Mario Draghi has ensured that the mini-boom in Dublin’s trophy houses will continue for a while. This is what happens when interest rates are cut to almost zero – the people with savings think there is little point saving any more, so they don’t bother any more. They think, what will I put my cash into?
In Dublin, in certain small areas, expensive houses have been rising in price, and it will not be surprising to see the savings of the already wealthy going into houses, pushing up house prices further and make the already wealthy, well, wealthier.
This has been the pattern over the past five years all over the western world, particularly in Britain and America. By reducing interest rates and printing money, central bankers have put themselves on the side of the financial markets. It is not that they love financial markets, but to achieve their objectives they have to go through financial markets. This bizarrely puts central banker and financial markets on the same side, less than six years after excesses in financial markets nearly destroyed the global economy.
It seems that memories are short and both in Britain and the US the central banks have used lower interest rates to boost asset prices. They are hoping that the ”trickle down” effect will drive consumption and spending, allowing the economy to achieve a lift off.
Given that the Irish economy displays many characteristics in common with the Anglo American economies, we can safely say that the same will happen here. The cheap money will encourage the banks to lend against trophy assets again and will encourage people with savings to draw down their cash savings and put it towards buying property, where prices are rising.
This might not be a bad investment decision in parts of Dublin and some other metropolitan areas in the country, but for the most part, interest rate cuts will have am ambivalent effect on borrowing and lending. This is because, while tracker rates will fall in tandem with the ECB rate, this will cause the banks to lose even more money on these trackers. This implies that the banks will have to claw back profits somewhere – and that somewhere may well be on variable rate mortgages.
So the variable rate mortgage holders will end up subsidising tracker mortgage holders to an even greater extent in era of very low interest rates. Similarly, in the rest of the eurozone we are seeing the spectre of deflation for the average guy and inflation for the rich guy.
Cutting interest rates, in the face of deflation on the continent, implies that money will also certainly cascade into financial assets. The banks will make sure of this – and the process will line the pockets of the already wealthy, increasing the divide between the very rich and the struggling poor and, of course, driving a deeper wedge between the haves and have nots.
The cut of the ECB interest rate to a historic low, signals that the Berlin-inspired policy of cutting European budget deficits is not leading to growth but is leading to deflation. Once deflation – falling prices – takes hold it is very difficult to eradicate.
The ECB’s inflation target is 2 per cent per year. Eurozone inflation is rising at only 0.7 per cent. This implies that prices are almost static. Static prices sounds like a good thing, doesn’t it?
If we look at it a bit more closely, we see that if you have static output prices, then you must have falling input prices for sellers of that product to make profit. The biggest input price in the European economy is wages. If you don’t get falling wages, you will get fewer and fewer people employed, this will drive up productivity and thereby, increase profit at the expense of wages.
This implies that Europe will see a return to profitability – yet unemployment is still very high. This will drive up stock markets and make Europeans who rely on stocks for their wealth very rich.
However, by rewarding the owners of capital, stockholders and punishing workers, through lower wages, the people who depend on wages for their income (most people) suffer. In contrast, the people who depend on the return of capital for their income – stockholders and in Ireland, landlords – will do well.
This is what we have seen in the US over the past few years, where the Fed’s quantitative easing policy has made the very rich exceedingly rich, while the income of the American middle class continues to stagnate.
All the while the money cascading into asset markets will push up asset prices and these higher prices, by definition, increase risk because all this new credit is pushing the asset prices way above fair value.
This is the counterintuitive thing about financial markets. Higher prices create higher risk, not lower risk. When prices are rising as they are in stock markets all over the world, people misjudge the risk. The higher prices make them feel not only rich but clever – as if it’s their own genius rather than cheap money that is driving their investment portfolio upwards. This belief in their own genius prompts them to commit more money and then to borrow money to put on the rising stock market.
Look at the chart. It shows what is happening and more to the point what has happened before. It shows the amount borrowed to be put on stock speculation in the US over the past three boom/bust cycles. What we see is that we are now back in dangerous territory.
The more the ECB reduces rates, the more European cheap money will be driving global stock prices. And now that Mario Draghi has opened the Pandora’s box of deflation, we are likely to see a European version of quantitative easing – printing money – some time next year. This will continue to fuel the prices of financial assets up further and further.
We are now in the situation where all the central banks of the world have engineered themselves into a hostage situation. The kidnappers are the financial markets, that threaten the central bankers that they will kill the hostage – the frail recovery – by crashing and bringing down the economies with them unless, the central bankers don’t deliver yet more and more cheap money.
The question now is whether the central bankers will pay the ransom? If they do, prices go even higher, risking crashes in the future. If they don’t they risk a crash now.
My guess is that they pay the ransom now – and worry about the future later. This will keep interest rates down and this is good news for tracker mortgage owners. And even better news for the owners of posh property in the capital cities of the developed world, including Dublin.
Subscribe to receive my news and articles direct to your inbox
Subscribe.
Hostage=Central Banks and by extension Government.
Most people have no clue who the agressor/kidnapper is, nor do they want to and if the Hostage just simply let the people know that it is in fact a Hostage, who knows what might happen.
The plot thickens…
MF Proposing 10% Supertax Bail-in On All Eurozone Household Wealth…
http://www.marketoracle.co.uk/Article42669.html
Deflation for the average guy?
Where is that David other than in his wages!
Falling wages leads to more employment? Really David? Ireland is a country with the jobsbridge scam going for a while and min wage now 8.65/hr and the country awash with eastern Europeans willin to work for min wage and we have 14% unemployment. When wage costs were much higherediting the boom we had 4% unemployment!
Landlords doing well are they? No chance.
Regards,
Michael.
It doesnt matter..anymore…situation has moved far, far from economics……
What’s important now is what can people do…and they have choices…once they realize, they have the power within themselves to take action…….not siit around , waiting for permission to do what is right. ..
Bravo, David.
Our first time down to Kilkenomics, we attended five shows Saturday, heartened to see full-house attendances, a great atmosphere, a great weekend and great to see Max Keiser in person. Will definitely be returning next year.
ps Anyone who missed the show “Pulling it out of our Arse? Economics, Statistics, Predictions and Lies”, well, it was a cracker!
Congrats to all involved.
Pretty overwhelming is it not? But it sells papers. The fact is that such news we see here and will continue to read about will only get more dramatic. Last 50 or so years only around 15% of the then S&P500 remain today. And so it will go on today except faster. My guess is that next 25 years, will see 15% surviving and 12 years after, 15% surviving and so on (a kind of Moore’s Law in reverse) And googles and twitters will come and go even more dramatically than banks and I suspect with more dramatic effect –… Read more »
DMcW perhaps sees a repeat, and short memories? Well of course, and here is why : GLASS-STEAGALL IS THE LITMUS TEST FOR BANKING REFORM Nov. 10 (LPAC)–“[T]he reinstatement of Glass-Steagall is a litmus test of whether or not one is serious about reining in the giant banks,” wrote Mark Karlin, the editor of Buzzflash at Truthout, on Nov. 8. Karlin made the observation in response to the remarks of New York Federal Reserve President William Dudley at the Global Economic Policy Forum in New York City earlier that day. “Dudley clearly sides with making incremental adjustments that will allow banks… Read more »
DMcW : “We are now in the situation where all the central banks of the world have engineered themselves into a hostage situation. The kidnappers are the financial markets, that threaten the central bankers that they will kill the hostage – the frail recovery – by crashing and bringing down the economies with them unless, the central bankers don’t deliver yet more and more cheap money.”. After visiting the KSA the other day, maybe it would be better to say another 9/11, likely nuclear, is the threat? The insanity of the doomed financial empire is that the cheap money will… Read more »
I’m not too sure that this analogy of the central banks being hostages to anyone is factually correct. All central banks are privately owned institutions which have shareholders, who are mainly the large commercial banks who they are supposed to regulate, and they pay these shareholders an annual dividend. This is not a hostage situation and is more of a cabal of bankers who move frequently and easily from commercial banks to “serve” on the central banks and then back to some plush job on the board of a commercial bank again as a reward for bailing out the bank… Read more »
Just read through all the comments here…and I really can not understand the constant reference to Glass-Steagall. Has some pseudo-intellectual just read about it and feels its appropriate to every discussion?
As regards the longevity of organisations Theo Levitt’s seminal HBR article “Marketing Myopia” clearly demonstrates the fate that befalls product orientated firms.
Anyway..back to DMW…I don’t like this article. Is it based on empirical evidence or pure conjecture? If I had €100k to invest…whats the bottom line bench mark for investments these days?
+1 Voltex. Best investment: 99k in land and the rest in good tools and seeds. It’s November so don’t forget some manure.
Frequently Monetary Excesses = Financial Crisis As the title states, this is the definition of a financial crisis, describing the underlying essential condition for a boom & bust cycle the can be observed over and over again. Back in 2007, John B. Taylor presented a chart and a paper to central bankers in Jackson Hole explaining to them that thier extra ease policies are responsible for the insane housing bubble. The ECB’s interest rates decisions are influenced by anchor currency decisions made by the FED, this is no secret. The epimistic forces that reshape, in fact they destroy it, the… Read more »
QUESTION: Can any Bitcoin’ers tell me the best process for buying Bitcoin? There is so many options out there. Much appreciated.
ps I’m following the advice, “Only invest money you can afford to lose.”
To talk about the real content of the article – Irish house prices. Its not much of an argument to say that low interest rates in the EU caused the recent bump in house prices, because the house prices were falling for years as interest rates fell. What happened was that Cash – which was waiting in the wings – jumped into the market to get some returns on their cash, but they waited until the ( then, perceived) bottom of the market. Expecting this to continually boost the house market is ludicrous, if house prices rise by 20% this… Read more »
A chairde, This was a very dry article and that may suit the purists who prefer to get down to business fast and start talking banking, gold and interest rates but you have to admit that all that stuff sends you to sleep especially when Michaal and Bonbon begin their daily duel in mid day sun. It’s a yawnfest lads. It’s tiring and it’s like watching two artificial intelligence systems having an argument over a comb As I write I notice the comment above re facts and logic and it must be a sign. Who must this sign be from… Read more »
So, if you find a few hundred thousand euro behind the sofa, buy a trophy house/flat to rent out to Googlers or IFSC wannabe bankster drones. If, however, you need something as tiresome as a mortgage to try to buy a roof over your head: caveat emptor. Property is illiquid, when the interest rate cycle changes, many folk are going to be shafted. No lube. The entire world economy has been hijacked/held hostage to ensure the previous cycles loans are kept viable, rather than the process of Creative Destruction be allowed to kick in. Whilst there was some value to… Read more »
http://www.eugenelinden.com/news9001.html
Nobody saw it coming…
The Kilkennylivers have now a few patrol code words. Self censoring. It must have something to do with Shutter Island (sorry Kilkenomics).
Hi,
Kenny & Co.,his counterparts were in gay Par-is fretting over the youth unemployment problem…. and what they could do to exacerbate the problem!
Just keep doing what they’re doing.
http://www.independent.ie/business/irish/enda-kenny-attending-paris-conference-on-youth-unemployment-29747191.html
Whilst simultaneously working on his Benito salute.
Bella Enda Bella.
The Max Keiser Report discusses his run-in with Karl Whelan at Kilkenomics.
https://www.youtube.com/watch?v=MNXmL771mBA&list=SPPszygYHA9K2ZtV_1KphSugBB7iZqbFyz&index=122
http://p.ost.im/RNAKmb via @southweborg
As talked about here by me for ever..!!
Stability in Africa…!
excellent time for investment
Good Afternoon
David,
Hope you had a happy and successful Kilkenomics last weekend. I wasn’t able to make it this year, but I’m sure its going from strength to strength. Hope all the contributors had a rare auld time.
I was looking for the chart but I couldn’t see it. ‘Look at the chart. It shows what is happening and more to the point what has happened before. It shows the amount borrowed to be put on stock speculation in the US over the past three boom/bust cycles. What we see is that we are now back in dangerous territory.’
OK..It’s Wed evening. Next article coming. Looks like Kilkenomics was a hit yet again and maybe a few insights will be derived accordingly.
I have no doubt that all markets in the world are manipulated. It is sufficiently documented to not be a matter of opinion but a pure fact.
The manipulation of governments was started centuries ago by the money lenders who morphed into bankers. I am on the same page as Cooldude.
most of today’s happenings are planned and premeditated and not happenstance. I’ll not argue with David except to say that he is mostly wrong.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/11/13_Man_Who_Predicted_Gold_Smash_Tells_Investors_Whats_Next.html
http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=223
“Free Trade” never existed – it was from the British East India Company CEO Adam Smith’s get go, a political invasion tool. As We have clearly the Panopticon, now exposed by Snowden, it should be clear that is also from the very same get-g, same source. By the way, everyone has heard of 5 Eyes, 7 Eyes ? Well most have forgotten Odysseus blinding One Eye, Polyphem (eats everone and everything). Snowden has blinded One Eye alright! But to claim “premeditation” is to believe on One Eye. I’d rather say cannibalism, not premeditation. But that’s a matter of taste, now… Read more »
It is Worse Than Weimar Germany in 1923. But
Lombardy Regional Council Unanimously Passes Glass-steagall showing the only response that works.
And Barrak O’Bama is Not Amused, nor are his Royal “betters”.
Just see what Clinton and Kerry and Warren just made public!