Saturday, 15 October 2016

The UK: A house price based economy with a house price based currency (2)

From The Telegraph:

Professor Mody, who led the EU-IMF Troika rescue for Ireland, said the pound had been driven up to nose-bleed levels from 2011 to 2015 by global property speculators and the banking elites acting in destructive synergy, causing serious damage to Britain’s manufacturing base and long-term competitiveness...

“It was essentially a bank-property nexus, and the rest of the economy was left to suffer. It is stunning that just 1.4pc of all loans were going to the manufacturing sector,” he said. The country was suffering a variant of the ‘Dutch Disease’, although in this case the problem was over-reliance on finance rather than commodities.

“Britain was borrowing 5pc to 6pc of GDP a year to buy imports and live beyond its means. The strong pound was great if you wanted to buy a Mercedes Benz of take a holiday in Spain, but the prosperity was an illusion, borrowed from the future,” he said.

Prof Mody said the pound was 20pc to 25pc overvalued in trade-weighted terms before the Brexit campaign got underway, based on classic IMF measures of the real effective exchange rate (REER). This currency distortion would have inflicted deep damage if it had been allowed to continue for another five years.

I pointed out two years ago that GBP and house prices tracked each other very closely from 2004 to 2014, I ought to update that chart and see if it still holds, but as a generalisation it does: "Brexit fears" have clearly been a fairly direct cause of high end London land prices falling (fewer foreigners want to buy here) which in turn reduces demand for GBP and hence leads to GBP falling.

The UK's trade deficit is about £100 billion a year. What do the foreign exporters do with the GBP they accumulate? They like buying up things in the UK which will provide rental/super-profits/unearned income: shares in UK companies, commercial land and buildings, 'privatised' utilities, high-end London residential, student accommodation and things that will entitle them to government-guaranteed payments (Sizewell B, farmland, UK government bonds etc.

This is a vicious spiral of course. Every year the UK as a whole is poorer by the amount of rent which seeps abroad, enabling foreigners to buy more UK rental streams ad infinitum.

So what would happen if we got rid of these subsidies; started taxing rents/monopoly income more and production/wages less; and reduced public sector deficit to zero? Foreign manufacturers and farmers will still be happy to sell us stuff, they are geared up to producing and selling as much as possible.

What will they do with the GBP they receive for what we import? They are welcome to buy land, but most of the value will go back to the UK Treasury as tax instead of seeping abroad as rent. So they will spend much more of their GBP on UK produced goods and services. Or maybe they will sell us less stuff while buying the same amount from us. Either way, it would do wonders for the balance of trade.


Lola said...

Yep. Another win win win win

Mike W said...

Brilliant. One page Manifesto. If only there was a political party that.....

Mark Wadsworth said...

L, ta.

MW, it's not a manifesto, it's just stating facts, but ta anyway (why don't you sign up?)

Lola said...

The elliptical logic of this is irrefutable. Any reasonably educated high school student can get it. In fact, the uncluttered minds of those students and their lack of the life experiences of the welfare state managerialst rent seeking is precisely what leaves them ready to understand.

So the obvious point is that TPTB are fully aware of the logic, but want no part of it for their own self interested reasons. And they have developed a whole language of deception to justify the status quo.

The question then is how does everyone else get this changed?

Funnily enough I think this change is starting. BREXIT is such an event. People may not have been able to articulate the argument (after an nationalised indoctrination masquerading as education is that surprising?) but somewhere deep down the people know.

DBC Reed said...

The problem with this site in a nutshell: a brilliant economic analysis of imvestment patterns followed by fascist nonsense that "deep down the people know".
It is surprising that the same natural wisdom that apparently allows the British people to see the way forward lies in being nasty to fellow Europeans is not able to work out that British house prices continue to be grossly inflated.
Deep down the British/mainly English people know that the extreme right-wing government of interchangeable parties will always bribe them with house price inflation - while he rest of the population is furiously jealous that they missed out on the deal. How come the inflated property market scandal is permanently invisible to the great British public?They never think of anything else besides house prices They were ready enough to support state violence to suppress wage inflation (in response to Nixon torpedoing the Bretton Woods "gold window" in 1971.)

Lola said...

DBCR how can you possibly conflate 'people knowing' with fascism? From what I see on the street every day a whole load of people are fully aware that high land prices are not in isolation a good thing. The point I was making was that a lot of them lack the language to express this.

Mark Wadsworth said...

L, I'm not even sure that "deep down people know". The degree of brainwashing seems to defeat logic. The Priced Out campaigners sense that they are being exploited, but they offer no real solutions/.

They can't even grasp the significance of the Georgism Lite we used to have and that the current state of affairs results from phasing it out. Even if LVT is a step too far, how come all the experts have forgotten how we kept rents and prices in check for most of the 20th century, they waffle on about "more supply" and that's about it.

Mike W said...

DBCR Reed, What do you think of this? One great headline joke and then 5,000 words of not really understanding; what Wadsworth nails in about 500!

Welcome to Poundland, where life is bliss if you’re a foreign buyer
Andrew Rawnsley

MW, Nope, I agree with Lola (very much) on this. There is a great ground swell of knowing that something is profoundly wrong, but no understanding of what to do about it. Hence the 'hit any target' that DBCR dislikes so much. I get this by the way, not from right wing reactionary cells, DBCR, but even from attending Postive Money meetings!

Positive Money, Mark, seem to have read your criticism of them from a year or two back. Basically, they know what the problem is but did not have a solution. Their public solution from what I could make out in Liverpool the other month is now, a straightforward, Steve Keen, Debt Jubilee and a Corbyn, Green Bank.The only economist presented was Minsky. So progress on that side.

Mark Wadsworth said...

MW, as regards Positive Money, I don't know what their current thinking is.

I have come to the conclusion that the problem is mainly banks mixing "land pounds" and "real pounds".

The real productive economy needs "real pounds' as a medium of exchange and to enable people to spread consumption over their lifetimes, called 'saving', the flip side of which is businesses borrowing to invest in stocks and capital assets or people taking personal loans etc.

When you buy a house and borrow money, the mortgage banks print "land pounds" which are just the future value of all the mortgage payments you have to make in "real pounds".

So there would be a strict segregation into

a) "mortgage banks" which only lend on land and buildings. If you sell a house, the bank creates an account for you denominated in "land pounds" with restrictions on how fast you can withdraw them, if house prices fall, then mortgages and deposits are written down accordingly, and

b) 'business banks' which do all the other stuff, personal loans, overdrafts, business loans, credit cards etc. People who spend less than they earn leave their earnings with these banks as they can be withdrawn in full immediately.

c) all lending between banks is strictly forbidden. The government will not lend banks money or allow banks to buy government bonds. The bank asset tax would only apply to mortgage banks (kind of LVT by the back door).

Neither type of bank gets a government deposit guarantee, if people want really 'safe' savings, they can deposit their real pounds with NS&I or something.

Which AFAICS deals with all the issues which PM are grappling with. They always make it far too complicated.