Monday, April 24, 2017

Housing's Echo Bubble Now Exceeds the 2006-07 Bubble Peak

If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden's housing bubble.
A funny thing often occurs after a mania-fueled asset bubble pops: an echo-bubble inflates a few years later, as monetary authorities and all the institutions that depend on rising asset valuations go all-in to reflate the crushed asset class.
Take a quick look at the Case-Shiller Home Price Index charts for San Francisco, Seattle and Portland, OR. Each now exceeds its previous Housing Bubble #1 peak:
Is an asset bubble merely in the eye of the beholder? This is what the multitudes of monetary authorities (central banks, realty industry analysts, etc.) are claiming: there's no bubble here, just a "normal market" in action.
This self-serving justification--a bubble isn't a bubble because we need soaring asset prices--ignores the tell-tale characteristics of bubbles. Even a cursory glance at these charts reveals various characteristics of bubbles: a steep, sustained lift-off, a defined peak, a sharp decline that retraces much or all of the bubble's rise, and a symmetrical duration of the time needed to inflate and deflate the bubble extremes.
It seems housing bubbles take about 5 to 6 years to reach their bubble peaks, and about half that time to retrace much or all of the gains.
Bubbles have a habit of overshooting on the downside when they finally burst. The Federal Reserve acted quickly in 2009-10 to re-inflate the housing bubble by lowering interest rates to near-zero and buying over $1 trillion of mortgage-backed securities.
When bubbles are followed by echo-bubbles, the bursting of the second bubble tends to signal the end of the speculative cycle in that asset class. There is no fundamental reason why housing could not round-trip to levels below the 2011 post-bubble #1 trough.
Consider the fundamentals of China's remarkable housing bubble. The consensus view is: sure, China's housing prices could fall modestly, but since Chinese households buy homes with cash or large down payments, this decline won't trigger a banking crisis like America's housing bubble did in 2008.
The problem isn't a banking crisis; it's a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.
China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.
About 15% of China's GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing's share of U.S. GDP barely cracked 5%.
Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)
There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose a majority of their operating revenues, and there is no other source they can tap to replace this lost revenue.
Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth. The end of that "rising tide raises all ships" gravy train will dramatically alter China's household wealth and local government income.
If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden's housing bubble. Oops, did I say bubble? I meant "normal market in action."
Who is prepared for the inevitable bursting of the echo bubble in housing?Certainly not those who cling to the fantasy that there is no bubble in housing.
NOTE: James Collins, please email me re: your generous contribution via Dwolla.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, T.G.N. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.
Thank you, Don Y. ($5/month), for your splendidly generous pledge to this site -- I am greatly honored by your support and readership.

Read more...

Sunday, April 23, 2017

Who Will Live in the Suburbs if Millennials Favor Cities?

Who's going to pay bubble-valuation prices for the millions of suburban homes Baby Boomers will be off-loading in the coming decade as they retire/ downsize?
Longtime readers know I follow the work of urbanist Richard Florida, whose recent book was the topic of Are Cities the Incubators of Decentralized Solutions?(March 14, 2017).
Florida's thesis--that urban zones are the primary incubators of technological and economic growth--is well-supported by data that shows that the large urban regions (NYC, L.A., S.F. Bay Area, Seattle, Minneapolis,etc.) generate the majority of GDP and wage gains.
Cities have always attracted capital, talent and people rich and poor alike.Indeed, "city" is the root of our word "civilization." So in this sense, Florida is simply confirming the central role cities have played for millennia.
More recently, Florida has addressed the rising wealth/income inequality that is making desirable urban areas unaffordable to all but the top 10% or even 5% wage earners. This is a critical concern, because vitality is a function of diversity: a city of wealthy elites paying low wages to masses of service workers is not an economic powerhouse.
What happens as buying a home in a desirable city becomes out of reach of all but the most highly paid tranche of workers?
The larger question is: what happens to home ownership as housing prices continue higher while the next generation's wages remain significantly lower than previous generations' incomes?
Millennials are typically earning less than Baby Boomers and Gen-X did in their 20s and 30s, and if this continues--and history suggests it will--then how many Millennials will be able to buy a pricey house?
One consequence of stagnating wages and rising home valuations is a "nation of homeowners" morphs into a "nation of renters."
The other big question is: if Millennials aren't earning enough to buy pricey homes, who is going to buy the tens of millions of houses Baby Boomers will be selling as they downsize/move to assisted living? As for inheriting Mom and Dad's house--that's not likely if Mom or Dad need the cash to fund their retirement/assisted living.
This question is especially relevant to suburban homes, especially those far from employment centers. Though data on this trend is sketchy, it seems Millennials strongly favor city living over exurban/suburban living.
Anecdotally, I can't think of a single individual in their 20s or 30s that I know personally who has bought a house in a distant suburb. Everyone in this age group has bought a house in an urban zone. Not a highrise condo in the city center, but a house in a ring city near public transport.
Though data on this is hard to find (if it exists at all), Millennials seem more willing to make the sacrifices necessary to live in the urban core, either by renting rather than buying a cheaper suburban home, or by purchasing a modest bungalow on a small lot rather than an expansive suburban home on a big lot.
(This could change if Millennials start having lots of children, but to date small bungalows in urban regions appear big enough for families with two children.)
In a turn-around from the postwar era, which saw a mass exodus of the middle class from city centers to suburbia, the upper middle class is moving back to urban centers and the lower-income populace--once the urban poor--are being pushed out to the suburbs. We can now speak of the suburban poor.
To some degree, the suburbs have become victims of their own success. Long commutes in heavy traffic are the inevitable result of the vast expansion of suburban subdivisions, shopping malls and business parks. These killer commutes detract from the desirability of suburbs, especially to auto-agnostics of the Millennial generation, who exhibit low enthusiasm for auto ownership.
Rather than symbolizing freedom, auto ownership is viewed as a burdensome necessity at best.
If we overlay these trends (assuming they continue into the future), we discern the possibility that marginal suburban housing could crash in price and morph into suburban ghettos of isolated low-income residents.
The Pareto Distribution may play a role in this transformation. Should 20% of the suburban housing stock fall into disrepair, that could trigger the collapse of valuation in the remaining 80%.
Not all suburbs are equal. Those with diverse job growth may well act as magnets much like small cities. Those with few jobs and long commutes are less desirable and have smaller tax bases to support services.
The asymmetry between modest/stagnant Millennial wages and the soaring cost of housing cannot be bridged. If these trends continue, only the top tranche of highly paid young workers will be able to afford housing in desirable areas. Given a choice between affordable ownership in a small city or in a distant suburb, Millennials may well choose the affordable small city rather than the distant exurb or low-services suburb.
Note that most incomes have gone nowhere since about 1998. Even the top 5% has made modest gains in real (inflation-adjusted) income.
Meanwhile, home prices are back in bubble territory. "Hot" urban areas such as Seattle, Portland, the San Francisco Bay Area, Los Angeles, Brooklyn NYC, etc. have logged double-digit gains in recent years.
So who's going to pay bubble-valuation prices for the millions of suburban homes Baby Boomers will be off-loading in the coming decade as they retire/ downsize? We know one part of the answer: it won't be Millennials, as they don't have the income or savings to afford homes at these prices.
These trends promise to remake the financial geography of cities (large and small) and suburbia--and in the process, radically shift the financial assets of households, renters and owners alike.
NOTE: James Collins, please email me re: your generous contribution via Dwolla.
This essay was drawn from Musings Report 15. The weekly Musings Reports are emailed exclusively to major contributors/ subscribers /patrons ($5/month or $50/year).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Morgan M. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.
Thank you, David N. ($5/month), for your splendidly generous pledge to this site -- I am greatly honored by your support and readership.

Read more...

Friday, April 21, 2017

Our State-Corporate Plantation Economy

We've been persuaded that the state-cartel Plantation Economy is "capitalist," but it isn't. It's a rentier skimming machine.
I have often discussed the manner in which the U.S. economy is a Plantation Economy, meaning it has a built-in financial hierarchy with corporations at the top dominating a vast populace of debt-serfs/ wage slaves with little functional freedom to escape the system's neofeudal bonds.
Since I spent some of my youth in a classic Plantation town (and worked on the plantation as a laborer in summer), the concept of a Plantation Economy is not an abstraction to me, but a living analogy of the way our economy works.
The Plantation Economy is extremely hierarchical. Corporations and the state are both extremely hierarchical.
In the Plantation Economy, the Company has access to nearly unlimited credit.Small businesses serving the employees and the employees have enough credit to live on but not enough to buy productive assets. As a result, the Corporation can always buy up any productive assets, expanding its monopoly.
The state also has an essentially unlimited line of credit which it can use to fund its favored cartels and state fiefdoms.
In the Plantation Economy, the Company suppresses any innovation that threatens its monopoly and the state enforces whatever means the Corporation deploys: buying up patents and small companies, predatory pricing to bankrupt competitors, etc.
The Plantation Economy is a mono-culture of large corporations and their partner in rentier skimming, the state. Our economy is a state-cartel finance-debt system; it's only capitalist on the margins, that is, in the fringes that aren't profitable enough for corporations to control.
The core feature of this Plantation Economy is the privileges of accumulating capital are all in the hands of the state-cartel elites. The foundation of classical capitalism is the accumulation of capital, which in our era is not just cash, factories, mines, etc.--financial and industrial capital--but knowledge capital: intellectual property, knowledge of processes, creation and control of content, research and development, control of information streams (that is, maintaining information asymmetry) and so on.
Those with unlimited access to low-cost credit can buy up or control all productive capital, including the labor of knowledge-based workers.
When an economy is optimized for global corporations, the only possible result of this arrangement is a Plantation Economy. Our economy is optimized for corporations: they have access to unlimited low-cost credit, their capital can be shifted around the globe at a moment's notice (i.e. it is mobile), they have the tax advantages of incorporation and complex tax codes, they can declare bankruptcy without any limitations and wipe out their debts, they can engage in fraud, corruption and embezzlement and face no consequence other than a modest fine, they can suppress competition and their size enables dominance of the labor market.
Imagine if all these immense advantages were granted solely to worker-owned collectives and co-ops, and corporations were de-optimized, that is, they no longer had access to credit, their employees and managers could be jailed for systemic fraud and embezzlement, they paid high fees for merely existing and they were denied the ability to buy political influence as easily as an employee buys a loaf of bread.
The problem with a Plantation Economy is that it inevitably stagnates and collapses. Suppressing competition and innovation corrodes productivity, and as productivity and social mobility both fade, so does wealth creation.
The state-cartel Plantation eventually eats all its own seed corn via the vast expansion of credit. What appears to be "wealth" in the state-cartel Plantation is illusory asset bubbles fueled by state-engineered credit expansion.
Beneath this brittle veneer of great "wealth," the real economy is stagnating.These charts reflect this reality:
Productivity: stagnant:
New business growth: stagnant:
New credit-money issued to finance, monopolies and cartels: through the roof:
And the only possible output of the state-cartel Plantation Economy: runaway wealth and income inequality. There is no other possible output of our system.
We've been persuaded that the state-cartel Plantation Economy is "capitalist," but it isn't. It's a rentier skimming machine. Capitalism enables the accumulation of capital by anyone in a transparent market, and the capitalist state enforces a level playing field.
There's the get-to-work horn, people. Time to labor for the rentier skimming machine and its enforcer, the state, to pay your taxes, student loans, mortgages, and all your other neofeudal "obligations" to the state-cartel elites.
For more on the inevitable collapse of Plantation economies, please see my book Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Leah M. ($5/month), for your marvelously generous subscription to this site -- I am greatly honored by your support and readership.
Thank you, C.R.S. ($5/month), for your splendidly generous subscription to this site -- I am greatly honored by your support and readership.

Read more...

Wednesday, April 19, 2017

Marx, Orwell and State-Cartel Socialism

When "socialist" states have to impose finance-capital extremes that even exceed the financialization of nominally capitalist economies, it gives the lie to their claims of "socialism."
OK, so our collective eyes start glazing over when we see Marx and Orwell in the subject line, but refill your beverage and stay with me on this. We're going to explore the premise that what's called "socialism"--yes, Scandinavian-style socialism and its variants--is really nothing more than finance-capital state-cartel elitism that has done a better job of co-opting its debt-serfs than its state-cartel "capitalist" cronies.
We have to start with the question "what is socialism"? The standard definition is: a political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.
In practice, the community as a whole is the state. Either the state owns a controlling interest in the enterprise, or it controls the surplus (profits), labor rules, etc. via taxation and regulation.
The problem with equating the community with the state is the community is a completely different order from the centralized state, which is operated and controlled by a self-serving clerisy class that institutionalizes benefiting the few at the expense of the many.
The more accurate definition of socialism is: the means of production are owned and controlled by those who produce the goods and services.
Marx wrote a great many things in his career, and those who view his writings as scripture will argue endlessly over various interpretations and passages, much like people argue over the Bible.
In my view, Marx was a political-economy philosopher, not a demi-god, and so he retained the right to be completely wrong about some things, to contradict himself, to have missed important second-order effects, to have gotten some things half-right, etc., and most importantly, not to have been clairvoyant about the trajectory of history and capitalism, which he correctly identified as disruptively dynamic, i.e. everything solid melts into air.
One of the things Marx got right was the alienation of the producer/ worker from the output of his/her labor. The alienation is not just a loss of ownership; it's also a loss of agency and a psychological alienation from the entire mode of production.
The workers' alienation from the output of their labor doesn't vanish just because the state owns the means of production; rather, the "capitalist" elite is replaced by a political elite and a state-clerisy managerial class.
"Socialism" is simply another flavor of state-cartel capitalism; Orwell would be proud of all the simulacrum self-serving "socialists" who have managed to enrich themselves at the expense of those actually producing goods and services.
Calling state-cartel finance-capitalism "socialism" doesn't make it socialist.Orwellian double-speak doesn't change the neofeudal nature of debt-based state-cartel finance-capitalism.
Let's boil it down to its essence: if the producers don't directly own/control the output of their labor, it's capitalism, not socialism. State ownership/ control is nothing but the state-cartel coin turned over.
The only truly socialist system would be comprised of worker-owned collectives and co-ops, and privately owned and operated small enterprises.
In a truly socialist system, global corporations would pay such high entry fees and taxes that they could not compete on price against local worker-owned collectives/ co-ops.
In a truly socialist system, state functionaries would be banned from accepting bribes, campaign contributions, seats on philantro-capitalist foundations, corporations, etc., and barred from taking jobs in corporations after leaving state employment.
In state-cartel economies, "socialist" or otherwise, the system optimizes corporate profits, influence and agency. In a truly socialist system, worker-owned collectives/ co-ops and small business are optimized and corporations are de-optimized.
The only way state-cartel "socialist" economies can prop up their vast spending is by inflating even vaster debt and housing bubbles via financialization-- the exact same mechanism used in so-called "capitalist" economies to benefit the few at the expense of the many.
So-called "socialist" nations from China to Scandinavia are inflating monumental bubbles of debt to keep their delusions of sustainability aloft. I have covered China's unprecedented expansion of debt many times; Acting Man does an admirable job of covering Scandinavian Bubbles in Overdrive.
Worker-owned and controlled enterprises don't need to inflate-monopoly-capital financialization bubbles to stay afloat. Only state-cartel elite-run systems need to exploit financialization to keep from imploding.
Danish household debt to GDP is among the highest in the world: what's "socialist" about debt bubbles?
"Socialist" countries like Denmark are practicing extreme financial repression: what is "socialist" about negative interest rates?
Why does "socialist" Sweden need to inflate one of the world's most precarious housing bubbles? If "socialism" requires extremes of financialization to stay afloat-- sorry folks, it isn't socialism.
Here's Norway's M2 money supply. What's remotely "socialist" about this staggering increase in elite-controlled money supply?
Last but not least, here's SOE (state-owned enterprises) "socialist" China's debt to GDP ratio.
As Marx anticipated, finance-capital would come to dominate industrial capital and the state. What we see in these charts is finance-capital running to extremes to keep the state-cartel version of capitalism from imploding.
When "socialist" states have to impose finance-capital extremes that even exceed the financialization of nominally capitalist economies, it gives the lie to their claims of "socialism." The simulacrum "socialist" economies will implode with even greater force than the nominally capitalist economies, as a result of the same dynamic: state-cartel financialization is intrinsically unstable and unsustainable.


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, William M. ($50), for your marvelously generous contribution to this site -- I am greatly honored by your support and readership.
Thank you, Craig M. ($20), for your very generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.


Our Commission Policy:
Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP