Thursday, August 2, 2012

Are prices re-inflating in Australia and the U.S.?

Misleading title, as this article is about price reinflation around the globe. Australia's evolving property puzzle
Until we get more data, this is just seasonal noise.
The obvious question to ask is: Why are these hard assets rising? Consider the abyss the world’s central banks faced in 2007. Before the panic, global assets equalled, let’s pick a number – $100 trillion. Global liabilities equalled, lets say $80 trillion. The difference represents the world’s pre-GFC wealth, i.e. $20 trillion. Trillions is a pretty nonsensical number for most of us to grasp, so let's keep it real simple. In 2007 the world owned about $100 in assets less about $80 liabilities giving net worth around $20.

Suddenly stupidity (sub prime) and later fraud (Madoff, Stanford, Libor) is uncovered. In the space of a few days to weeks, asset values drop by say 35-50 per cent. At that point the world’s global balance sheet looks like this. Assets - between $50-65. But liabilities stuck at $80. As my daughter would say – “busted”!
Stage two is a little trickier. Reducing liabilities is impossible without triggering a default. So if liabilities can’t be changed, the only other alternative is to reflate asset values back to 2007 levels. Hmmm.
But what are the real inflation figures. You can't inflate just housing and not everything else, like wages, and have a stable situation. Surely we've learned that, no?

I think there is a much simpler explanation, there is a lot of wealth, a planetary boatload of wealth, seeking safety. It's in the hands of just a few % of people and it moves in great fashionable sloshes. You want the economies of the world back on track, the wealth needs to be growing in the working class as well as the moneyed class. Otherwise, the system just gets more imbalanced. That's how this whole journey began back in the late 90s with rapid imbalances in wealth accumulation and the middle class using debt to retain a middle class lifestyle.
Luxury homes in particular are on the march. In the Hamptons on Long Island, transaction volumes rose nearly 10 per cent in the June quarter.

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