When China’s tinderbox economy implodes, who will be left to bid up the world’s surplus commodities and real estate?
After 30 years of torrid expansion, perhaps the single most consequential factor in China’s economy is how much of it is a “black box”: a system with visible inputs and outputs whose internal workings are opaque.
There are number of reasons for this lack of transparency:
Here is the conventional narrative about rents and housing valuations:
1. Rents have soared because people can’t afford to buy a house and have to rent
2. Based on soaring rents, housing is fairly valued
In other words, rents and housing are tautological: rents are rational because housing values are rational, and housing values are rational because rents are rational.
Nice, but wrong: rents and housing are self-reinforcing bubbles:
Speculative bubbles that burst are often followed by an echo bubble, as many participants continue to believe that the crash was only a temporary setback.
The U.S. housing market is experiencing a classic echo bubble. Exhibit A is the Case-Shiller Housing Index for the San Francisco region, which has surged back to levels reached at the top of the first bubble:
When a speculator bought a new particle-board-and-paint McMansion in the middle of nowhere in 2007 with nothing down and a $500,000 mortgage, the lender and the buyer both considered the house as $500,000 of collateral. The lender counted the house as a $500,000 asset, and the speculator considered it his lottery ticket in the housing bubble sweepstakes: when (not if) the house leaped to $600,000, the speculator could sell, pay the commission and closing costs and skim the balance as low-risk profit.
But was the house really worth $500,000?
Bubbles are followed by echo-bubbles, and the bursting of the second bubble ends the speculative cycle.
If we have learned anything in the past 20 years of massive asset bubbles and equally massive declines when the bubbles finally pop, it’s this: those caught up in the expansionary phase of the bubble cannot believe the bubble that’s rewarding them so richly could actually burst.
This psychology of mass delusion now dominates housing, stocks and bonds: not only is this not a bubble, the expansion will continue forever.
History, however, suggests otherwise: all bubbles burst, period.
As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: the Federal Reserve.
Federal Reserve chair Janet Yellen recently treated the nation to an astonishing lecture on the solution to rising wealth inequality–according to Yellen, low-income households should save capital and buy assets such as stocks and housing.
It’s difficult to know which is more insulting: her oily sanctimony or her callous disregard for facts. What Yellen and the rest of the Fed Mafia have done is inflate bubbles in credit and assets that have made housing unaffordable to all but the wealthiest households.
We discuss ‘American Psycho’ type banker murderers roaming the streets beheading prostitutes. While in the central banks, we see ‘corporatism’ as defined by the World Bank in the 80s and 90s – and that is a balance sheet greater than 25% of GDP. In the second half Max interviews Professor Steve Keen and artist Miguel Guerra about their new crowdfunded graphic novel series – CRASH, BOOM, POP – where economics will be fun to learn. Professor Keen promises Max a naked Margaret Thatcher to keep with the genre. They also discuss the godzilla in the Japanese central banking consuming any debt the population throws at it and where this might lead for the final global debt showdown.
Tagged with: bitcoin
, housing bubble
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, miguel guerra
, minsky moment
, steve keen
There is nothing remotely “normal” about the echo-bubble’s rise, and we can anticipate that its deflation will be equally abnormal.
Conventional wisdom on the resurgence of the housing markets takes one of two paths:
1. Housing is not in a bubble, it is merely returning to “normal”
2. Housing is bubbly in some markets, but prices will continue to rise
Here’s an alternative view: housing is in an echo-bubble that’s popping.Courtesy of the excellent Market Daily Briefing, here are some charts that make the case that the housing echo-bubble was just another Federal Reserve-induced speculative asset bubble that’s popping, like every other speculative bubble in recorded history.
As rents climb, developers large and small take out their calculators and dreams of wealth blossom: but no, this is not bubble.
The disastrous blowback from inflating housing bubbles is painfully obvious: as housing becomes unaffordable, households impoverish themselves to “get in now before it’s too late;” malinvestment (i.e. McMansions in the middle of nowhere) flourishes as housing becomes a speculative financial vehicle rather than shelter; retirement funds are sold designed-to-default mortgage-backed securities, and when the bubble finally pops, those lured into buying at the top are left underwater, owing more on their mortgage than their house is worth.
But there is one silver lining to housing bubbles: some of the money squandered in the speculative frenzy ends up rehabilitating old buildings or erecting new housing in useful locales.
American citizens already have a hard enough time affording a home. Squeezed out by financial oligarchs buying tens of thousands of properties for rental income, and faced with real wages that haven’t budged since the mid-1970s, the demographic of U.S. citizens that historically dominated the new home market has been forced to live in their parents’ basements. Just to kick em’ when they’re down, Americans now face the impossible task of competing with laundered Chinese money.
It appears the only people not buying American real estate are Americans needing a place to live.
Read more here.
Institutionalizing the speculative excesses that inflated the previous housing bubble has fed magical thinking and fostered illusions of phantom wealth and security.
The global housing market has been dominated by magical thinking for the past 15 years. The magical thinking can be boiled down to this:
A person who buys a house for $50,000 will be able to sell the same house for $150,000 a few years later without adding any real-world value. The buyer will be able to sell the house for $300,000 a few years later without adding any real-world value. The buyer will be able to sell the house for $600,000 a few years later without adding any real-world value.