Saturday, May 26, 2012
House Price Inflation
It is a conventional economics axiom that increasing the money supply without a concomitant increase in production causes inflation.
In the last thirtyfive years we have had low inflation in wages.
Essentials, including land , and thence housing and farm prices, have gone up many times the rate of wage rises.
Land inflation is driven by private Banking's incentive to print money. The more money they supply the more interest they can make.
Unfortunately, there is also a strong natural incentive to lend only on solid security, such as land and buildings.
Banks know better than anyone the inherent insecurity and instability of financial instruments, including shares.
Mortgage law in most Western countries favours lending on land. Unlike other investments, or lending, if the value of the security, land, goes down, the borrower is still liable for the full amount of the loan and interest. The bank is indemnified against loss.
For example, in New Zealand, the bank has priority over all other creditors, including contractors.
Lending on business and other assets does not offer the same security. The bank has to wait in line with other creditors and, normally, cannot continue claims in excess of their proportion of the sale.
Banks, while reluctant to risk their own money, are happy to risk small savers investments. Our pension funds, bank deposits and savings.
These schemes, whether shares, derivatives, hedge funds or other financial instruments are designed so that banks can gamble with our money. Win or lose they always get a cut.
De-regulation of banking has removed almost all constraints on lending and the amount of wealth banks can take.
Loses come out of our pensions and other savings. Or, if they really stuff it up, taxpayers are expected to borrow more from them to pay for it. "The bailout".
The total monetary value of financial instruments and debt is now so great that a crash, or super inflation, is inevitable if it is ever fully spent on real production.
Does anyone really think that infinitely compounding interest is possible in a world with finite resources.
While we lose our savings, houses and farms, bankers still get richer.
Given the difficulty in obtaining bank finance without land as security, favourable tax treatments (in Western countries for banks, homeowners, landowners and farmers ), incentives for banks to avoid risks inherent in other investment (The inevitable crash of Banker's ponzi schemes and the likely devaluation of currency denominated investments) it is not surprising that investors prefer land.
The Chinese Government buying up land worldwide with US dollars, before they become worthless, is only a minor example.
Hence land prices rising much faster than wages.
Our economy, along with most other Western economies has been skewed, towards speculation in existing assets, by banks following their own self interest. The "invisible hand" has failed