Sunday, November 30, 2008
The Paradox Of Plenty
If we all managed economic wealth responsibly we would never, ever have to go through periods of recessions in North America.
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There has never been the shadow of a doubt in my mind that if one of those little green aliens flying UFO’s way up there in the sky were to add all the brainpower our North-American societies are so very plentiful of, he or she would definitely think twice before considering Homo Sapiens an undeveloped, undereducated, undercivilized, underachieving and overall somewhat primitive creature. If this little alien were to take into account all the intelligence that our Presidents, Prime Ministers, Congressmen, Members of Parliament, Senators, Chairmen of the Boards of a plethora of Corporations large and small, luminaries of all sorts and walks of life and indeed each and everyone of us put in behind the economic and business decision-making processes we make on a daily basis, he or she would crank up the engine of the UFO (possibly fuelled not by oil or other fossil derivative) and shoot away in the Universe all the way back to Alpha Centauri or wherever he or she came from in the first place.
But then, if in fact in this great continent of ours we are all so smart and capable at figuring out the overall economic picture, why is it that every so often we have to go through periods of economic downturns? For one thing, monetary policies reflect valuations of what we have in terms of economic resources and how we use them and, to a certain extent, they are also a reflection of who we are. They are Capitalism way of dealing with national wealth in an all-encompassing fashion, which in turn determines our economic stability or instability for years to come.
Take for instance the situation wherein windfalls flow in from exports fuelled by excessively low interest rates, which ultimately push up the value of currencies and in turn decimate other areas of the economy, most notably manufacturing. Overall growth suffers as the “easy money” resource sector crowds out more productive sectors, thereby tending to bring in economic stagnation and, in the limit, de-industrialization. Or, more perniciously, the other situation wherein wealth is increasingly bestowed rather than earned, as it has been the case in recent times with speculative trends in both the Stock Market and in Real Estate, where winners came to dominate losers, at least in financial terms or, by way of another example, with excessive access to credit on the part of consumers that has resulted in the spread of debt, as opposed to distribution of wealth, to endemic proportions.
In fact, it can be safely stated that lack of an even distribution of wealth through sectors of society is a main underlying cause of recessions. When resources are harnessed in such a manner so as not to promote general economic vigour, this is the time when economic expansion sooner or later will come to a halt. What economists define as the “polarization of wealth” may come in different forms, but it is more typically present when governments’ ability or otherwise willingness to resist short term grab–and-run tendencies and temptations is impaired. This particular economic concept, it must be noted, is a far cry from the parallel but dissimilar political doctrine of “redistribution of wealth” first enunciated by Karl Marx and Friederich Engels in their Communist Manifesto of 1848, and most recently and so successfully re-enunciated by President-elect Obama during the 2008 electoral campaign, hopefully with a different nuance. With the difference consisting mainly in the fact that the economic concept of polarization of wealth lacks the reference to struggles between the ruling class (capitalist bourgeoisie) that owns the means of production and the working class (proletariat) that labours for a wage, which is present in the political doctrine. In fact, in capitalist economic theory capital and wages complement and are intertwined with each others.
Wealth dependence on speculation, as opposed to production and investment, creates the illusion of prosperity which is, in ultimate analysis, destabilizing for the economy. Speculators, more often than not, reduce liquidity by inflating prices. This has the deleterious effect of reducing the pool of buyers, thus hampering demand and reducing prices even further. By comparison, instead, investors buy and hold capital assets, which are not consumed instantaneously but rather are to be used at a later date. Thus, for example, the purchase of a house to be used as one’s primary domicile and place of residence is an investment and much more beneficial for the economy than, say, the purchase of a second or third house with the intent of flipping it or otherwise re-selling it for a hefty profit in the short term.
Capitalism, of course, does not condemn making a profit – and neither do I. But it is the speculative excesses that we have witnessed in both the stock markets and real estate these past few years that have altered and skewed the relation between personal income and capital appreciation in favour of a few to the detriment of the many, particularly when fuelled by easy access to credit. And all this has resulted ultimately in a gross mismanagement of national wealth for which we now have to pay the cost.
Greed, like just about everything else, has a price.
Luigi Frascati
But then, if in fact in this great continent of ours we are all so smart and capable at figuring out the overall economic picture, why is it that every so often we have to go through periods of economic downturns? For one thing, monetary policies reflect valuations of what we have in terms of economic resources and how we use them and, to a certain extent, they are also a reflection of who we are. They are Capitalism way of dealing with national wealth in an all-encompassing fashion, which in turn determines our economic stability or instability for years to come.
Take for instance the situation wherein windfalls flow in from exports fuelled by excessively low interest rates, which ultimately push up the value of currencies and in turn decimate other areas of the economy, most notably manufacturing. Overall growth suffers as the “easy money” resource sector crowds out more productive sectors, thereby tending to bring in economic stagnation and, in the limit, de-industrialization. Or, more perniciously, the other situation wherein wealth is increasingly bestowed rather than earned, as it has been the case in recent times with speculative trends in both the Stock Market and in Real Estate, where winners came to dominate losers, at least in financial terms or, by way of another example, with excessive access to credit on the part of consumers that has resulted in the spread of debt, as opposed to distribution of wealth, to endemic proportions.
In fact, it can be safely stated that lack of an even distribution of wealth through sectors of society is a main underlying cause of recessions. When resources are harnessed in such a manner so as not to promote general economic vigour, this is the time when economic expansion sooner or later will come to a halt. What economists define as the “polarization of wealth” may come in different forms, but it is more typically present when governments’ ability or otherwise willingness to resist short term grab–and-run tendencies and temptations is impaired. This particular economic concept, it must be noted, is a far cry from the parallel but dissimilar political doctrine of “redistribution of wealth” first enunciated by Karl Marx and Friederich Engels in their Communist Manifesto of 1848, and most recently and so successfully re-enunciated by President-elect Obama during the 2008 electoral campaign, hopefully with a different nuance. With the difference consisting mainly in the fact that the economic concept of polarization of wealth lacks the reference to struggles between the ruling class (capitalist bourgeoisie) that owns the means of production and the working class (proletariat) that labours for a wage, which is present in the political doctrine. In fact, in capitalist economic theory capital and wages complement and are intertwined with each others.
Wealth dependence on speculation, as opposed to production and investment, creates the illusion of prosperity which is, in ultimate analysis, destabilizing for the economy. Speculators, more often than not, reduce liquidity by inflating prices. This has the deleterious effect of reducing the pool of buyers, thus hampering demand and reducing prices even further. By comparison, instead, investors buy and hold capital assets, which are not consumed instantaneously but rather are to be used at a later date. Thus, for example, the purchase of a house to be used as one’s primary domicile and place of residence is an investment and much more beneficial for the economy than, say, the purchase of a second or third house with the intent of flipping it or otherwise re-selling it for a hefty profit in the short term.
Capitalism, of course, does not condemn making a profit – and neither do I. But it is the speculative excesses that we have witnessed in both the stock markets and real estate these past few years that have altered and skewed the relation between personal income and capital appreciation in favour of a few to the detriment of the many, particularly when fuelled by easy access to credit. And all this has resulted ultimately in a gross mismanagement of national wealth for which we now have to pay the cost.
Greed, like just about everything else, has a price.
Luigi Frascati
Real Estate Chronicle
Labels: ECONOMICS
Monday, November 24, 2008
The Great Canadian Recession
And, if indeed it does happen, how it will affect you.
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November 24, 2008 may have been a glorious day in the stock markets following the rescue of Citigroup Inc. with the U.S. Government purchase of $20 billion in preferred shares and the announcement of its subsequent back up to $306 billion worth of the giant bank's assets, in return for a further $7 billion stake. But the financial news coming from our home front, British Columbia and Canada, are far less encouraging.
For one thing early in the morning Prime Minister Harper stated that Canada could soon be in a recession later this year (not much time left) or early in 2009, adding that "Indeed, the economic growth is just about zero, perhaps a little bit less". The Prime Minister, who was attending the Asia-Pacific Economic Cooperation summit in Lima, Peru, attributed Canada's present woes to the deteriorating economic conditions in the western world and "especially in the United States".
This was followed by the announcement that the Royal Bank Of Canada (RBC) will likely be forced to take a CAD1.6-billion hit as market losses mount and loans start to go sour. The largest bank in the country cited "extreme volatility in the American financial markets" as executives said they would write down CAD1-billion in investments and set aside CAD620-million to cover credit losses.
Then La Presse Canadienne reported that the "Prairies see biggest-ever consumer confidence decline in November". In a very concise statement, La Presse declared that "Resource-rich Western Canada, once thought to be the most recession-proof component of the national economy, is beginning to experience the same economic malaise that has gripped the rest of the country". La Presse Canadienne quoted a survey published by the Conference Board Of Canada wherein consumer confidence in the Prairies has dropped 7.4 percentage points between October and November - the region's biggest decline on record. The Conference Board attributes the drop to energy exports to the United States, which will see "an expected 12 percent decline in 2009".
And, finally, there was Colin Hansen, Finance Minister of British Columbia who in a terse bulletin announced that the Province "will lose more than $3 billion in revenues over the next three years because of the cascading effects of the American financial crisis", adding that the CAD 1.77 budget surplus this year will have to be scaled down to 'only' CAD950-million.
Heck, it sure seems that Canadians like Americans only when they are rich! So much for all those who thought that Canada was somehow 'immune' to the crisis affecting pretty much the rest of the world.
Canadians, just like their American counterparts, are unaccustomed to recessions, particularly when they involve shopping less. During the past quarter-century Canada has suffered only two official downturns, in 1990-91 and 2001. Both were short and shallow. What's more, in 2001 consumer spending barely skipped a beat; a decade earlier it fell, but only briefly. Since then, the Canadian wallet has not snapped shut. But all this may be about to change.
Evidence is mounting that the economy has slipped into recession - and this time consumer weakness is to the fore. For instance, the Real Estate Board of Greater Vancouver reports that "Residential property sales in Greater Vancouver declined 55 percent in October 2008 to 1,364 from the 3,028 sales recorded in October 2007" and that prices are down 8.8 percent since May, 2008, or about 17 percent annualized (if you wondered why I have taken up writing again in this blog, this is it). Likewise, the British Columbia Real Estate Association estimates a conspicuous drop in the number of licensed realtors in the Province in 2009 (I will stay on).
The once doughty Canadian consumer is being pummeled mainly by two things: the perceived forthcoming housing bust and a weakening labor market, especially in the East where unemployment has been steadily rising as the private sector has lost jobs for four months straight. And seeing that consumer spending accounts for 70 percent of demand, that hurts, especially when coupled with the near collapse of the once mighty construction industry.
There are two big questions about this downturn, both for Canada and the world: how long and how deep? On the second count, there is room for guarded optimism: although American recessions have usually sent the world economy into a funk, this time around the slowdown need not be so severe, especially for the emerging world. The economic test instead may come from the length of this downturn: an America that stays sluggish for several years could cause all sorts of problems.
Contrary to the popular and widespread belief that the origin of this crisis is due to housing and the real estate bubble, the present situation is a direct consequence of the biggest asset bubble in history: the stock market. Financial markets have already suffered arguably their biggest shock in eighty years, dragging down even real estate. There is a reason as to why Congress is poised to throw billions and billions of dollars at financial institutions of all sorts and at the Big Three, all important players in the Dow Jones, and not at the real estate and construction industries. In fact, the Dow began its decline a full three years before real estate, a modern day 'Fall Of The Gods'.
A prolonged sluggish America will be a problem hard to tackle for President-elect Obama. With the budget deficit rising, big domestic reforms such as expanding health-care coverage will become more difficult. And with a fragile economy, the Democrats may have to rethink their plan to roll back George Bush's tax cuts, while the momentum to re-regulate the financial markets and punish the oil industry, credit-card firms or indeed any other malefactors of great wealth will grow.
So where will all this leave you, the British Columbia consumer? Let me appeal to that old and somewhat clichéd saying:"Cash is king". It is a saying not without some wisdom. For when a recession strikes then asset prices fall - shares, real estate, just about everything you can buy - and the person with cash in hand can take advantage. So if you are pondering how to invest your millions, perhaps the best option right now is simply to open a deposit account with a triple A-rated bank.
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE ECONOMICS
