Friday, October 07, 2005

Housing Bubble, Debt Boom

Bubble to burst?: Prices have gone too high, too fast, pessimists say, while optimists insist the increases have been restrained compared to other global hot spots

What is driving the current economy in North America is NOT manufacturing and industrial productivity but consumption. When consumption drives the market it sets up the market for collapse, as pre-WWII economics remind us. The Austrian School of Economics dominated economic thinking then too; "
Taxes collected undermine productivity and growth".

Except that taxes have nothing to do with the failure of business to reinvest its profits into manufacturing as I have already pointed out. In North America the investment boom is being driven by business debt, investment in money markets and high interest financial schemes, and by personal debt. Taxes have nothing to do with it.

We aren't in a Housing Boom we are in a Debt Boom, negative productive growth in favour of growth in interest and credit. So when the economists complain about declining productivity, what they really are talking about is not worker productivity but lack of investment going into manufacturing and the industrial sector, cause all that money is circulating in credit and mortgages. Its what is supporting the largest economy in the world, the USA.

And its impact is global as the housing boom reflects the cashing out of savings and the creation of massive personal debt. Personal debt is the source of the current capitalist boom. And that was the case just before the Great Depression.

The Canadian housing market has indeed lagged the global real estate explosion of the past few years. From 1997 to the first quarter of 2005, house prices surged 244% in South Africa, 114% in Australia, 154% in Britain and 145% in Spain, according to a survey by The Economist magazine. Over the same period, U.S. prices rose a more modest 73% and Canadian prices a mere 43%. Since then, British and Australian prices have eased but North American prices have continued to climb. Historically low interest rates have prompted Canadians to take on larger and larger mortgages and to borrow more against their houses.
Personal savings levels plunging to Depression-era lows
Our savings rate is now in negative territory, meaning we spend more than we bring in. That suggests that when price gains do tail off, the adjustment could be harsh for consumer spending and the economy.

Canadian Consumer Confidence Drops to Lowest Since Sept. 2001

Oct. 6 -- Canadian consumer confidence dropped to its lowest since September 2001 last month as fewer households said it's a good time to buy homes and cars, a Conference Board of Canada poll showed.The findings are similar to those of the Decima-Investors Group Index of Canadian Consumer Confidence, released Tuesday, showing a decline to the lowest level in four years, with Canadian results mirroring a similar drop south of the border.The earlier Decima-Investors Group survey found Canadians had a gloomier outlook on family finances, job market prospects and big-ticket spending. The private group's index, which stood at 87.9 in May, dropped 13 points by September to 75. "The spike in gasoline prices following hurricane Katrina left less money in consumers' pockets and clearly affected confidence in September," Paul Darby, deputy chief economist, said in a release."Even so, this is a major decline in consumer confidence and will likely affect spending and Canada's overall economic performance for the next six months."

Ottawa's new, improved mantra: 'productivity'-Cabinet sees future prosperity threatened, writes GORDON PITTS in the first of a three-part series

The simplistic approach is that Canadian companies have to innovate more, and that is often equated with research and development -- another area in which Canada is perceived as a global laggard. Only a small minority of companies in Canada actually perform R&D, and Canada already has an attractive tax incentive program to spur pure research. Yet until very recently, Canada has not done well in investing in machinery and equipment compared with other G7 nations. Paradoxically, this was happening when companies were awash in profits. Investment sentiment has improved in the past year, perhaps because the higher value of the Canadian dollar makes U.S.-made equipment much more affordable. But the record of the past decade has been generally weak, particularly in crucial high technology. The Information Technology Association of Canada recently pointed out that Canadian companies invest only 43 per cent of what U.S. companies spend per worker in information and communications technology. There are other problems. Canada is in the midst of an income trust boom, that according to Mr. Mintz militates against productivity growth. The high distributions accorded unitholders detract from a company's ability to pour cash back into equipment and machinery, or to use funds to expand or acquire other firms. "This is not a good strategy to be on top of the world," says Mr. Mintz, who is particularly appalled by the number of growth companies that are doing income trusts. "The basic assumptions are you've eliminated tax and you're not doing much investment," Mr. Mintz sighs. Even the windfall of higher energy prices is not a big productivity booster. Upward spikes simply spur companies to start bringing marginal fields on-stream. These may generate strong profits in the short term, but according to the economists' strict measure of volume per working hour, these fields are not highly productive.

Whenever I hear the word productivity I reach for my Das Kapital. Of course when capitalists talk about productivity it means outsourcing, job cuts, and of course the inevitable....wait for cuts. Yet tax cuts have done nothing in the past decade to promote re-investment in fixed capital, that is techonology, plant and infrastructure, or in variablbe capital, labour training, skills innovation.

Nope the money made in profits, and tax breaks have gone into the stock market, real estate, money markers and other capital investments, in order to make profit.
After all capitalism is about profit not production or productivity.

In this era of finance capital, productivity is about how much interest can be made on the dollar not how the dollar can be invested for our long term interest. No amount of tax cuts will improve productivity if profits are NOT invested in assets, fixed and variable capital, but instead invested in profit making financial markets. $152 billion in tax cuts federally, not including provincial tax cuts, and still productivity lags.

Tax cuts do not insure that captialists will reinvest in improving their products but it does insure they will improve their bottomline and line their shareholders pockets. In fact despite the billions in tax cuts Corporate Canada has set up Income Trusts to stash its cash in and avoid paying taxes. Corporate Canada could pay zero in taxes and it would not assure us of increased productivity in anything but coupon clipping.


galbraith said...

Could you possibly be more economically illiterate? Money not flowing to your beloved social bureaucracies in taxes immediately becomes part of capital markets, providing lower interest rates. But I wouldn't expect the Marxists in your public education schooling to have let you in on that fact. They're too busy trashing the very companies that their own retirement funds are invested in.

eugene plawiuk said...

m-c-m, money produces capital which produces more money, and finally
c/sv, capital is determined by surplus value, value produced by labour, which then produces m-c-m. Mr. Galbraith a great Canadian economist would recognize this formula. Shows what a public education will do for you.
As for the Ontario Teachers Retirement Fund this just shows a lack of proper corporate regulation that leaves decision making in the hands of managers not shareholders...something even most liberaltarians would argue is topsy turvy. There economically literate enough for ya? No of course not because I don't live in the cloud koo koo land of supply side distributist economics of the Austrian and Chicago Schools that have so fucked up the US economy.