Sunday, 22 November 2015

George Osborne guides UK on unsustainable trajectory

Ask yourself this question: When have house prices in the UK ever been higher?

According to the Halifax House Price Index, the only time prices have been higher, as a multiple of average earnings, was just in the run up to the crash of 2007/8. And as you can see from the graph below, we are now on course reach or exceed those levels all over again.

So, why should this matter I hear you ask... Maybe house prices will simply flatten out, at some high level and we can just carry on with our great economic recovery... The problem is that a sizeable constituent of the demand for houses is precisely the perception that they are on a rising trajectory. When the trajectory is no longer expected to continue, the enthusiasm for new mortgages drops dramatically and you have a crash in house prices and consequently a crash in demand for new mortgages.

So why should a crash in mortgage demand matter? Surely housing will just be cheaper and we'll all be happy? The problem is, that with our crazy fractional reserve monetary system, the amount of money in the economy is critically dependant on the amount of borrowing that goes on. So a slump in borrowing equals a slump in money. Economists and the media confusingly refer to this as a "credit crunch", but it is more accurately described as a money crunch. Money, quite literally, starts disappearing. As Mervyn King said just after the crash "What the banking system has been doing is destroying money". A shrinking money supply is painful for an economy, and George Osborne is setting us up for just that scenario.

There are ways out of this predicament. We don't actually need rising house prices forever to maintain the money supply. We could actually have normalised interest rates, non-looney house prices and a stable money supply... we just have to fix our crazy monetary system and switch to something sane like full reserve banking as supported by the FT's Martin Wolf.

Monday, 28 September 2015

Not meaning to gloat or anything but...

Mark Carney and other central bankers have been trying to persuade us that higher interest rates are coming any moment now - for years!

Not meaning to gloat or anything but, in my book (published July 2011) I did say: After "bursting of any asset bubble"... "Society can get locked in to low rates, painted into a corner."

Sunday, 14 June 2015

MMT and The Problem with Government Bonds

Proponents of MMT are fond of arguing that the amount of government debt, i.e. the amount government bonds, that a government creates is not a problem. I have to take issue with this idea. The problem is that the interest on government bonds is paid by taxpayers in general, whereas the recipients of the interest are exclusively the bond holders. The greater the government debt, the greater the flow of money from the taxpayer in general to bondholders. This is clearly unfair to tax-paying-non-bond-holders... like me.

A possible counter argument is that the people that purchased government bonds are investing in the government and therefore the rest of us should be grateful for this service, and be happy to repay them with interest payments. The problem with this argument is that the money was not really investment at all. True investment is where you spend money on something that makes future production more efficient, like buying new machinery for a factory. But most of the money received from bond sales is simply spent on running costs, like wages. That's not investment at all.