Tulips of Stone
Nigel H Maund
posted 14 Sep 2004
Today, on 1st September 2004,
we stand amidst the greatest real estate over-valuation that
the world has ever seen. It dwarves, both in scale and geographic
extent, the "Tulip mania" experienced in Holland in
the 18th Century. This state of affairs is far from limited to
the United States of America as there are even worse examples
such as the UK and Australia, where valuations in places such
as London have reached unprecedented extremes. The process is
a global phenomenon, accentuated amongst the economies of the
developed world, and in the affluent sectors in developing countries
and third world states. This astonishing financial bubble, the
largest in human history by an entire order of magnitude, has
been primarily created by the "munificent", if not
to say recklessly profligate, Federal Reserve Bank of the world's
richest state, the USA, which has oiled the wheels of speculative
fever with an unparalleled exercise in FIAT money creation. Of
course, DIGIMONEY or DIGICASH is better than "MONOPOLY"
money. Monopoly money has to be printed and put into a box with
the game. DIGIMONEY can be created out of thin air by the click
of a mouse; so much more convenient and efficient. How jealous
would have been the Kings and Princes of yesteryear, who spent
all that money on unsuccessful alchemists whose job it was to
turn lead into gold. All they needed was a computer, a loose
legislature, a totally compliant government and a financial wizard
like Alan Greenspan, and "Hey Presto", instant wealth!
EEEZY MONEY!!? .......or, so it seems. However, never in human
history has the FIAT experiment stood the test of time. In the
end the laws of finance and economics, like the immutable laws
of physics, such as gravity, exert their inevitable influence.
The post 2000 market correction wiped several trillion US$ off
the NYSE and other world bourses. However, the full-blown bear
market was successfully averted, as the US Fed funded everyone's
personal bank..... their house, to support the consumer at a
critical juncture. Interest rates were savagely cut from 6% to
1%, a 45-year low, with unseemly speed in order to stave of the
healthy correction of speculative excess. Mortgage financing
went into hyperspace with everyone jumping on the bandwagon to
purchase their first homes, move "upmarket", or to
simply purchase a new car, jet ski, boat, holiday, get back into
the equity markets or just settle those worrisome credit card
debts as their home valuations and relative equity increased.
Refinancing turned into an "all out binge" which has
kept the US and World economy afloat through 2002, 2003 and 2004....
so far so good. In the past 2 years, the Mortgage Finance companies
have been offering even cheaper "Adjustable Rate Mortgages"
or "ARM's" to give the market more legs as the inevitable
rise in interest rates looms like the rising sun over the murky
horizon. These ARM's are fraught with danger if the upward trend
in interest rates, which has already begun, continues and accelerates.
The real estate market has produced "year upon year"
increases in home valuations of anywhere from 8% to 20% or more,
dependent on local factors. These increases have outstripped
rental increases in most countries by a factor of several hundred
percent, and the highly tampered with and thoroughly debased
CPI by a factor of between 5 and 10. However, this happy state
of affairs (for house owners and real estate agents) cannot go
on ad infinitum. The economic distortions created in societies
around the world are immense, as the increasing misallocation
of human, financial and economic resources becomes more acute,
and the cost of housing goes completely out of reach for workers
in essential services. Furthermore, high property and rental
prices spill over through the entire monetary system, generating
huge inflationary pressures throughout the entire economy. This
may be fine for the haves, but for those on middle and lower
incomes life is going to get tougher by the day. The "Illusion
of Wealth" thus created is little other than a poisoned
chalice when prices inevitably head south and one's personal
equity versus the loan is the declining factor . One's home is,
after all, an abode and nothing more unless you are rich enough
to afford more than one in which case you should be looking at
cashing in your winnings now.
Given the immense scale of debts: Government, State, Municipal,
Corporate and Personal, and rising liabilities in such essential
services as medical care and education as inflation starts to
make a serious impact, it would be prudent to expect cash-strapped
governments and states to raise taxes. Some idea of the real
rate of inflation may be gained from a perusal of top executives
pay awards in such countries as the US and UK where these have
been averaging between 11% and 13%, and by looking at increases
in utility prices. Of course, to control the ignorant masses
at the bottom or even middle pay scales, industry and government
cynically wave around the "doctored" CPI, claiming
that wage rises must be kept in line with inflation. This piece
of amazing claptrap is perpetuated by the syndicated media in
order to successively reduce labor costs whilst maximizing profits.
Many people realize that they are being duped, but scarcely understand
the full extent and pernicious nature of this complicated little
game. The inevitable outcome of inflation and reduced real wages
will be to further impoverish the middle and lower wage and salaried
employees, whilst their liabilities increase in line with real
inflation, interest rates and additional debt servicing costs.
Any serious correction to the world economy will result in an
increase in unemployment particularly in service related industries.
Many of those affected will most probably lose their homes.
The world's largest economy, comprising more than 25% of the
global economy, is now utterly dependent upon Chinese and Japanese
support for the very first time in its history. The entire lopsided
global economy is dependent upon the credit "maxed out"
US and European consumers and Asian trade surpluses buying US
Equities and Bonds. The longer this bizarre situation is sustained,
the greater will be the resultant adjustment, or bust. A collapse
of the mighty US economy would create a global economic tsunami
of epic proportions from which none will survive without serious
economic and social damage. Indeed, it would be folly to regard
the remaining worlds' currencies as having any more real worth
than the intrinsically worthless greenback. When the collapse
of the entire FIAT exercise finally eventuates, the entire house
of cards will come crashing down with the dollar. Already the
precious metals are responding, albeit painfully, due to massive
intervention and market manipulation to control their now inexorable
rise, to the colossal inflationary pressures now making their
way through the pipeline. As the Aden sisters and Jim Puplava
so correctly pointed out some months ago, when inflation really
takes off then there will be no stopping the precious metals.
AD 2005 promises to be a very interesting year for gold and silver.
Gold will indeed have the last laugh. Nothing on this earth can
stop it. No one in history has succeeded in ultimately supplanting
the yellow metal as a basis for money. Those that try, live to
regret their hubris and folly.
As with all human manias, this one, like all the others, will
end in disillusionment and impoverishment when reality brings
the mass psyche back to earth with an appalling crash. Often
such manias start off on some rational basis, but very soon enterprising
individuals see a wonderful opportunity for personal or collective
enrichment, and, as the greed of the masses knows no bounds their
psyche can be readily whipped up to a state of mind where rational
analysis completely escapes them. Such opportunists as Adolf
Hitler fully understood this weakness of the mass of humanity,
and tuned into the collective psyche in organized rallies to
capitalize on it, much to everyone's eventual loss. So it is
with real estate, shares and other forms of ephemeral financial
investments.
Nigel H Maund
BSc (Hons) Lond., MSc, DIC, MBA, MIMMM, SEG
Economic Geologist
eMail: c/o Clive.Maund@t-online.de
Footnote by Clive Maund: Previous articles by Nigel Maund have
been mistaken for my work. I did not write any of this article.
Nigel will soon have his own website.
Copyright ©2004
Nigel Maund. All Rights Reserved.
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reprinted
at 321gold Inc Miami USA
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