Tuesday, March 31, 2009

The First Tremors


Last week we talked about the looming possibility of inflation and even hyper-inflation with the 'quantatitive easing' policies (ie. printing money) of many Western goverments, particularly the United States.

The danger this represents to Vancouver Real Estate, of course, is we could see a return of the high interest rates of the early 1980s. With the inflated bubble real estate prices of the Lower Mainland, homeowners with with large outstanding mortgages face potential ruin.

[For example: the monthly payment on a $650,000 mortgage at today's five year monthly variable rate of 3.30% would be $2,603.28. If the rates spiked to 11%, the montly payment would be $6,090.22. If rates spiked to the 1981 level of 22%, your monthly payment would be $11,922.46.]

The greatest concern outlined by Peter Schiff was the massive dependance by the United States on foreign countries to continue purchasing US Treasuries. Schiff speculated that if China stops financing US debt, the value of the US dollar will plummet, triggering a hyper-inflationary spiral in the US.

Last week, for a few horrifying moments we saw the possibility of this scenario playing out.

The tremors began in Beijing, where a essay from the governor of the People’s Bank of China favoured the creation of an IMF currency to replace the U.S. dollar as the world’s reserve currency.

Delegates of China’s legislative advisory body suggested that the biggest foreign holder of U.S. debt diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said that his $200 billion sovereign wealth fund may invest in “undervalued” commodity assets. Zhang Guobao, head of the National Energy Administration, said China should invest more in commodities instead of hoarding the U.S. dollar.

Almost simultaneously, in Europe, the rotating president of the European Union, outgoing Czech Prime Minister Mirek Topolanek, characterized America’s plan to combat the widening global recession as the “road to hell.”

Meanwhile, British Member of the European Parliament Daniel Hannan made headlines with his stinging rebuke of the inflationary and debt-focused policies of the current UK government.

In response to these events, the U.S. dollar suffered a dramatic drubbing on money markets.

Immediatly Treasury secretary Geithner and his ministerial counterparts in Berlin, Paris and London did their best to convince everyone that the world is pulling together as one to combat the economic crisis.

The charm offensive was effective, calm was restored and the dollar leveled... for the time being.

Given the size and scope of the remedies that the Obama Administration is cajoling the world to adopt, it is likely that the unease will grow. Germany and France are now openly refusing to continue with America’s stimulus plans.

Washington insists that North America's economic problems result from a lack of consumer spending. Therefore, the solution is for government spending to pick up the slack. However, if Americans are too broke to spend, then how can government spend for the people? The only money they have is taken from the American people through taxation. To postpone immediate tax hikes (adding interest for good measure), Washington plans to borrow more from abroad.

The US Administration continues to argue that more debt will restore growth which will then allow the repayment of borrowed money.

But the rest of the world is starting to vocally condemn that approach. This week, at the G20 conference, the United States and Canada will hear that to solve our problems we must first come to terms with their source. We borrowed and spent ourselves to the brink of bankruptcy, and now we must save and produce ourselves back to prosperity.

The voices from abroad are insisting that there is simply no way to sustain an economy based on consumer credit.

Nothwithstanding, the Obama Administration will go to London to cajole the world to adopt its stimulus initiatives. Given the size and scope of the remedies they want implimented, it is likely that worldwide unease will grow until many countries emerge in open revolt to America’s plans.

Meanwhile we continue to splash about on the shores of the Village on the Edge of the Rainforest blissfully unaware of it all.

As greater Vancouver home sales continue at a pace of 100 sales per day, I wonder how many real estate agents - supposedly representing the best interests of their clients - have offer a single, cautionary word to their clients making those purchases?


Email: village_whisperer@live.ca

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