Tuesday, March 15, 2011

GUEST POST: Dismal Economists & Spruikers [updated]

_Kris_Sayce Guest post by Kris Sayce from ‘Money Morning Australia’

“One final point, the reconstruction of Japan will economically help
the country and provide more demand for resources. You can see
why economics is described as the dismal science.”
– Peter Switzer, switzer.com.au

We’re not quite sure what point Mr. Switzer is making.

Is he saying the tsunami and earthquake in Japan are good for the economy?

Or is he saying it’s crazy to think the tsunami and earthquake are good for the Japanese economy?

We don’t know for sure.  And we don’t want to put words into someone’s mouth.  So, we can only guess.

We think he’s saying that it’s economically good for Japan because money will be spent on construction and buying new things.  And that economics is sometimes a bit topsy-turvy.  But all up, bad things end up being good… economically.

As you know, the argument is nonsense.  And to simply blame it on economics is just as bad.

Let’s get one thing straight: economics isn’t a “dismal science”.  It’s not economics claiming that destruction leads to a booming economy.  It’s the economists who make that claim.

So rather than economics being a dismal science, it’s the 95% of economists who believe that sort of rubbish who are dismal.

In other words, don’t blame the science, blame the scientists.

If you study real economics, not the mumbo-jumbo variety, then everything makes perfect sense.  In reality economics is nothing more than sound common sense.

It’s about understanding an economy is made up of individuals who interact with each other.

Economics isn’t about placing bets on whether the unemployment rate will be 5.1% or 5.2%.  Economics isn’t about stiff-necked central bankers raising or dropping interest rates, or deciding how much new money to print.

And it isn’t about spreadsheets and ratios.

Once you figure that out, you’ll realise economics isn’t as hard as most will have you believe… then you’ll agree with me that economics isn’t a dismal science at all.

It you want proof, I suggest you check out the videos and information at the Mises Institute.  You’ll be enlightened by economics from the Austrian School. [Just don’t bother with their non-economics. – Ed.]

If you’re not familiar with the Austrian School that’s not surprising.  It’s a school of economics that believes in free markets.  It believes in the evil of central bankers.  And it believes that governments can only ever hinder and distort an economy.

That’s why you may not have heard of it.  Because it opposes everything the mainstream believes in – government intervention and central bank omnipotence.

But check it out for yourself and make up your own mind.

Now, we won’t cover old ground again by explaining how the destruction of property and lives isn’t good for an economy.  I’d wager you’ve gotten the message on that by now.  So for today, we’ll look back at comments from our old pal, Reserve Bank of Australia (RBA) governor, Glenn Stevens…

He’s a bit of a wag you know is Glenn Stevens.

Answering questions from analysts in London, the RBA guv’nor said:

“I don’t think we have huge [house price] rises going on.  We don’t have a gearing up going on now.  We’ve got quite modest growth in housing credit now for the past year or more.  That all seems to me to be consistent with a household sector that’s being more careful.”

Your honour, could the witness please refer to chart ‘b02’ from the RBA.  The chart details total residential household loans made by Australians from 2000 until January 2011:

Source: Reserve Bank of Australia

You’ll note your honour, Australians have a cause for celebration.

During the month of January, in the year of our Lord 2011, the great people of Australia (otherwise known as the Children of the Lucky Country) amassed for the first time in history a total of $1,004,896,371,000 in residential housing debt with Australian banks.

Or to put it another way M’Lud, ONE TRILLION DOLLARS!

Not only that, but during the time of the supposed Great Deleveraging, household residential debt increased from $750 billion in September 2008 to over $1 trillion today.

That’s right it increased.  It went up.

Plus, during the time Mr. Stevens claims there has only been a modest growth in housing credit, the rate of increase quickened.

To the extent that housing credit has climbed 33%… in just two-and-a-half years!

And if we take all household debt – including unincorporated businesses such as sole traders, and personal loans – the total amount of household debt is nearly $1.5 trillion:

Source: Reserve Bank of Australia

Pardon us for mentioning it, but we fail to see any “modest” growth.  Over the period from late 2008 to September 2010, total household debt increased nearly 15%.  That’s 7.5% per year.

Including a 33% increase in housing debt.

Obviously your editor and Mr. Stevens have different ideas about what modest means.

So in the face of what the numbers show, Mr. Stevens insists there’s no housing bubble, and no credit-driven bubble.  Everything is fine with Australian house prices… there’s no need to panic.

Well, he may care to take a look at an article that appeared in The Australian over the weekend.  It’s titled “No Shore Thing”.

There’s only one word to describe the article – Amazing!

It’s the biggest, most bearish and most honest article on Australian housing we’ve ever seen in the Australian mainstream press.

In fact it’s so good I could easily quote the whole thing here.  But I won’t.  Instead I suggest you read it in full for yourself.

It’ll give you an idea of what can happen when property goes bad.  The great thing about it is that it’s describing people and properties in Australia.  Not in Detroit or Bristol or Phoenix or Liverpool… these are examples of prime Australian properties being sold at 30%, 50% and even 70% discounts!

Let me give you one cracking quote from the article:

“‘A couple of magnificent estates that would have fetched $8m to $10m during the good days were recently sold for $4.7m.’  He says apartments in the Peninsula Apartment complex near the Abel Point Marina, which originally cost more than $2m, including fittings, have been recently sold for less than $900,000.”

Wow!

Now, I know what the property bulls will say.  They’ll say these are holiday homes.  And holiday homes are different to city homes.

Our reply is this – and how do you think those holiday homes were financed?  That’s right, withdrawing so-called equity from the city home to buy the weekender.

Owners who are forced to sell these overpriced trinkets by the sea will now find themselves having to withdraw even more equity from their city home to pay off the negative equity on the weekender.

And they’ll be in competition to sell with those who just want to get out while they can.

That’s not all.  It’s a mistake to believe holiday homes are isolated from city homes.  That negative price action won’t impact the prices in metropolitan areas.

The fact is it will have a flow-on effect.

Already we can see the spruikers squirming.  Now they’ve got to change their argument.  The walls are closing in on them.

No longer can they say Australian house prices don’t fall, because here’s the proof.  The house price Armageddon from the US and Europe has finally touched Australian shores.

But onward they’ll go.  They’ll now claim that city house prices can’t and won’t fall – even though we know that’s happening already.  But when prices start falling in the suburbs, the next claim will be that they can’t and won’t fall in the inner-city areas…

So they’ll change their argument again.

It’ll be CBD properties that can’t and won’t fall… eventually they’ll have nowhere to go.  Except to admit they got it wrong – real wrong.

It’s quite sad really.  Why can’t they just admit prices can and will fall?  You know the answer to that, we explained it last week – Aussie housing is built on leverage and the belief prices always rise.

Take away that belief and you get the other side of leverage’s double edged sword… and that’s the bad side.  The side that’ll cut the market in half and make the debt position of over-leveraged Australians even worse.

Until then, keep saving.  Cheap, discounted property is coming to a suburb near you soon.

It seems it’s not just 95% of economists who are dismal, but 95% of property spruikers too.

Regards,
Kris Sayce
For
Money Morning Australia

UPDATE:

Peter Schiff explains why it's idiotic to think Japan's earthquake will "stimulate" the economy. (Ten minute video.) http://bit.ly/hOmQ4e

Yaron Brook and Terry Jones talk about the same idiocy. (Eight-minute video.)
Earthquake, Tsunami, Destruction: Can Japan's Economy Withstand the Strain?
http://www.pjtv.com/?cmd=mpg&mpid=113&load=5079

People might reflect that no matter where the insurers are who are paying for rebuilding (leading to inevitable rises in premiums for everyone) the resources used in the rebuild will now be bid away from other folk who otherwise would have been using them for productive purposes.
Building materials, for instance, that could have been used to build new affordable homes, will instead be bid up to be used to rebuild that which already existed.
New computers and servers, that could have been used to expand or start up new businesses, will instead be re-installed in businesses that (before the earthquakes) already existed.
All that labour, which could have been used to build new houses and new business opportunities, will instead be used simply to get things back where they were before--and with a lengthy delay.
So instead of new houses and new businesses, after many years we will simply have at best only what he had before.
If that's what alleged economists call economic progress, then they should be drummed out of their alleged profession.

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