Thursday, Nov 15, 2007
Good summary of k-cycle
theroxylandr: Kondratieff wave
The current Kondratieff wave will be completed when the mortgage debt will collapse back to historic levels of the start of new wave, i.e. 10%-15% of GDP. Obviously, it means that $4-$6 trillion of outstanding mortgage debt will end up in default, which means many millions of homes will foreclose and losses will devastate the banking sector.
Posted by sold 2 rent 1 @ 11:38 AM (1117 views) Add Comment
14 Comments
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1. cornishman said...
I'm having a problem getting my brain round this.
If nearly everyone eventually defaults on their mortgage and banks collapse and debt is written off then money disappears out of the system. But those houses/assets still exist and will be owned by someone. What will dictate the value of them? And where does the money come from to pay everyone on the dole and keep paying MPs salaries? Why can the government not keep printing money at the same rate that the debt is being written off?
2. techieman said...
s2R should the K-Winter be [soon] upon us, then i revert to my question to you before. Assuming that we are about to enter a deflationary cycle, then what does 3.5x income (for your purchase) actually mean? Does it mean 3.5x YOUR income now, 3.5x YOUR income dependent on what your income is at the time that the prices are 3.5x your then current income, or 3.5x average income (again either now or then)? My point was if there is a deflationary environment its not just assets that deflate its salaries as well. (you may well argue that YOUR salary wont be affected, i have no clue because i dont know what you do), but surely none of us would mind salary cuts so long as the purchasing power remains or improves. A fear is that the income levels in the aggregate deflate - i.e. salaries for the people that maintain employment remain constant but jobs disappear.
3. sold 2 rent 1 said...
techieman,
In a deflationary depression, many borrowers default on their loans and the money supply contracts (debt is money). Less money means lower prices of assets, goods and services, and wages (driven through unemployment).
I run a successful travel website that I think will be finished by 2010 (travel always gets hit the hardest in a downturn). My plan for the depression is simple. Save as much income as I can. Convert all assets (property and stocks) into cash and then more slowly into gold/silver mining stocks
cornishman,
"What will dictate the value of them?"
What lenders want to lend and what borrowers feel comfortable borrowing (not much)
"And where does the money come from to pay everyone on the dole and keep paying MPs salaries?"
Massive budget deficits
"Why can the government not keep printing money at the same rate that the debt is being written off?"
Because it will destroy its currency.
Most debt is issued by private banks and outside government control
4. planning4acrash said...
Banks make debt out of thin air from a small deposit base and sell the debt through bonds. The government does the same, in the UK via vehicles call Gilts and gold reserves, etc are a useful collaterol, but you do wonder what the government is mortgaging! Presumably the promise of repayment via future tax returns, so the Northern Rock gilts will presumably have been sold on the promise that future Northern Rock income, guaranteed by the potential to raise tax will pay for them. The punative rates will be because the gilts weren't AAA rated so required a higher return for the market to buy the debt. The government can produce as much money as it wishes, as is the case in Zimbabwe where you have hyperinflation, so private lending cannot go to infinity because companies go bust relatively easily, but government lending can go virtually to infinity, particularly given that a country can default by devaluing its currency, but that is of course very VERY stupid, except in times of war, when you're being invaded and need to tool up! But seriously, I thought we were at war with climate change, surely governments would be better off printing money to tool up for peak oil and climate change? Generate 15bn of government loans and you could build one hell of a lot of off-shore wind turbines.
5. techieman said...
I think i might have to apologise - perhaps it was confused 76 who told me that he was looking for a 3.5x income multiple to buy. if so i apologise for my confusion, although confused if it was you whats your reaction to my question. Since we seem to be in agreement 3.5x then will be less than 3.5x now - infact if you take this to a logical extreme is there not a case for affordibility to still be an issue of levels of wages fall pari passu with asset (eg house prices).
6. planning4acrash said...
3.5x is the long term average, so, any crash should go below 3.5x before rebounding back and the cycle starts all over again.
7. Stillthinking said...
The money really disappears. As in sooner or later, when the mortgage is abandoned, the money given to the seller disappears as well. The seller doesn't keep the money. In the case of the same bank owed the mortgage money and also holding the sellers new found wealth this is a direct cancellation of both. When banks issue money it is backed by something, i.e. somebodies debt (or the labour they have to do to get the money to pay the debt). The seller holding cash can attempt to run, by moving banks for example, which would maybe set off a run because getting out first is so important. In an extreme case you the seller can get out of the UK banking system by converting to a foreign currency, which could lead to a run on the currency.
Probably, and effectively, the UK gov. have printed this money because although really it is backed by tax, they can't raise taxes anymore because they already borrowed too much. However, problems with printing money are inflation, but also the fairness of who do you give it to? Should I as a taxpayer pay the original seller money because the mortgage holder defaults? The transaction has nothing to do with me.
This is why bailing out Northern Rock is unfair to the taxpayer in general. I never had any money with them, but either I potentially face paying £730+ through additional tax, or I pay £730+ on price increases. Hence the need for regulation. Northern Rock lent money they didn't have and got caught out. Why should I help them? Seize and sell the assets of the directors and management first, and also the shareholders who hoped to profit. These are the people who should pay, the ones who would have profited.
Hence the moral hazard of bailing them out. They stood to gain, but not to lose.
8. d'oh said...
S2R1 said:
"Why can the government not keep printing money at the same rate that the debt is being written off?"
Because it will destroy its currency.
Most debt is issued by private banks and outside government control
What I am concerned about now, and I think there are indications from the Americans and elsewhere that central banks will try to gently inflate there way out of this predicament. Fine if it works, but if the general public lose faith in the value of paper...it could all go horribly hyperinflationarily wrong in a scramble for hard assets. The K-wave people would say that Greenspan and now Bernanke have been trying to avoid a K-Winter and that they will eventually fail. On the other hand, some countries, such as Australia are raising interest rates, but will the politicians be willing to sacrifice their jobs by pushing the country into a recession and having numerous voters go bankrupt after their recent credit binge? I don't think so. (Given that the likely next treasurer of Australia is a relative I reckon I'm in a good position to be a cynical judge of what will happen there.)
I think it is very difficult to see how all of this is going to play out. Many leveraged BTLers will probably go to the wall, but people who own their own homes or have little outstanding mortgage debt may do better out of this than all of us who have our assets stored as confetti.
9. planning4acrash said...
America is trying to deflate China from the dollar peg so that the Yuan doesn't floats freely and China stops dumping low cost goods and taking American Jobs. That's why the French PM was on record attacking America for a trade war that will impact upon Europe by inflating the Euro. The inflated Euro is however collateral damage in the US China trade war and will be tolerated by the US because China is a bigger issue for them right now, not supporting them on Iraq will be part of why Bush doesn't care.
10. sold 2 rent 1 said...
Most debt is created by private banks. The timescale for the debt peak IMHO is 2010-2012. The governments would have to create such an enormous amount of money in such a short period of time (say 5 to 10 times their current budget deficit) that they need to get going now. Also the new debt money must go into wages and shop prices and NOT assets for the hyperinflation government plan to work.
Money supply growing at 12pc
wages growing at 2.9pc
RPI is 4.2pc
The new debt money is still pouring into assets so the problem only gets worse.
11. drewster said...
@d'oh: The UK and USA are rather different to Australia. Recent economic growth in the UK came mainly from services, whereas Australia are mainly exporting commodities (coal, wheat) to China. This means that they have hard cash coming in with which to repay the debt. The UK by contrast may not have nearly as much hard cash coming in if the financial services sector falters.
Hyperinflation is a relatively small risk, our bankers are wiser than those of Zimbabwe. A better parallel might be modern Brazil. In 2002 a populist party won the elections. Fearing economic mismanagement and high inflation, the Brazilian upper- and middle-classes (i.e. those with large savings) purchased tangible assets or moved their cash into foreign currencies instead of just saving cash locally. This pushed the currency down to an all-time low of R$4 per US$1 (down from about $2). In the end the fears were overblown, the populist government agreed to stick to sensible macroeconomic policies, and the currency regained its losses. Somehow I don't think we're in for such a happy ending.
Other countries offer similar lessons: the Mexican crisis of 1994, the Argentinian crisis of 1999-2002, and of course the Asian Financial Crisis of 1997. However I think the UK's situation is different to all those.
12. sold 2 rent 1 said...
"Australia are mainly exporting commodities (coal, wheat) to China. This means that they have hard cash coming in with which to repay the debt."
Look a the debt graph
http://www.financialfoundations.com.au/news/56.pdf
Oz is in a bad state in terms of household debt. If the world economy stumbles and commodity prices collapse then things will turn really nasty
13. the northerner living in oz said...
Australian housing is over priced
The buying and selling of houses just for profit
Is just as bad as in the U.K.
There are adverts in the state papers for various get rich quick schemes
Attend seminars in CFD Trading, make your property fortune etc.
14. Exile said...
oz has vast mineral deposits not just wheat and coal, you name it they've got it gold, uranium worlds biggest reserves, cadmium, alum any mineral you can think they have, they have just discovered vast iron ore deposits in western australia, oz is a very rich country and with the rapid development of china india is a very good place to invest your money.