Perception Of Prosperity, Prosperity Of Perception

I am not too sure that I agree completely with the Bank Of England Governor who recently said that there is a structural problem in the UK housing industry in that not enough houses are being built every year.

There is certainly a need to build more houses every year in every country in order to accommodate more new people being born and new families being formed. The number of new houses that has to be built must be equal or proportional to the birth rate or the rate of household formation. This would be in the vein of classical economic analysis. Or in the mode of Marxian argument. But, in modern Keynesian-type analysis, that would called notional demand - the ideal situation when everybody who needs a house would be built a house, regardless of ability to support that notion with the ability to pay. The Keynesians are adamant that your demand is effective only when you have past or future savings to support your wish for a house - effective demand. (Students of economics wasted a substantial amount of time in college debating this point in the seventies.)

I am of course a bit apprehensive over the BOE Governor's recent statement because that statement could in principle be applied anywhere in the world today - if we that into consideration the globalising effect of the three decades of QE, starting with Japan which was then happily exported to the US by Greenspan. We know that the QE is now being tapered off, in the sense that the quantity of pumping cash into the US financial system - and then the global financial system - is now being gradually reduced. We are still talking about net injections, but net withdrawals of funds from the system. In old economics language, monetary policy is still said to be expansionary albeit at a reduced pace.

Under a sustained expansionary global monetary position, it is unlikely that global interest rates will rise. Downward pressure is still being put on interest rates as the system continues to be flooded with liquidity, albeit at a slower pace. The tropical storm is still on although you may feel that the rain is falling not as hard as before.

It is this global QE effect that, in the initial phase, drove the liquidity from the US to China which caused the latter economy to boom and now threatens to be the second largest economy in the world. When China has worn out its competitive advantage of super low wages, that liquidity which has since filtered from US hands to China hands then converted fertile farmlands into construction sites. Blocks and blocks of residential housing are built and left vacant so that speculators can sell as pristine properties for the next buyers who are afraid that they will be left out in the asset-inflation game. When the China authorities begin to curb that asset inflation, the speculators, having learned their tricks, now play their game of speculation outside China. London, among others, becomes the current favourite.

That speculative demand is now driving London properties prices is a truth that cannot be denied. But what to make of it. Of course, such waves of speculation on London properties are inevitable, starting with the Arabs in the 1970s and 1980s, the Japanese during their bubbles years in the 1990s, and now the Chinese. No doubt, London seems to be most precious jewel for the world, with its rich history and culture, or rather its history and cultural richly told to the whole world.

If the intention of the BOE statement is to suggest that foreign (Chinese) buyers are now competing with resident buyers for London properties and that there is a need to build more houses in London, then while more houses may be built it is unlikely that local buyers will be able to afford those houses as surely London property prices will rise according to the demand of the foreign speculative buyers. If the BOE statement is to say those who originally grew up in London will now have to move out of London because they cannot afford to stay in London any more, then there is very much a need to have a major structural plans to build new urban centres outside of London in a way that locals can afford to buy them. This will need a further integration of the public inter-city transport system.

The above analysis can apply to a place like Kuala Lumpur or the Klang Valley, but I am not too sure about Singapore or Hong Kong. Unless you bridges to connect the islands to the nearest mainland.

Now, the danger of all property speculative bubbles is that bubbles will burst. It's a question of whether you allow the bubbles to burst with a bang - which inevitably means banking bankruptcies- or you try to reduce the bubble with a deflation that can take decades to reach equilibrium and during which time incomes will fall faster than prices - and which means a slow and painful death.

The real danger for the BOE or any central bank with a hitherto vibrant real-estate sector is now engineer an adjustment of asset prices which are consistent with current incomes. Most residential properties in urban centres are beyond the reach of ordinary working professionals. Maybe the best thing is for the new potential buyers to hold out and what for sellers to be sensible and even cut losses.

You are king when you have cash in your pocket or a good credit rating. I think the speculators must bite their nails.

Having said that, though, prime is prime and future values are always held in prime locations - until the centre shifts.

Perception Of Poverty, Poverty Of Perception

We were just being told that some people, "to our naked eyes, look like poor people" or people who earn "small salaries but they can still send their children abroad" at their own expenses. "This means they could have under-declared their income." But the GST system "is more progressive as it depends on how much our expenses are."

I think it is dangerous when the Government make statements like this - based not on proper analysis but on impressions. One may be clever at making statements on isolated issues. But isolated issues may be the outcome of an error in the whole system

To my naked mind, there is absolutely nothing wrong with the person who dressed down and live a simple life so that he can save his salaries for the education of his children abroad. There is even something to be admired about such a person because he does not rely on the government for scholarships for his children's education as he knows they will never get the scholarships based on their ethnicity. He knows that, for the future of his children, an overseas education may be worth the money as the local education may not be good enough for his children. Of all persons, a salaried man is likely to be the only salaried man who is honestly paying his taxes. There is just so much ignorance in such a short statement.

The GST should be held up as a major contender against income tax. The debate is whether you tax effort or you tax expenditure. In the old world where money (capital) was scarce, there was the view that profit made out of capital should be taxed, and that incomes from salaries should be taxed to pay for pensions and healthcare and education, and other public services.

Then along came Keynes who said that spending is good for the economy, the more you spend the better the economy. Keynes was right to suggest that government spending should be used to smooth out a temporary cyclical glitch. But expansionary fiscal policy are now wrongly used to cover up the problems of slow growth of an economy with structural errors. Instead of correcting structures, the government continues to spend and it is looking for all kinds of ways to tax in order to keep feeding a badly managed economy.

If the currently thinking is that spending is good for the economy, then this is the wrong time to implement the GST which taxes spending.

If you think that GST is the better revenue generator, then you must let off the consumers by removing totally the taxes on personal incomes. You can keep the taxes on profits.

Just to think that the government will berate the poor citizen who has to live the life of a simple person so that he can rise above the wrongs that his government and his country is doing to him and his family...