We actually need a crash

market must crash to recoverImagine a phoenix rising from the flames or whatever it is that helps you to rationalise the need for something getting destroyed so it can be rebuilt, in any case, for the Europe and the USA we need our governments to allow property to crash.

Inflation and deflation are not to be confused, property prices falling is not ‘deflation’. what is happening with money and credit is where you find the answer, and it lies in money being printed like there is no tomorrow. Bubbles need to be corrected, the only way to do that is to allow property prices to crash and not intervene. The way this benefits is that prices fall so far that eventually more buyers come in because its more affordable, at the moment prices coming back from levels that were unaffordable, the way to fix this is to let prices continue to fall.

No more property tax breaks, no more money for Mortgage Interest relief and certainly don’t undo stamp any further. Fortunately in Ireland despite a few minor mistakes, we have not gone the way the US is going, because the American government is trying to bail out mortgage holders.

Prices had gotten so wild that people started using more exotic means of arranging finance, such as self certification in order to be able to borrow bigger amounts of money. And doing this meant that at some stage they would have to face the financial gravity of their decision [which in the US is where the ARM’s came in and the punitive break fees] and in the Irish mortgage market this was normally in the form of a higher interest rate.

Nobody wants pain or losses, but economic cycles, and certainly the property based one we are seeing at the moment, are a fact of life and shouldn’t be interfered with, corrections must be allowed to happen, in fact your author is going to be personally hit very hard by the fall off in property prices.

I am reminded by a famous poem that goes something like ‘there are only two things to worry about, either you are sick or you are well, if you are well there is nothing to worry about, if you are sick, there are only two things to worry about, either you get better or you don’t etc. etc. Today there are only two things to worry about, either you are rich or you are not. The people who are rich can absorb increased costs in credit and food prices, the people who can’t are those who are in the lower middle class and the lower class, when the price of one thing rises then something else has to go, so increased price in fuel means that they can’t afford health insurance or some other need.

The people who were not enriched by the Celtic Tiger have the daily task of having to try to balance a budget when their resources don’t have the ability to absorb the increases. The best analogy is to imagine that we are all separate nations, some of us are balancing the budget of Switzerland, others are doing the same but they have to do it for Uganda,

hyperinflation in GermanyThe root cause of inflation is monetary, it comes at the moment from an increase supply of money and credit, money is being created but there (in the current market to ease banking liquidity) is no wealth creation, savings, increase in productivity or reason for the extra money – other than fixing the credit crunch. So now there is more money chasing fewer goods and thus the price of those goods goes up.

Greenspan and Bernanke took a Fed approach similar to the one the Germans followed in the early 1900’s which ultimately lead to hyper-inflation. The Germans had financed WW1 by printing money and removing the gold backing of the Reichsmark. The currency started devaluing and a crisis ensued. It was argued that increased imports over exports was what was causing the dilution of the value of the currency, we are seeing this again today because the same thing is being said of the US dollar.

The extra money being printed today is causing the rise in inflation in the US and this inflation is hurting the economy there, if the economy there is hurt then we also get hurt, because the fact of the matter is that economic pain is kind of like an electric current and we are all (US/EU) holding hands. The knock on effect is real and it’s hitting Ireland in more ways than you can imagine.

fed printing off money causing inflationThe Fed is trumping a line that talks about dollar value on a solely national level, which means that if you don’t spend outside of the USA then dollar value doesn’t matter that much, but what it doesn’t take into account is the inflation being caused by dollar devaluation. Depreciation in the currency that many commodities are priced in means that commodity hungry countries have better purchasing power, and thus things like oil start to get very expensive very fast, food inflation follows not long after as countries like India and China (who have about half of the worlds population between them) buy resources at breakneck speed in order to feed their huge and growing populations.

The Fed is now working on the basis of Inflationary Expectation, basically they believe that they can print as much money as they want once – and it hinges on this – inflationary expectations are well anchored. Government are clouding the issues of inflation by including and excluding certain costs.

market crash required for correctionThere are different forms of a ‘crash’, you can have a crash where the engines on a plane fail and the pilot brings the plane down safely and nobody gets hurt, its a crash but its a landing with many survivors, then there are the uncontrolled crashes where everybody dies. The problem with the American solution is that they have engine failure but they want to keep going and keep the plane flying, and the last runway is quickly fading into the distance.

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