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Interesting Take On The Coming Hpc

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The US housing bubble has popped. Sales of existing homes fell to their lowest levels in two years in July, while sales of new homes dived 22% on the previous year.

The average house price was barely changed compared to July 2005. But as many commentators in the US press have pointed out, this doesn’t account for all the incentives that sellers are now having to offer potential buyers, such as free pools and coverage of buying costs.

It’s little wonder that US consumer confidence is now at its lowest level since hurricanes Katrina and Rita battered the south coasts in autumn last year.

New York university economics professor Nouriel Roubini goes as far as to say that: “Every possible indicator of the housing sector that has been coming out in the last few weeks…suggests that the housing market is in free fall.” He reckons that “this may end up being the biggest housing bust in the last 75 years” - in other words, since the Great Depression.


US consumers have been relying on the housing market to fund their debt-fuelled spending. A housing bust of these proportions would be “enough to trigger a US recession…expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession,” says Roubini.

And unfortunately, a US recession would be very bad news for the rest of us.

As Morgan Stanley’s global economist Stephen Roach so eloquently puts it: “There’s no consumer in the world like the American consumer.” In 2005, US consumers spent nearly $9 trillion. That’s 20% more than Europeans, three times more than the Japanese, nine times more than the 1.3 billion Chinese and a whacking great 17 times as much as India’s population.

The trouble is, they’ve spent plenty but their earnings haven’t been keeping up. In fact, US consumers have been spending more than they earn for quite some time. For 2005, the savings ratio (the percentage of annual income that consumers are putting away for a rainy day) actually went negative for only the first time since - you guessed it - the Great Depression.

It isn't actually true that the bulk of mortage equity is supporting direct consumption: most of it goes to refinance existing debt and sustain small businesses. But of course, those things in themselves support consumption indirectly, so a collapse in the housing market - which after all bailed out the US economy during the 2000-2 recession - will have dire consequences. US marxist economist Doug Henwood has been on this issue for over a year now, so he's the guy to check with. Also, his book about Wall Street is available free online (PDF). Another economist who has a remarkable history of accurate predictions is Wynne Godley - he too has been popping the debt-fuelled bubble.

Meanwhile, Britain's housing market bubble continues apace, apparently "supported by historically low interest rates, low rates of housebuilding, steady income growth, and positive demographics". It is true that there is very little investment in house building, and one factor that isn't mentioned on the linked page is the increasing privatisation of housing in the UK, which has the effect of driving up prices and rents. The base rate is historically low at 4.75% but has risen this year, and will continue to rise. Besides, interest rates are only useful for as long as people can continue to afford to borrow money. Wage growth is, however, not conducive to this. According to an HSBC economist who spoke to Reuters, "unemployment is rising and real income growth is being squeezed".

The British economy has been sustained - never quite booming, but usually growing - by a number of factors, not least the unprecedented consumer borrowing, which helped households to sustain spending. Government expenditure is also a key factor in growth, particularly in IT which it fancies will allow future savings (this might be true if they didn't have a track record of giving massive IT contracts to rip-off merchants like EDS). To keep the economy afloat when the consumption bubble bursts, however, the government would have to borrow on a massive scale and spend like there's no tomorrow on infrastructure and public sector employment. As it is, you're more likely to hear employers' demands for reduced pension contributions, lower corporation taxes, the reduction of the minimum wage and of course reduced interest rates so they can borrow like crazy.

Basically, folks, the capitalist class won't pay you enough to buy enough, so they rely on you borrowing as much as you can to keep production going and stave off the recession. When the recession does come, they'll make sure you foot the bill. The only time they will ever tolerate a government trying to do something in your interests in a time of recession is if they're threatened with revolution. I trust you all have your pitchforks ready to hand.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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