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Today, on 1st September
2004, we stand amidst the greatest real estate over-valuation that the world
has ever seen. It dwarves, both in scale and geographic extent, the
"Tulip mania" experienced in Holland in the 18th Century. This
state of affairs is far from limited to the United States of America as there
are even worse examples such as the UK and Australia, where valuations in
places such as London have reached unprecedented extremes. The process is a
global phenomenon, accentuated amongst the economies of the developed world,
and in the affluent sectors in developing countries and third world states. This
astonishing financial bubble, the largest in human history by an entire order
of magnitude, has been primarily created by the "munificent", if
not to say recklessly profligate, Federal Reserve Bank of the world's richest
state, the USA, which has oiled the wheels of speculative fever with an
unparalleled exercise in FIAT money creation. Of course, DIGIMONEY or
DIGICASH is better than "MONOPOLY" money. Monopoly money has to be printed and put into a box
with the game. DIGIMONEY can be created out of thin air by the click of a
mouse; so much more convenient and efficient. How jealous would have been the
Kings and Princes of yesteryear, who spent all that money on unsuccessful
alchemists whose job it was to turn lead into gold. All they needed was a
computer, a loose legislature, a totally compliant government and a financial
wizard like Alan Greenspan, and "Hey Presto", instant wealth! EEEZY
MONEY!!? .......or, so it seems. However, never in human history has the FIAT
experiment stood the test of time. In the end the laws of finance and
economics, like the immutable laws of physics, such as gravity, exert their
inevitable influence.
The post 2000 market correction wiped several
trillion US$ off the NYSE and other world bourses. However, the full-blown
bear market was successfully averted, as the US Fed funded everyone's
personal bank..... their house, to support the consumer at a critical
juncture. Interest rates were savagely cut from 6% to 1%, a 45-year low, with
unseemly speed in order to stave of the healthy correction of speculative
excess. Mortgage financing went into hyperspace with everyone jumping on the
bandwagon to purchase their first homes, move "upmarket", or to
simply purchase a new car, jet ski, boat, holiday, get back into the equity
markets or just settle those worrisome credit card debts as their home
valuations and relative equity increased. Refinancing turned into an
"all out binge" which has kept the US and World economy afloat
through 2002, 2003 and 2004.... so far
so good. In the past 2 years, the Mortgage Finance companies have been
offering even cheaper "Adjustable Rate Mortgages" or
"ARM's" to give the market more legs as the inevitable rise in
interest rates looms like the rising sun over the murky horizon. These ARM's
are fraught with danger if the upward trend in interest rates, which has
already begun, continues and accelerates.
The real estate
market has produced "year upon year" increases in home valuations
of anywhere from 8% to 20% or more, dependent on local factors. These
increases have outstripped rental increases in most countries by a factor of
several hundred percent, and the highly tampered with and thoroughly debased CPI
by a factor of between 5 and 10. However, this happy state of affairs (for
house owners and real estate agents) cannot go on ad infinitum. The economic
distortions created in societies around the world are immense, as the
increasing misallocation of human, financial and economic resources becomes
more acute, and the cost of housing goes completely out of reach for workers
in essential services. Furthermore, high property and rental prices spill
over through the entire monetary system, generating huge inflationary
pressures throughout the entire economy. This may be fine for the haves, but
for those on middle and lower incomes life is going to get tougher by the
day. The "Illusion of Wealth" thus created is little other than a
poisoned chalice when prices inevitably head south and one's personal equity
versus the loan is the declining factor . One's home is, after all, an abode
and nothing more unless you are rich enough to afford more than one in which
case you should be looking at cashing in your winnings now.
Given the
immense scale of debts: Government, State, Municipal, Corporate and Personal,
and rising liabilities in such essential services as medical care and
education as inflation starts to make a serious impact, it would be prudent
to expect cash-strapped governments and states to raise taxes. Some idea of
the real rate of inflation may be gained from a perusal of top executives pay
awards in such countries as the US and UK where these have been averaging
between 11% and 13%, and by looking at increases in utility prices. Of
course, to control the ignorant masses at the bottom or even middle pay
scales, industry and government cynically wave around the
"doctored" CPI, claiming that wage rises must be kept in line with
inflation. This piece of amazing claptrap is perpetuated by the syndicated
media in order to successively reduce labor costs whilst maximizing profits.
Many people realize that they are being duped, but scarcely understand the
full extent and pernicious nature of this complicated little game. The
inevitable outcome of inflation and reduced real wages will be to further
impoverish the middle and lower wage and salaried employees, whilst their
liabilities increase in line with real inflation, interest rates and
additional debt servicing costs. Any serious correction to the world economy
will result in an increase in unemployment particularly in service related
industries. Many of those affected will most probably lose their homes.
The world's
largest economy, comprising more than 25% of the global economy, is now
utterly dependent upon Chinese and Japanese support for the very first time
in its history. The entire lopsided global economy is dependent upon the
credit "maxed out" US and European consumers and Asian trade
surpluses buying US Equities and Bonds. The longer this bizarre situation is
sustained, the greater will be the resultant adjustment, or bust. A collapse
of the mighty US economy would create a global economic tsunami of epic
proportions from which none will survive without serious economic and social
damage. Indeed, it would be folly to regard the remaining worlds' currencies
as having any more real worth than the intrinsically worthless greenback.
When the collapse of the entire FIAT exercise finally eventuates, the entire
house of cards will come crashing down with the dollar. Already the precious
metals are responding, albeit painfully, due to massive intervention and
market manipulation to control their now inexorable rise, to the colossal
inflationary pressures now making their way through the pipeline. As the Aden
sisters and Jim Puplava so correctly pointed out some months ago, when
inflation really takes off then there will be no stopping the precious
metals. AD 2005 promises to be a very interesting year for gold and silver.
Gold will indeed have the last laugh. Nothing on this earth can stop it. No
one in history has succeeded in ultimately supplanting the yellow metal as a
basis for money. Those that try, live to regret their hubris and folly.
As with all human
manias, this one, like all the others, will end in disillusionment and
impoverishment when reality brings the mass psyche back to earth with an
appalling crash. Often such manias start off on some rational basis, but very
soon enterprising individuals see a wonderful opportunity for personal or
collective enrichment, and, as the greed of the masses knows no bounds their
psyche can be readily whipped up to a state of mind where rational analysis
completely escapes them. Such opportunists as Adolf Hitler fully understood
this weakness of the mass of humanity, and tuned into the collective psyche
in organized rallies to capitalize on it, much to everyone's eventual loss.
So it is with real estate, shares and other forms of ephemeral financial
investments.
September 14, 2004
Nigel H. Maund
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