The collapse of the global housing bubble, leading to a banking crisis was so well flagged that to suggest we have been taken by surprise by the huge falls in stock markets is simply not credible.
Anyone with a jot of knowledge about financial market history or, more fundamentally, with an iota of common sense could have seen that the inflated markets of the past few years were an aberration.
So whether it was holiday homes in Bulgaria, bank shares in New York or hotel sites in Dublin 4, each decision was clouded by the irrationality of cheap credit. The assets were not worth a fraction of what was paid for them. Try to sell an apartment overlooking the Black Sea today and see what you’ll get for it.
However, the global markets meltdown allows us all to think where do we go from here? It’s not the end of the world, but what is necessary now is clear thinking.
We in Ireland need to accept that the past few years will not be repeated and the State has to come up with a big Plan B.
If the paper wealth associated with the banking and property sectors is a mirage which has inflated and deflated rapidly in a period of five years, what can Ireland do to build something sustainable in the future?
Sometimes these stock market crashes are interesting because they focus the mind. Just think ahead.
The big issues for the world are essentially Malthusian. I realise that he’s not a popular thinker, being associated with failing to appreciate how technology can make huge population growth possible. However, his core hypothesis is sound.
He argued that food would run out as the population grew and that ultimately, great famines would become normal.
Obviously, this didn’t happen because of great advances in agricultural productivity, but the idea that resources do run out and when they do, people suffer, seems pretty sound.
This is particularly the case now, at a time when the world’s population has never been higher. An estimated five to 10pc of humans who have ever lived in all our history are alive today!
How is this challenge affecting us? Think of what you heard yesterday morning on the radio. We heard reports from the stock markets of India and China.
But what exactly are these telling us? How do we make sense of it all?
One way of looking at the global nature of this financial market meltdown is to appreciate that the world stock markets are just a barometer of the westernisation of major parts of the globe which, up to recently, were cut off from the rest of us.
The world economy has just experienced a Malthusian shock with the opening up of China and India.
Any visitor to either of these countries can feel the palpable desire on the part of the average person to acquire a Western lifestyle (This is well captured at the moment by George Lee’s excellent RTE1 documentary.)
Whether that is a good or a bad development is a value judgement but we are where we are; and in Shanghai, people want cars, cosmetics, iPods, Starbucks, mobile phones and satellite TVs just as much as they do in Shankill.
This is a huge drain of the world’s finite resources. Think about how this change in lifestyle habits and the enormous growth in global population will impact on the world.
Over the past two decades, the world’s population has increased by 34pc to 6.7 billion from five billion. However, land available to each individual has shrunk from close to 20 acres in 1900 to five acres in 2007 due to environmental degradation. (United Nations Report on Climate Change 2007.)
Resources are the real issue, not the tittle tattle in the financial markets. History reveals that wars over resources are a recurring fact, so, whether that resource is water, oil or food, the battle is on.
People have been told this so many times now that there is really no excuse for anyone to claim to have been taken by surprise by the increases in the price of agricultural commodities or petrol that we have seen in the past few years.
The bleating from the financial markets is a different thing altogether. The financial markets have decoupled from these real issues in recent years, becoming a casino for a parallel global economy which could be termed the paper economy.
The basis of the paper economy — where people bought and sold assets to each other in return for paper money — was/is a great illusion where the key is not to question the value of things.
So Irish “investors” bought apartments from other Irish investors in Bulgaria for €150,000 — a country where the average wage is €350 a month.
This is obviously silly and the price put on the asset by the Irish investor bore no relation to the value of the property based on proper benchmarks such as local wages/land prices or rents.
The nub of the issue is that there is simply too much cash and debt around because the global banking system was prepared to use all sorts of makey uppey derivatives as collateral in order to lend money.
So all we have in the financial markets is a huge system of IOUs where the value of the IOUs is dependent on confidence in the system.
Because the banks tried to hide their losses initially, no one believes anyone anymore and all integrity of the system is now shot.
No-one has any reason to believe anything that anyone promises so the key is to get out of the IOU game and get back into money and if you can get out of paper money and put it into something that has a logical reason to be valuable.
The only assets that are now logically valuable are the resources we mentioned earlier or technologies which might postpone a Malthusian shock for some time.
And these are old-fashioned things like gold, oil, commodities and, most notably, uranium — the key to the world’s only viable energy option, nuclear power.
Also, technologies which affect human health are bound to boom as people who are alive want to stay alive. So brain power, research and development opportunities will also become more valuable.
Notwithstanding turbulence from the fallout of the paper economy, these are the areas that Ireland should focus on.
The paper economy will recover in time, but people who invested in inflated assets like property will be so burned that they will be shy next time out.
The liquidity crunch might cause a recession here — it is now quite likely simply because we turned ourselves into an economic Tir na nOg, embellished by the very cheap credit which is now evaporating.
This will be painful but will give us time to really plan for the future. And the future patterns are becoming clear. It’s not “the economy, stupid”. It’s “the resources, stupid”.
So forget all the noise of the past few weeks in the stock markets and look to real global trends. This is where the action will be.
David,
With the recent bailouts by central banks, rate cuts and US “stimulus” package it would appear we are on the road to hyper-inflation. Does this insane approach suggest that the global financial system is facing a collapse?.
First it was the subprime crisis, then it was the SIVs, and now it is the bond insurers that are the problem….will be interesting to see announcements in comming weeks…..
Also, does anyone really believe that a lone trader managed to cause Societe Generale bank to lose 4.9 billion euros yesterday?
Ahh… feel better now.
On the contrary, I believe global deflation and a renewed, more aggresive credit crunch will soon be upon us. The only place to store one’s wealth will be gold, cash and longer dated government bonds. Watch out…this is just the start of something we’ll be telling our grandchildren about! The perma-bulls will have you believe coordinated action by govenments and centrals banks will save the day. Not this time!
Hey Walnut, I am actually still struggling on whether I think the outcome will be Hyperinflation or Deflation, but agree on the extent of the problem. Due to the crashing of humongous equity bubbles that were generated by the Fed’s abusive expansion of credit and the unprecedented spread of non-transparent structured-debt instruments we could see it triggering a round of hyperinflation which is already evident in soaring food, energy and health care costs. These prices are bound to increase substantially as the Fed continues to cut rates and further undermine the dollar. But on the other side is the loss… Read more »
Indeed there’re some challenging times ahead. The housing bubble has at last been accepted for what it was and it’s now time to move on. Housing is a nice side order, but it should never be a main course. You can’t export housing, apart from wooden prefabs and even building technology doesn’t have a big export potential for us – unfortunately, houses are not like cars with a life of about ten years – they’re too expensive and they last too long. It’s now time to look around us and to realise that we don’t have many resources other than… Read more »
Our own human resources should be our top priority. Manufacturing labour is too expensive, job losses on a regular basis and the laid off have difficulty getting a new job with so many foreign nationals living here to compete with. Does anybody think that the foreign workforce here is to large?
If we do have a recession, emmigration will increase and foreign workers will continue to trickle in here and work for less than the Irish. As it is there are reports of foreigners being hired here instead of our own.
After the events of the last week, is the World Economy, like Amy Winehouse, finally accepting: It’s time to go to Rehab? Or is the ‘model of grief’ outlined by Elizabeth Kubler Ross a more useful analytical tool? Denial. Anger. Bargaining. Depression. Acceptance. In my view, most people I meet are firmly entrenched in denial. http://www.businessballs.com/elisabeth_kubler_ross_five_stages_of_grief.htm Within the ‘Axis of Credit Junkie Nations’ I doubt the general reaction will be quite as sanguine as you suggest David. Despite the best efforts of economists to understand human behaviour: Distressed gentlefolk rarely act in rational ways. I spent last week in London… Read more »
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More on resources: The earth cannot sustain it’s entire population with western living standards. That’s the simple fact at present. India/China rush to increase standards of living will of course apply huge pressure for world’s resources. Who can blame the developing world to try and crawl out of grinding poverty. Read Jared Diamond’s collapse to see a good analysis on resource utilisation (especially the later chapters) http://en.wikipedia.org/wiki/Collapse:_How_Societies_Choose_to_Fail_or_Succeed Technology or wonder breakthroughs may stay the enivatable fundamental lack of resources but will reassert itself. As for fuel efficency (round 2) see the “end of oil” http://the-end-of-oil.com/ any savings due to efficency… Read more »
I read your article about resources with interest. Much talk of the state of Ireland’s economy and of that globally and indeed what Ireland can do in the future to grow home business and increase exports. It is rarely mentioned and quickly forgotten in mainstream current affairs/politics that as an island, Ireland has the largest stocks of fish in the EU bar none. Not to mention the longest coastline in Europe etc.etc. These fish stocks are being actively plundered by France, Spain, Netherlands et al, whilst Irish Fisherman have to stand by and watch, their boats tied up with miniscule… Read more »
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