When the Music Stops

The Outlook for Real Estate in the Western World

I have been saying for some time now that real estate is in trouble in the western world. I don’t know what drugs the pundits are taking who are claiming house prices will rise this year. It’s nice to think the sun will always shine, but some of us see some serious clouds overhead already.

Let’s have a look at a few basic facts that cant be denied.

The most obsessive nation when it comes to statistics is the USA. Have a look at the Case Shiller house price index. It has been rising for some time, and has risen to dizzying levels. The average house price has doubled over a decade. Does anyone seriously think that is sustainable?

Every time prices rise like this, there is a point where reality breaks into the dream, and the money runs out. That means the rises stop, and once there is a sign that prices are falling, the party turns into a case of musical chairs. When the music stops someone doesn’t find a chair to sit on.

The equivalent in the real estate industry is that optimistic buyers have paid top dollar for something on the assumption that prices only ever go up, and that next year they will get a rise in wages, and … well, to put things simply, the sun will always shine, and the music will always play. Who needs that chair if the music never stops?

Well, it’s stopped. Here’s the evidence.

There are two issues which are squeezing America to death. The first is that the USA is living way beyond its means. There has always been a way to deal with that. Kick the can down the road. In practical terms, borrow money to spend today on the assumption that the next generation will pay it back. The trouble is the US has been using that technique for about a generation, so the next generation is now being asked to pay back the previous generation’s excesses, and to pile on more.

How long this can go on is beyond my understanding, but it cant last much longer. Maybe later this year the whole edifice will collapse. After all, this year almost nine trillion dollars worth of borrowing comes up for payment or refinancing. There isn’t nine trillion available to pay it back, so it will have to be refinanced.

That brings us to the second issue. Where is the new money coming from? Usually it’s foreigners who buy the Treasury bills for the interest payable. How high an interest rate will be required to get that borrowing? The more dodgy the deal looks the higher the interest needs to be paid.

Who said interest rates were coming down? And how many governments need to borrow?

Yet the pundits reckon interest rates will fall. If they are cut that will make it increasingly difficult for the US treasury to sell more bonds and bills. The EU central bank will be in a similar position.

That will mean the Fed will have to print more money and buy the bonds itself, which it then lends to the government, which cant pay for them.

In a nutshell one arm of the US government (hiding behind a facade of private company), prints money to give to another arm of the US government.

If the Fed prints more money to pay for the deficit, the existing dollars get devalued again. That shows up in the inflation figures. The current inflation rates as calculated on the old basis which was used prior to the dollar coming off the gold standard, is running well into double figures.

The annual public deficit is approximately 5% of the US GDP. Inflation even listed in real terms at 10% means that the country’s commercial value is decreasing, but if you add the two figures together that means the country is effectively losing value at about 15% p.a. That’s ridiculous.

In real economic terms the USA is surviving by living off itself. It can do that until its currency falls so low that it  has consumed itself. That can go on for a very long time, especially as the country is rich in commodities. What it does mean is that Mr Trump is probably right to bring manufacturing back to the USA. If it isn’t brought back there will very quickly come a time when the value of the dollar will make importing goods prohibitively expensive.

Now let’s transfer our thinking to Europe.

Europe is not rich in commodities. Neither is it good at producing the goods it consumes. Since all this needs to be imported, the local currencies need to be strong so that goods can be imported cheaply. If the BRICS nations start to use a trading currency based upon a weight of gold, that will mean their exports will be priced in a gold-backed currency, and Europe will be paying in a fiat currency. That way lies ruin for the West.

I’m sure those of you who have been paying attention will have noticed that as of last week the first steps towards introducing this new system was taken by one of the Middle Eastern states. Over the course of the rest of this year this new trading methodology will expand rapidly. That is going to hit the dollar, the euro and sterling.

The country that will probably spearhead the final move to a gold backed currency will be Russia.

In the meantime the EU cant print money like the US. The EU central bank would have to get back-up agreement from all the separate central banks using the euro. That is clearly impossible. That means the EU is seriously on the ropes. If your income is sourced in euros you are facing a dodgy future.

The West is currently attacking Russia. But Russia has the food resources, and the energy, and will have control of a gold backed currency. Dont you think Europe needs to be friends with these guys?

I dread to think what would happen if the UK government set up an exchange program with Russia. Brits going over to Russia would be amazed at what a great place it is. Russians would probably be appalled at the poor standard of living they would experience in the UK. And I challenge anyone who has lived in Russia to think otherwise.

I was nineteen when I first went there, and got stuck in the Ukraine in winter. I was not impressed.

I later lived with my Hungarian girl-friend in Budapest (south of the river, of course). And later still had a very strange relationship with a lady in Bulgaria. That was not a happy country.

I may print a couple of chapters from my memoirs of those days. You may find them amusing in places, and informative about living conditions way back in the late sixties and early seventies. In the meantime here is a link to my book about part of my life behind the iron curtain way back then.

UK link: https://www.amazon.co.uk/dp/B0BVRSLP7J

USA link: https://www.amazon.com/dp/B0BVRSLP7J

Life was better in the West back then. It is undoubtedly better in Russia these days. Life has changed out of all recognition in most of the world. Those of us who first travelled fifty or more years ago simply cant recognise the countries we visited way back then. The third world has largely become the first world, while the first world has regressed. Western politicians need to get out more and see how backward their thinking is.

I dont know when there will be a financial turn-round which will screw the West, but it could easily start within the next twelve months. How it will play out, God only knows, but it will not be pleasant.

One thing you can guarantee. When that currency change takes place, those people left using fiat currencies will find their standard of living dropping rather drastically. That means house prices wont be rising.

I have said on many occasions that living in a poor country can be fine, but only if your income is coming from a rich country. I think you need to pay attention to that remark.

I know no-one will pay the slightest attention to the following comment, but it might be a good idea to buy an apartment in St Petersburg and rent it out. It’s a lovely city. I can recommend it. I am glad I managed to show one of my favourite cities to Julie before she died.

I may well be making another unusual recommendation, probably about next springtime. As they say — Stay Tuned.