Economic Madness

OPINION

housing madnessIn 1970 the average house cost around 3.5 – 4 times the average (male) income. Compare that to the present-day Auckland, where the average cost of a home has risen to around 8 times average income. 

Nobody seems to know why, but on closer inspection, matters are compounded by the fact that section sizes have gone down from around 700 sq metres to around 400m or less. So new buyers are faced with paying double for half as much land or even less. Back in 1971, the cost of tertiary education in the U.S. was around 6 months of the average(male) salary. This has now extended to 2 years creating the regrettable dark hole of student debt which has become almost universal.So, we have to ask ourselves why has the 2 most fundamental needs of life become so inordinately unaffordable? While there is never a simple answer to a complex issue, a couple of events have been the catalysts of change.

 

Firstly in 1971, Richard Nixon took the USA off the gold standard which allowed the printing presses to be ramped up and the economy boosted with a huge injection of money supply. The world soon followed Nixon’s lead and the world became awash with money, which in turn spiked demand for secured borrowing. The 1970s saw house prices spiral while incomes lagged as banks had money to lend and lots of it. The 1980s was the decade of the yuppie, where phenomenal amounts of money changed hands in commercial property developments. Eventually the yuppies went broke and were replaced by housing sector property developers whose legacy of the 1990s was leaky homes.

There are a couple of reliable ways to boost a lagging economy. Under the stewardship of George W Bush, aided and abetted by economist Alan Greenspan, the economy was boosted to avoid an imminent bust cycle after the boom years of Bill Clinton. In 2002, the Bush administration eased property lending restrictions and flooded the market with a mass of funny money. Property prices spiralled and lenders were funding deals that were destined to fall over.

The plan worked nicely and delayed the bust cycle long enough for George W to retire from office and for Barack Obama to inherit the effects of the 2008 global financial meltdown. Lending institutions went to the wall, so Obama resorted to the same strategy and printed even more funny money. After the market recovered, property prices once again rose exponentially around the world to the point whereby home ownership is nowadays just a dream for many people.*

Another strategy to jump-start an economy is to start a war. Not satisfied with the Greenspan tactic of quantitative easing, (a euphemism for printing money) Bush did a belt and braces job by starting the Iraq war on the phoney premise of weapons of mass destruction. (On reflection, it is somewhat ironic that Saddam Hussain hated Al Qaeda, yet it was his downfall that led to the emergence of Isis)

The upshot of all this, is that Russia and China have a strategy in place to make the Yuan the reserve currency, should the greenback collapse. Shanghai Stock Exchange is already transacting oil deals in gold and it is speculated they visualise a new era with a gold standard reserve currency. It is also interesting to note that Russia is stockpiling gold for some reason.

There seems little reason mistrust the veracity of claims that Russia is continuing to meddle in American politics. It seems they want to keep Trump in office. Therefore, one might ask, Is Russia providing sufficient rope for Trump to hang the American economy?

* Unaffordability of homes is a direct legacy of global economic madness. The best thing that could happen for prospective homebuyers is the mother of all recessions . No one knows when, but as night follows day, an adjustment favouring the have nots will one day happen.

 

Last modified on Sunday, 05 August 2018 19:26

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