable, but I’d be interested to know the figures you came up with anyway – i.e. what was the multiple of average house price to average household income 60 years ago compared to today that you are referring to?

    Also, I followed that link to the pro-property site and signed up – and found the same claim that you are making – but no figures to back it up. The subsequent HIA link you provided has figures from 1985 to 2006 but doesn’t cover the periods that we are talking about – i.e. 60 ago and now.

    Cheers.

  44. Abby Says:

    GTO
    i dont think it’s at all realistic to be claiming that property is today what gold was to the ancients – a store of wealth.
    firstly, gold is today just as much a store of wealth as it was for the past 5000 years – it is no less valuable today.
    gold is money in its purest form and is owned by the owner in full, i.e. it carries no liabilities whatsover.
    property on the other hand is a liability. if you dont think so, just stop paying your rates and taxes for a couple of years and see what happens…

  45. cb Says:

    Abby – True, although GTO is also correct in that nowadays most people will first and foremost keep their savings in their own homes, and only secondarily in gold, which has been officially demonetised by the scamsters, even though, as you say, it remains money and a store of wealth. There is a lot in there, but here are some of the elements:

    1. The official demonetisation of gold and silver means that the taxman treats it as an asset, and therefore capital gains on it taxed on it accordingly. This is part of the scam that is fiat money, because it means that they keep taking parts of your store of savings, on the pretence that you have made some capital gains, whereas in reality they were the ones that debased their pretend, fiat money.

    2. Essentially, by demonetising the monetary metals they leave the savers without means of storing purchasing power of savings put aside from current income. The dilemma they make you face is this: You either keep your savings in fiat money and they will dilute your purchasing power through printing and inflation, or you put your savings in real money, gold and silver, and they hit you with capital gains taxes, claiming that you have generated new wealth that they must tax, when in fact they were the ones that debased the fiat money relative to real money, and so if they cannot steal from you that debasement, they will take part of your savings in the form of a tax.

    3. What to do? Well, there is one asset class, so-called, that is exempt from this scam, and namely the owner occupied family home. It tends to keep pace with inflation, so you are more or less protected against their stealing, and it is also exempt from any capital gains taxes. When you look at GTO’s claims in this light, you can appreciate perhaps what he means, even though, as you say, property does come with certain other expenses and hassles that would otherwise not attach to gold.

  46. GB Says:

    I just spent the week visiting friends in Jurien Bay north of Perth. Use google maps and the satellite image and you will see the new subdivision to the south of the town. The roads are drawn but there are no houses in the image.

    A rundown includes:
    1. The blocks are small, maybe 700m2, and dont have ocean views.
    2. Most of the blocks are sold however there are only a few houses actually built
    3. The houses built are more reminiscent of what you expect to see in Perth rather than a country town
    4. Jurien Bay has nothing, no manufacturing, no industry, no mining. It has crayfishing but only during season
    5. Going rate on these properties is between $600,000 to $700,000

    cb – That is the true definition of a bubble, when price is disproportionate to the fundamentals, i.e. a town with nothing, in the middle of nowhere, should not be selling property for prices higher than most suburbs in Perth

  47. OREO-ruddxpin-BASHER-BUMMER Says:

    @22- oh thats right just fight debt ,,with getting another loan

    wat a joke
    thats wat happened in USA
    this booming & rebooming & more booming stuff is gonna catch up with us ,,
    USA is RS thats wat china was buying resources to sell usa ,but usa isnt buying

  48. Drew Says:

    GTO says “there will be no huge POP”.

    Before we debate that point, it might be useful for any property bears out there to define what they mean by a pop or crash.

    I don’t think anyone thinks that property can “pop” overnight like shares can. When I talk about a property crash, I’m thinking of prices falling for several years.

    My expectation is that the falls (whenever they start) will be as roughly steep as the rises and wipe out any gains made in the last boom (i.e. the last 20 years).

  49. cb Says:

    All right, GB, I’m glad some is taking up the challenge. On the face of it, the case appears to be compelling: A deadbeat place with no employment opportunities and hence, fundamentally unsupportable land prices.

    But here is the catch: On what basis are you ruling out the possibility, and the obviously present expectation, that money will continue to flow into the area, into these blocks of land? I am at the other end of this beautiful land, so I have no local info to construct a positive case. However, from your description, Jurien Bay sounds like a very nice place, where well to do Perth and mining types see themselves moving to at some point down the track. It might be the place they have in mind for a comfortable and pleasant retirement, for all all I know.

    And if it is some dynamic of this nature that is driving up the price at seemingly irrational levels, the question must be asked as to whether this dynamic can be maintained, or whether it will inevitably end, leading to a price collapse? There are a couple of relevant things we know: One is that they are not churning out Jurien Bay’s in our great factories in China. Another one is that WA has plenty of dirt to dig up and sell for good money, providing with people with above average incomes. Another is that cashed up business and mining types are probably going to opt living in Jurien Bay when they retire, instead of downtown Perth. And, finally, as population grows, so will gevernment facilities and services, infrastructure in terms of good raods, airport, and who knows, even fibre to the home broadband?

    So, all in all, here is my earlier point about fundamentals- versus bubble-based prices: the concept of fundamentals is too slippery and imprecise to afford any definitive and reliable definition and conclusions. If you define the dynamics of current price support one way, your way, then you have a bubble. But if you define them another way, like I am guessing from a great distance and with no local knowledge, then you have your fundamentals.

    That they might change in the future, is no counter-argument. Fundamentals of all nature can, and do, change. Just like in the former mining towns that have now become ghost towns. Once there were lots of jobs in them, and now there are few, or none. Nothing new there, and I cannot see merit in trying to categorise booms and busts into bubbles and fundamentals.

    The more I look at this, the more it appears to me that the distinction between bubbles and fundamentals is trying to trade on the concepts of the temporary versus the permanent, and in a world, I must observe, including the economic world, where nothing is permanent. When I look hard, I do not see bubbles and fundamentals, but ever changing fundamentals. Some last longer than others, but none seem permanent.

    And if the concept of a bubble is to be made useful, then we would need to say how short some condition has to be for it to qualify as a bubble. Is the circus that comes to a small country town for a week creating a bubble, which then pops when it leaves? If so, what about the one that stays for a month, a year, five years, or ten years? And what if it decides to settle down and for good and becomes a greater and greater tourist attraction? At which time will this growing bubble become part of the fundamentals of the town’s economic life, and house prices? I would say, that is quite impossible to tell, unless we are willing to set an arbitrary, and hence less than compelling figure on it, like: less than five years in town is a bubble, but 5 years, plus 1 day is solid fundamentals, which would be clearly implausible.

    Hence, my preferred conceptual framework proceeds not in terms of bubbles and fundamentals, but in terms of changing fundamentals and expected or likely money flows into, and out of, a given asset or asset class. You don’t need to appeal to a vague and undefinable concept, like that of a bubble, to explain why some asset price is going to go up, or collapse. It can all be explained with a much more comprehensible and reliable concept, and namely that of money flow, based on the likely dynamics that determine supply and demand.

  50. Drew Says:

    cb,

    It sounds like you are saying that every person’s decision to buy an asset is based on fundamentals – either current or expected. But surely you know that sometimes, people put aside the fundamentals (and often logic) and buy simply because prices are rising.

    For example, if you were to ask people buying those blocks in Jurien Bay why they are buying, I imagine the response would fall into one of two categories. They would either refer to current or expected fundamentals of the place, or they would refer to price.

    Under the fundamentals category, they might mention things that you brought up like “nice place to retire”, “expected infrastructure improvements” or “close to mines expected to open soon”.

    Under the price categories, reason would include “because if I don’t buy now, I’ll never get in” or “I’m hoping to sell in 10 years and retire”.

    If the majority are buying for price, it’s likely that the price will be pushed higher than justified – even if all the fundamental improvements come to fruition.

    I agree every asset has ever-changing fundamentals which, along with anticipated changes, cause prices swings. When the price swing goes well beyond this, the price is support by noting but air (hence bubble is a great metaphor) and the bubble will burst.

    I would imagine that every price swing in every market has a bit of bubble built in it, causing it to overshoot – it’s human nature. The size of the bubble is what’s in question – and can be estimated based on traditional valuation method – i.e. for housing – it would be current and forecast population growth, rental returns, household income, broader inflation etc.

  51. cb Says:

    Thanks, Drew. Yes, speculators have to be counted in as part of the picture. Note, however, that speculators also, if not especially, are making their speculative decisions on the basis of current and likely fundamentals going forward. One would have to be a particularly stupid speculator if one invested in an asset class in the belief that prices would be pushed much higher in spite of fundamentals that scream at them “SELL!!!”.

    Unless, that is, we are looking at a scam, where the insiders first buy, and then pump and dump. But these are the limiting cases and quite illegal, and not the ones to which a conceptual framework in terms of bubbles versus fundamentals is supposed to apply.

  52. Drew Says:

    ‘The Economist’ estimates that Australian house prices are now 61.1% overvalued.

    “By this measure Australian property is the most overvalued of any of the 20 countries we track.”

    http://www.economist.com/node/16542826

  53. GB Says:

    The theory in Jurien Bay is that a new road will be completed soon so prices will skyrocket when its finished. It drops about 30-60 minutes of the travel time so isn’t really awe inspiring

    There is a guy up there that bought a block for $130,000 and is currently building a small castle on it for $200,000

    Existing property sold/selling for $600,000 to $700,000

    Jurien Bay is not really considered a retirement town

    Having high speed internet is not a reason for property to be priced higher than most Perth suburbs

    The existing town consists of fibro houses

  54. cb Says:

    Drew – I would nevertheless agree that the most promising concept on which bubble theory could be based and defended is that of speculation and hot money investment flows. A useful theory with predictive power could possibly be developed along these lines, but it would need some work and clearer definition than I am currently able to discern from bubble talks. For example, are the hot money flows into China and Australia speculative, or are they genuine investment flows based on current and expected fundamentals?

    I, for one, cannot tell, and and no amount of thinking in terms of hot air that is supposed to be blowing up bubbles seems to help in deciding the question. But I could easily be missing something, and hence the value of exchanging and discussing thoughts with others, like we do here. Anyhow, I have run out of puff, so over to you for any suggestions.

  55. cb Says:

    GB – How many k’s from Perth to Jurien Bay? The discrepancy between existing home and newly built seems massive and seemingly nutty. There surely must be a difference between the properties, perhaps their location, or something? How much are the new blocks of land? You said that some guy bought for $130K. That does not appear prohibitive in a coastal area that might be within commuting distance of a large capital city. If they are building a highway like you are mentioning, Jurien Bay might be envisaged to bcome the next Sunshine Coast, and unless that is out of the question, the apparent bubble might in fact have some rather solid, long term fundamentals.

  56. cb Says:

    GB – I couldn’t contain myself, so I looked up Jurien Bay on Google. Well, knock me over with a feather. Jurien Bay seems to be a very fine place. It has an excellent golf course, the finest beaches, and a safe harbour for the (aspiring) rich and famous to moore their ocean going yachts. Being situated some 200 – 250km north of Perth, with a good highway, Jurien Bay is destined to become WA’s Noosa Heads. I am not in the least surprised that prices are rising, and they will probably continue to rise for a fair while yet.

    Is it a bubble, or is it due to fundamentals? I don’t know, because I cannot distinguish between supposedly different types of money flows. What is clear to me is that Jurien Bay would be a very fine place to live in, and will continue to attract people with money to spend on the finer things in life.

  57. Drew Says:

    cb,

    Sure the answer is a judgement call, but the simple question is: does the current price reflect the future cash flow of the investment?

    When the future cash flow is not even a consideration for many investors (i.e. during the tech boom and arguably during the current housing boom), that’s a pretty good sign that the price doesn’t reflect the value, hence a bubble.

    You say “One would have to be a particularly stupid speculator if one invested in an asset class in the belief that prices would be pushed much higher in spite of fundamentals that scream at them SELL!!.” But that’s exactly what happens in a bubble. In fact, that’s how many chartists operate in any case – they only care about the direction, not the fundamentals. It’s the greater fools theory and it works– as long as you get out before the music stops.

    In addition, while you focused on speculators from my post, I was also referring to owner-occupiers who are buying at these high prices for fear of missing out and/or thinking it will make them rich. When reasons like this become the main reason to buy, it’s a bubble.

  58. cb Says:

    Drew – Sure, much of what you say makes sense, or at least is arguable. One problem I see is a reliance on a particular valuation model, as if it was applicable to all asset types and classes. The case in point here is the reliance on a valuation model based on current and expected future cashflows. This valuation model might be fine for some assets, but it clearly sucks in the case of others. Gold, for example, earns you no interest and some idiots have come to the conclusion that therefore it is impossible to value the metal, and hence a rising gold price can only mean one thing: a bubble.

    The problem, as far as I can tell, is not with the metal, or its current value, or even its future price, but the theoretical commitment of some self-proclaimed “experts” to a conceptual framework that is plainly too narrow and handicapped to do justice in terms of a half-decent explanation of reality. The problem is with theory, which clearly cannot explain what is already happening in practice, and if you then take that theory and try to predict the future with it, well … what can I say, but wish the nitwits good luck with it?

    And that is precisely my charge here, that those who understand the world in terms of bubbles are already failing to account for a whole host of things happening on the ground, and so when they claim to be on bubble watch so that they can front run a super bubble popping, as in the case of the gold price, I am left open mouthed at their arrogance and stupidity.

    But enough of my raving, and back to this valuation model, which cannot account, as far as I can tell, neither for assets that lack an income flow, nor for much of the price movements and variations we see between various areas and suburbs across both space, and time. But instead of admitting the limitations of a cashflow-based valuation model, they insist that the model is right and that prices are irrational and unjustifiable.

    Well, I suppose, it is a view to take, but as far as I am concerned, my response to models is a recurrent one: Garbage in, garbage out. Ultimately, the value and price of anything is determined by the market, by whether the market will pay or not pay a certain price for whatever one might put up for sale. And when the market does not accord with what is being said by some nitwit’s model, which one would you rather argue with? Me thinks the model, while those wedded to their favoured models, choose the price, which leads them to declare the existence of all manners of bubbles in property, in gold, or whatever.

  59. cb Says:

    Drew – let me sumarise all that and say: Instead of taking some model and proclaim on its supposed infallibility that prices are fundamentally- or bubble-based, a far more reliable approach would be to ask whether a given asset, or asset class, based on currently available knowledge about current and likely future conditions, is likely to attract strengthening or weakening money flows, for whatever reason. I repeat that: For Whatever Reason. To judge the likelihood of this purely on the basis of the asset or asset class generating an economic return in terms of cashflow generation is clearly too narrow and in many instances just plain wrong.

  60. Abby Says:

    so CB, if i understand you correctly, you’re saying that property is not an asset that should be valued in terms of its cashflow potential?
    do you feel it should be valued on ‘feeling’ instead?
    if so, then Australia’s property market is in good nick.

    perhaps this is why you disagree with Steven Keen then, as he clearly believes that Ozz property is overpriced based on the enormous gap between rental income and price.

    i’ve read many books on real estate investing, and pretty much all of them define the true value of property in terms of the income potential of said property. there is just no sensitive alternative.

    Australia’s property market is just so far removed from reality that it is truly laughable! whenever i hear arguments trying to justify why Ozz property is NOT in a bubble it’s really difficult to not laugh out loud at the ‘logic’…

    CB – you’re an articulate fellow for sure, and i share many of your views, eg on the climate change scam, 9/11 scam,fractional reserve banking, gold etc..
    however, your views on the Ozz property market, however well articulated, just dont cut it.

  61. Abby Says:

    sorry – that should be “sensible” alternative…

  62. cb Says:

    hahahaa, Abby, now you are provoking me to shoot from the hip, as it were, but so be it:
    - 1. No, I agree with you that property should be valued in terms of actual, or equivalent imputed cashflow it is able to generate. I say that it should be in the sense of it being a good idea.
    - 2. But the fact that it is often not is ignored at one’s own peril.
    -3. As for the question of how in fact it is being valued, in terms of the things that people, and especially the buyers, factor in when determining a market price that they are willing to pay for a property is probably very complex, and in many cases rather idiosyncretic, particular to the individual’s tastes and unfathomable quirks. But I will think about it a little more, as the subject is indeed most interesting and well worth pursuit.

  63. cb Says:

    hahaha, lol, Abby, I have just finished reading the rest of your post. You make me chuckle, … it sounds as though we are nearly there, and only one more step to win you over completeley, ON HOUSING!!!! ahahahhaaaa

    I am only kidding, of course, but allow me to have a hearty go at it, anyhow. But the first step has to be a disappointment to you. I am not a housing bull, and I agree that our housing prices are bordering on the insane. So there you go, I cannot win you over, because I am already sitting in your camp on that one.

    Where we might still have a chance of a meaningful debate concerns the question of bubbles, and whether Australian housing is or is not in a bubble that is on the verge of an imminent POP, and whether in fact it is going to go POP.

    I am not quite sure where you stand on these questions, but I, for one, remain a sceptic, and a self-declared ignoramus who does not know. There are many things that could collapse our insane prices, and goodness knows that they would have a very long way to fall. But at the same time, I do not see any of those clearly identifiable factors kicking into high gear here, all but making a massive fall inevitable.

    You mention Steve Keen, and the example is indeed highly relevant. Keen’s model is becoming shinier by the day, and his faith in it remains unshaken, notwithstanding lost bets and other glaring evidence that it does not work. He sees no room for such doubts about an inevitable crash as I happen to harbour.

    His approach is very typical of what you find in academia, and it used to drive me to distraction. Clever academics develop their neat theories and polish, defend, and nurture them like their very own dear little babies, and it phases them little that observable facts and reality pronounced them dead and retarded upon arrival. But such is the human psyche that we tend to hate with a passion being wrong, and we would more readily declare reality to be wrong than face that reality and admit that, we, in fact, were wrong. It does happen, of course, but it sure is an uphill battle.

  64. cb Says:

    But I should also say about Keen, that I largely agree with the relevance and importance of his work, and the contribution it makes to understanding why and how debt deflation does, and can happen. My only questins concern its reliability in terms of predictive power. At which point a bubble will pop is a mystery, and part of the reason for this is theoretical, in that the very notion of a bubble-, as opposed to fundamentals-based asset appreciation and depreciation is problematic.

    This is what I have been arguing of late, and insofar as my doubts about the bubble- versus fundamentals-based money flows are warranted, any theory employing and relying on this dubious distinction will itself prove problematic. But telling that to an academic in love with his own theory, his own baby, is next to useless. Not that they will mind you telling them such things, as they love debating ideas, and nothing more than defending what they regard their own.

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