Friday, 6 June 2014

BUBBLE ABOUT TO BURST?

International Monetary Fund chairperson Christine Lagarde is highlighting that something needs to be done about Britain's housing bubble. The IMF are suggesting either a rise in interest rates, more house building, or a combination of both.
It's Friday. It's financial. It's Friday Financial with JULIAN SAYER.

Mortgage misery on the way for millions.

This week I want to give a quick recap on what's been happening since I started writing this blog back in February, both on the subjects I have covered, and geographically around the world.

First domestically. A few weeks ago I covered the problems building up in the housing market, and it looks as though it will become even worse than I had feared. The Bank of England even admits a housing bubble is forming, the bubble is out of control and when it bursts it will cause misery for all involved. This is the concern for millions, and if it does it will so damage the UK and its economy over the rest of this decade. This paragraph was taken from the article below which is well worth a read:

"The independent think tank raised the alarm about the most vulnerable 770,000 households already with mortgages, saying they were “doubly exposed”. Typically, they might have very low equity in their home (less than five per cent), might be self-employed or have an interest-only mortgage, making them less attractive to lenders. Secondly, it would take only a relatively modest rise in rates by 2018 for a third of their income to be eaten up by mortgage repayments."


How is this Governments gamble to ride the housing market to stimulate growth for the UK economy going to end? They will have to be very careful, it's already overheating and they have an extremely difficult balancing act ahead, but these housing bubbles don't tend to end well! As a whole the UK economy is growing, but it lacks of any real strength, which means it is very susceptible to outside shocks, and everywhere you look around the world, business is struggling and central banks are panicking.


Next the tax burden in the UK is not going away, it is in fact getting worse. The latest figures shows borrowing by the Government is actually continuing to rise. This coupled with the reduced tax revenues will mean the Government will have to raise taxes on the easy targets of middle England and Pay As You Earn. The lack of any real ease in the cost of living crisis within the UK means there are many more years of hard times for the working poor.


The next problem that both the consumer and Government will have to face are the interest rate rises and inflation that is bound to come, if and when the economy recovers. It's estimated nearly 2 million households will struggle with any rise in interest rates.


A very good article was written this week about the problems the world economy is storing up. The massive Quantitive Easing (QE) that nearly every central bank has undertaken to try to save their respective economies has stored a lot of huge difficulties around the world that will be an almost impossible task to unwind. It's an excellent article and well worth a read, this was taken from it;

"There are troubling signs that globalisation may be in retreat. There is a risk of yet another epoch-defining and disruptive seismic shift in the underlying economic regimes. This would usher in an era of financial and trade protectionism. It has happened before, and it could happen again," he said."

This is the article and something we have seen coming for the last few years, how it plays out will frighten many economists.


Let's have a quick look around the world at the troubles the world economy is having. The USA is the most important economy which dwarfs every other, in size and spending power. If America sneezes the world catches a cold the old saying goes. Well America appears to be sneezing!


Japan was the first to experiment with QE and was dubbed Abeonomics after their Prime Minister. It never really succeeded, and Japan has become the most indebted country in the world, with no real hope of ever paying their debt off.


China has struggled, as their economy is based on exporting to the developed world. As these exports have struggled as have China's companies. This in turn affects the raw materials they import from Australia and South America to make these goods.


South America is feeling the heat as well;


Europe is in many ways a basket case, countries such as Italy and Greece are building up debts similar to Japan and will never be able to pay them off. It has huge problems, in debt, unemployment, pensions and demand. The European Central Bank has just about used up all its tools trying to restart the economy. Let's see how the latest one works.


Hot off the press, Mexico is the latest to press the panic button.


Finally, I reported about the fixing of various markets by the global investment banks. As the investigations continue, it seems the theft and deception entered every market they were allowed to operate in.


Anyway, hopefully now I am back in the groove, I will continue my blog next week with a very important piece on understanding how we got into these troubles. Next week's blog will be on Financialization.

Enjoy your week.

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22 comments:

  1. Hi, was interested in reading the article in the daily telegraph which you advised reading, but the link seems to be missing.is there another link please ?

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  3. This growth can only come about from an expansion of the money supply. If there is a drought of money within the UK, which obviously has a knock on effect of lowering consumer demand, then where is this money expansion coming from? Has the fortunes of UK businesses with oversees customers taken a huge turn for the better? Or is this little housing bubble creating enough new money in the form of mortgage debt, that it is flooding through our industries via a renewed growth in consumer spending (all be it, only in the parts of the country where the bubbles are allowed)? Oh wouldn't I like to know....

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