We have all heard the incredible stories of housing riches in commodity producing hotspots such as Western Australia and Canada. People have become millionaires simply by leveraging up and holding on to properties. These are the beneficiaries of a global money-printing spree that pre-dates the financial crisis by decades. The road toward such outsized gains in property is not paved with some global savings glut concocted by theoretical economists, but have rather been a process whereby the US leveraged up its economy-wide asset base allowing the Chinese to print ‘dollars’ with abandon. China, being a top-down system favoured fix asset investments as a means to grow their economy; the newly minted ‘dollars’ were thus used to bid on international commodities. That this increased the nominal values of tangibles, especially commodities with a direct Chinese bid, should come as no surprise. However, now that the Chinese economy is trying to move away from a system based on slave labour, foreign direct investment and exports to an overleveraged world, fixed asset investment growth is slowing down. That this has negatively affected Perth and Calgary is clearly visible in property data. However, one stalwart bubble remain resolute in all of this. A bubble like few before it and which will inevitably burst spectacularly with dire consequences for the small community. If you look to the prosperous fringe of northern Europe, you will note a small resource-based economy that has gone completely haywire. A population befuddled by surging commodity prices in a world where monetary policy is a foreign import. Remember the Impossible Trinity; a country cannot have free capital flows, a fixed exchange rate and a sovereign monetary policy all at the same time. While exchange rates were supposedly freely floating, they were in practice partly managed because a too strong exchange rate would crowd out the non-commodity export based part of the economy. Capital was certainly free to flow across the border, but to dampen the effect on the exchange rate the central bank set its monetary policy with diktat from the Eccles Building in Washington DC via Frankfurt. The result of such folly? We present exhibit A, a gargantuan housing bubble equal to none before it.
This post was published at David Stockmans Contra Corner on August 19, 2016.
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