eppo said..nnnbrewery said..eppo said..
Credit creation lubricates the wheels of the economy ... it is necessary.
but when it is allowed for speculation and generation of economic rent on government granted licenses (property being the most lucrative of them all) and the gains to be capitalised then traded you get boom and busts which eventually are realised on the stock market. This is caused by the eventual contraction of credit as banks have forced to improve their balance sheets.
It is pretty simple really.
Dont panic. This is just the mid cycle correction playing out.
The most lucrative part of the cycle is yet to happen. That's when things really get wild.
Although this has only happened ONLY every cycle since 1800 (and before but figures were collected more after then).
SO take a deep breath. Watch the next two years and governments and banks start to take the gloves off the avoid a "recession ". Homeowners grant is a perfect example. This will only capitalise back into the price of property. They really have no clue what they aren't doing or what is really going on. If they did we wouldn't have had the same cycle play out over and over again.
Long way to go yet lads.
If you believe this is the "mid cycle correction"... then when was the last begin/end of cycle correction? We didn't have it in Australia at the GFC.
I am not so sure government efforts to take the gloves off will work. But I suppose if Scomo wants to deliver his surplus the only way we will avoid a recession is if it does.
Bottom was 2011 roughly 4 years after the GFC. We still had a property correction but this buffeted by the commodity boom and the fact that China created 28 trillion in debt in that time to finance their expanding economy. Local factors are always at play within the overall cycle.
Banks create credit which essentially means they create their own deposits. Have done for 200 odd years. This is not a new thing.
The biggest lender of this credit is the government (used to be kings and queens to finance war efforts... Rothschild lent to both the British and French ffs through the Napoleon war era).
They call these securities (interesting term) as it was essentially backed by the productive capacity of a country as monarchy's now modern governments can tax the living Fck out of their subjects to pay off this debt. (The only time a war debt was ever paid off completely was in 1886/1887 in America by the way).
Now this is all well well and good if the credit (through debt) is essentially backed only by the future productive wealth of a nation. Credit in that respect is a useful and good thing.
But when it is allowed to be used to speculate on government granted licenses (of which the property mortgage is the mother load of all license), when the non productive gains (the rent) is allowed to be capitalised into a price then traded like a commodity... then simply boom and bust.
Eventually the Price reaches a point that the actual productive economy can not afford. The value of the mortgage drops below the credit created (the banks deposit) in the first place. This then bleeds into all other industries (including the ones that actually make stuff) as bank credit starts to contract... as their deposit base contracts.
Of course credit is now created through central banks lending money to governments through bonds etc and these themselves are leveraged and this leveraging through derivatives have their only markets themselves. This exacerbated the problem even further.
If you read enoug history through this lens you will see each cycle has never been the same. The players slightly change, the economy setup changes, the type of government changes, the banking regulation and how they slightly operate chanages, some deflationary situations, some inflationary, floated dollar, controlled centralised pricing of the dollar ... you name it.
But the end result ultimately is always the same. And it's surprisingly regular...
this is because at the core of the problem (which has never changed ) is allowing government granted licenses (which are not a productive part of the economy) to be traded as a commodity. Speculation happens and valuable credit is used to chase the rent (free money). It is NOT put into productive partner of the economy. Well it is but too much is used to trade ...
this is hasn't changed hence we will get the boom and bust.
So lift your eyes out of the forest and see the whole picture. Don't get lost in the current economic situation and structures and think you can extrapolate from there. And ffs stop listening to the media and throw most most of your smarty pants economic knowledge in the bin. If it is so good, written by so called experts then why do they never see the bust coming (they never have) and why can the not explain it after?
They dont see the core root root of the problem. They have lumped land into the capital bracket and all their models can't see it coming. Then they pull out the black swan Bs.
And these so allied experts have got it wrong over and over and over again. Well into past lifetimes.
good points made re residential property boom bust set up. Agree with most of it but can you explain the timing side of it - ie -
"The most lucrative part of the cycle is yet to happen. That's when things really get wild.."
"Eventually the Price reaches a point that the actual productive economy can not afford."
If we are going to go up big time from here for 2 years how is that going to happen if most are already at or beyond their maximum borrowing capacity? If real residential property yields are zero or even negative in some cases, if loan to income ratios are at all time record highs?
Further rate drops from here will have very little effect on that capacity so how does this next wild leg happen?
Tell me its more than just because last time the cycle lasted 9 years and we are only 7 years on from the late 2011 bottom???
Haircut
> 9 months ago, 11 Jan 2016
