Will the debt monster eat your savings?

 With house price growth and house sales slowing down; I sometimes begin to wonder what other crazy plans the government could invent in order to prop up the housing market. If house prices still begin to fall after Help to Buy, Funding for Lending, bailing out the banks, printing £375,000,000,000 and holding interest rates at 0.5% for six years; what would they do? How bad would things have to get before we would see even more extreme market manipulation?

They could reduce interest rates even further so that they become negative. This would reduce the cost of servicing debt but I suspect that savers would have something to say about paying a bank to hold their money! There could well be a mass exodus of capital out of UK banks and possibly social unrest.

As the whole fiat monetary system is based on growing levels of debt, maybe the debt monster will soon consume all bank deposits. The following scenario may seem extreme but we now live with a western economy that already has unsustainable debt levels, increasing volatility and signs of currency wars.

Savers deposits are replaced by debt of equivalent value due to a collapse in economic growth and deflationary pressures. This helps keep mortgage rates low because an artificially engineered demand for the debt would have been created. Savers are paid a small amount of interest (yield) for holding the debt but would never be able to draw out any of their original capital as it would no longer exist! Virtually all money in existence represents debt and savers become mini bond traders. Capitalism without the capital.

Why is there so much ‘spin’ in economic journalism?

 Since the onset of the financial crisis one could be forgiven for getting slightly confused about what is really going on in the economy. Bank bail-outs, house prices, inflation, quantitative easing and the Eurozone debt crisis; there has certainly been much to report.

The fact that there is no longer strong economic growth focuses the attention of different groups within society. These groups seek different outcomes and their perception of what has caused the economic downturn and what needs to be done to put it right, varies significantly. Many journalists ‘spin’ their stories to represent the views of one these groups within society. This is especially common in news reports about the housing market; there is a cognitive bias in order to support vested interests.

Looking at the economic pages of the BBC website recently I noticed conflicting reports on the same subject. On one page there were two articles about the Japanese economy. One headline read, “Signs of a pick-up in Japan’s economy” and the other said, “Japanese economy worse than forecast.” The predictions for growth in the economy over the last few years have been farcical. The IMF, OBR, CBI and others have all consistently downgraded their predictions. Do they not know what they are doing or is their reporting suffering from some kind of cognitive bias?

The truth is that we need to read many economic articles from different sources, some more trusted than others. Instead of our self-grasping mind attaching itself to an ideology, we can take a clearer and more balanced view by trusting our inner wisdom and integrity.

Wealthy elite to control the London property market?

 Within days of posting my first blog, the London Evening Standard ran a front page headline which read “£100,000 deposit to buy first home”. This astonishing conclusion was the result of research carried out by Oxford Economics who predict that London property prices will just keep on rising and by the year 2020 the average price will be £489,214.

Even if it was possible to amass £100,000 for a deposit, one would still need to obtain a mortgage of nearly £400,000 to buy the ‘average’ house. Given that most lenders have now come to their senses; it is no longer possible to borrow much above four times annual earnings. This means a salary of around £100,000 a year would be required to qualify for the mortgage.

We talk of the human race progressing in many areas but when it comes to something as fundamental as housing we seem to be fast tracking back to the Victorian era; a wealthy property owning elite providing expensive, insecure short term rental accommodation for the rest of us.

The current influx of foreign money and the influence of ‘The City’ is keeping London’s property bubble inflated. All bubbles though, must eventually burst.

The London wealth gap. A recipe for more unrest?

 I was reading in utter amazement a front page article in the London Evening Standard which reported that three quarters of the first phase of a luxury housing development had been sold in just four days. The prices started at £350,000 for just a studio flat and rose to £6 million for a penthouse. Many of the buyers are from overseas, especially Asia.

How long can the London property bubble be sustained? This is difficult to answer but due to the fact that over half of all property bought in London is by overseas buyers, the current momentum is being driven by the wealth created in growing and emerging markets. The UK and US economies are being kept afloat by unprecedented central bank intervention which is sustaining the wealthy elite.

The gap between rich and poor has always been wide in London but it seems that it is now reaching huge proportions. With the prospect of many more cuts to social welfare, increasing energy bills and increasing food prices; the social unrest that we witnessed in 2011 could seem quite minor in comparison to future displays of discontent. I wonder if all of these overseas property 'investors' realise what they may be letting themselves in for.