THE TOP THREE listed companies are banks whose biggest assets, at 60% of the total, are housing mortgages, over four in ten of which aren’t making capital repayments. The money isn’t there you see, because prices have risen to 13 times the average wage in the big cities, and there’s precious little sign of real wage growth.
For those who could afford to stay in the game, the only way to borrow was by interest only payments. And if you ran short on rent versus mortgage repayments, you wrote the deficit off against tax and used the equity in the house as a down payment on the next one.
Making voters feel richer
Successive governments have rowed behind this because it makes voters feel richer. The big cities’ skylines are bristling with tall cranes, visual reminders that all is well as developers race each other to fat profits and banks chase fresh loan assets.
The media eulogise ordinary workers on averages wages as entrepreneurs control property empires worth millions. Services are nearly two-thirds of the economy and its main exports, commodities, for which it acts as a price taker, reach a world market that has lots of surplus.
The biggest buyer is China whose own banks are sitting on vast swathes of non-performing loans, estimated at four times US losses at the Global Financial Crisis (GFC). These buy nearly a third of the mining exports, making the economy the most reliant in the world on The Middle Kingdom. The mining sector has fallen from 19% of GDP to just 6.8% and, operating on thin margins between costs and revenues, is particularly vulnerable to a Chinese slowdown and falling prices.
Dependent on buying and selling houses
The economy, which had been built by extracting stuff like iron ore and coal out of the ground and selling it overseas, is now dependent on the knock-on effect of buying and selling houses fuelled by cheap money, government incentives and banks willing to lend on the never-never. This includes overseas buyers, many of them allegedly producing dodgy income certificates.
The country’s housing values now reach four times GDP, and house renovators are TV celebrities. The CEO of the biggest bank recently told politicians that they only lend to those who can afford to repay. It has 50% of its housing loans on interest only. The banks are sound, there hasn’t been a recession for 26 years or a reversal in property prices for 55 years. There’s no folk memory.
This is an OECD country
This describes an OECD country where, despite everything that has happened elsewhere, the prevailing mood is still bullish. The Central Bank is in a trap, slow to raise interest rates, concerned that tepid wage growth will tip borrowers over. It is the same trap facing Central Banks globally.
For the first time since Marilyn Monroe sang happy birthday to President Kennedy, house prices are falling, prices in the lead city have reversed two months in a row. The bulls are convinced that this purely relates to the regulator’s recent rule change on interest only loans, that it is a welcome soft landing, a temporary pause before returning to business as usual, certainly not the first sign of a tipping point in a house of cards.
The city is Sydney and the country is Australia, which I monitor not just because of the huge numbers of Irish living there, but because Australia could become the first casualty in the next wave of imbalances caused by a prolonged period of cheap money and global quantitative easing, which at $19 trillion, has flattened the cost of capital everywhere.
A global debt bubble
But Australia is not the only weak part of a global debt bubble pumped up by 50% in the past decade to $215 trillion. That’s the total of national, consumer and business debt. Add on the huge levels of unfunded social protection promises not covered by tax inflows and, on this trajectory, the West is going broke.
The Irish total, I reckon, is €869bn, nearly half of that projected deficits in pensions, being funded by a little over two million taxpayers. Pause and imagine an ATM printing a tenner per second. Now start printing somewhere safe about the time Israel was invaded by Assyrian King Tiglath-Pileser in 738BC.
In Loot, a book I wrote for Jack & Jill in 2006, I’d identified the USA as vulnerable to crisis, and recommended readers to reduce overall leverage to less than 50% of assets, move money to AAA rated banks, buy some gold, and shift from equities to bonds.
But I’ll freely admit to miscalculating the degree to which the global financial system was interconnected and the degree of demand destruction that would come. I thought sectors like the German property market were safe. I was wrong and spent much of my time in between trying to make sense of it all. I’m still trying.
We’ve reached a dangerous period
I’ve chosen to release my new book The Pivot coming into 2018, because we’ve reached the most dangerous period in the vast experiment in money elasticity, when quantitative easing is put into reverse gear and interest rates rise.
The Pivot asks some of the toughest questions of our time: Is the global recovery fake? Are asset values, including property, artificially inflated from vast quantitative easing where Central Banks buy unloved securities including lending to their own governments at prices no one else will?
What is likely to happen as the destiny with excess debt plays out? How did the modern State develop and how will it be forced to reinvent itself to deliver on social promises? What can you do to prepare Plan B? What to hold, what to sell and what to buy when everything is for sale again?
Nothing is certain but I’m pretty convinced that we will shortly know the answer to the biggest question of all. Is the economic doctrine of John Maynard Keynes the most damaging carried forward from the 20th century?
The Pivot is now available from the Jack & Jill Children’s Foundation for €20. Each copy finances one hour of paediatric nursing care for one of 300 Irish families supported by the charity.
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