Month in Review, September 2012: Part 1, “I abhor the implication”

November 1, 2012 | Capital markets, Central bankers, Currency rates, Democracy, Euro, Fences, Global news, Grexit, Housing, Month in review, New Haven, NYCHA, Public housing

By:David A. Smith


[Previous Months in Review available here: Aug 12, Jul 12, Jun 12, May 12.]


Looking back via these Month in Review compilations on my blog oeuvre (if one is allowed to call an accumulation of blog posts an oeuvre), I am struck by how far afield of the narrow topic of housing they have occasionally strayed.


I find it important to focus


Perhaps that’s because, when it comes to global housing economics, good news is hard to find:


As a naval officer I abhor the implication that the Royal Navy is a haven for cannibalism!

Monty Python, Lifeboat Sketch


In September, we covered currency markets, the slow-motion-implosion of the Eurozone, and extensive wild theories spun without a scintilla of academic proof, as in my minim opus A comprehensive theory of China’s cities and housing, of which two parts were posted in August (Part 1A, “Nothing outside China matters”, Part 1B, But the world is globally connected):


A Grand Unified Theory in three parts


In September there followed four more posts, completing the set, starting with Part 2A, “An imperial economy is a successful society”, Part 2B, But the modern city is too complex, Part 3A, “Between observation and doctrine, report doctrine”, and Part 3B, But markets will not be fooled:


The material for this extensive post comes from a whole series of intriguing pieces, including a lengthy essay by Mark Kitto in Prospect Magazine (August 8, 2012) (brown text); a sweeping historical blog essay by C. Owen Johnson, Why China is not going to be a superpower (June 4, 2011) (green text); a Tyler Cowen op-ed in the New York Times (August 12, 2012) (orange text); and news stories about Chinese property prices in the Economist (July 28, 2012) (gray text), and flooding in Beijing in the Economist (July 28, 2012) (blue text).


At some point the excess supply of empty flats (as many as 65,000,000, according to one reckoning I read) is so absurd that China’s money rich no longer will buy them, and will demand some other outlet for their alleged wealth. Or at some point, a Chinese state-owned developer, bank, or municipality, will hit a cash crunch of the kind we have seen in the US:


When one such, Yunnan Highway Development and Investment, told creditors in 2011 that it would not repay the principal on their loans, it was described (with equal hyperbole) as the “default heard around the world” by Business Insider, a news website.


Three years ago, we thought US municipal bankruptcy impossible. Now, with scarcely a shift in awareness, it’s become routine – hardly a month goes by without another California city filing in Chapter 9, and the list of likely filers grows ever longer.


The jury is out. But to my eye, we may well find a significant and lasting disruption, closer to what the Austrian theory would predict. Consider a broader historical perspective: How often in world history have countries enjoyed 30-plus years of extremely rapid growth without a major economic tumble somewhere along the way? One can be optimistic about China for the long term and still be fearful for the next turn in its business cycle.


In Part 1A, I cited Deng Xiaopeng’s implicit promise – you be quiescent, we will give you economic success and safety. Such a promise has been offered by autocrats throughout the last fifty years, including Nasser in Egypt, King Abdullah in Saudi Arabia, and the whole Soviet Union throughout its history.


We know best


Unlike the overlevered US, collapse of confidence in Chinese residential real estate prices should not lead to massive foreclosures, because most of the purchases appear to have been for cash. So if there is a bubble to pop, it will be less an economic pop (that’ll be more of a tire deflating slowly and loudly), and more a psychological one:


Other collapses are much swifter, such as  for countries whose economies are smaller and whose governance is more questionable, especially when they decide they might as well outlaw doubt:


I’m certain you’re doubtful


Among the many reasons that money, that is the portable and numerical denomination of freely tradable symbols of value, is one of humanity’s greatest inventions (mathematics is discovered, money was invented) is its power to rebalance power between questionable rulers and poor people – and, as shown in this article from the Wall Street Journal (August 12, 2012), that is partly why dictatorships, autocracies, kleptocracies, and just plain dysfunctional governments all hate money’s portability, even to the point of banning competition to their depreciated currency:


African countries are trying to shoo the US dollar away, even if it means threatening to throw people who use greenbacks in jail.


When a country seeks to stamp out capital portability, and when it goes to ban alternatives to the sovereign’s fiat money, you can be sure the government is heading in the wrong direction.

Starting next year, Angola will require oil and gas companies to pay tax revenue and local contracts in kwanza, its currency, rather than dollars.


It’s worth what you can buy with it


Next stop, exchange controls. The stop following: controls on capital flight.


Mozambique wants companies to exchange half of their export earnings for meticais, hoping to pull more of the wealth in vast coal and natural-gas deposits into the domestic economy.


Many groups of people benefit from using dollars instead of local currency:


1.Poor people who want to protect their savings against government inflation.

2.Rich people who want to expatriate capital to somewhere it can buy something useful.

3.Public officials who want to stash ill-gotten gains in Swiss or Bahamian banks.


Foolish ideas are not the province solely of small countries’ governments, as Europe’s fiscal leaders continue their paradoxical strategy: to keep the Euro strong, they must keep within the currency all its weaker members, even if that means flooding the market with currency certain to weaken everyone’s Euros, not just Greece’s future drachmas, as we saw in OMT? OMG! The bad bank to end all bad banks:




While obviously the cost of capital impacts a nation’s ability to repay, rates have never been the Eurozone’s problem: the weak nations cannot repay their principal, and the capital markets are pushing up the interest rates in the expectation of an eventual default and rescheduling.


Markets like it when dodgy paper is guaranteed by the man who prints the money


Called Outright Monetary Transactions, the program will focus on purchasing government bonds with maturities from one to three years. The ECB will not set a limit on how much it buys –

We will save for tomorrow the national-sovereignty implications of granting unelected administrators authority over a nation’s checkbook – for today the more important howler is what follows:


Hey, this is serious now


– and will not insist on senior creditor status, which means being paid ahead of others in the event of a restructuring. Such status worries other investors who fear they would face disproportionate losses.


Only the New York Times could write an explanatory sentence as credulously backwards as that. We have already seen that in a previous bailout round, Europe’s governments totally shafted private bondholders to give preference to public bondholders, and got away with it, and this particular breach of contract followed only a few months after a previous total betrayal of principle, that itself worked only for a short while.


For this scheme to work, those printing the money need to attach the bank account of the one nation in Europe with resources to make the indebtedness good, and if that holds them, then for Germany it’s Auf wiedersehen, sovereignty?:


Printing money worked so vell in Weimar


Yesterday’s post spelled out why I think this is stupendously foolish political economics – but more relevant, and more urgent, is that if this stands legally (and it may not), then Germany can bid auf wiedersehen to its national sovereignty, as can every other nation in the Euro zone.


Frankfurt — The European Central Bank, acknowledging that Europe’s debt crisis has reached a critical stage, said it was prepared to use its most powerful tool—its printing press—to save the euro.


You just grasp their principal … and squeeze


If so, this makes Germany (and every other nation, like Spain) a sub-sovereign state to the greater Europe, and Mario Draghi its largely unelected president.


First and foremost, even the part of Draghi’s speech designed for headline quotation begins with an awkward phrase. “Under appropriate circumstances…” the bond-buying will happen, the principal circumstance being that Spain – the largest country closest to default – requests an official bail-out and accepts all the related conditions. That will mean signing a “Memorandum of Understanding” involving a major loss of sovereignty and extra fiscal austerity, to be policed by both the ECB and International Monetary Fund.


That unelected body then decided, in simple terms, to expropriate money from German taxpayers:


Underscoring the historic dimension of the move, the ECB’s 22-member governing council took the decision over loud objections of the Bundesbank, the German central bank on which the ECB was modeled.


You see, Germany, 21 of us have decided to raid your wallet because that will be better for us, so why don’t you just go along?


From each nation according to its ability, to each according to its needs.” Haven’t we heard that somewhere before?


Poetic justice that we were Germans and our statue’s in Berlin, don’t you think, Karl?


[Continued tomorrow in Part 2.]