The International Writers Magazine: Comment
The Importance of Process
As we approach the beginning of the election campaign in Britain, we could be forgiven for believing it has already begun.
I have grown tired of hearing both main parties plucking numbers out of the air to justify their policy intentions. Party A proposes to give every child in Britain a lollipop at a cost of X only to be challenged by party B who alleges to have found that the proposal will actually cost Y. All this is no more than a fascinating though tiresome pantomime, the numbers giving a false impression of precision and careful research. The electorate would be well advised to ignore such ‘mine is bigger than yours’ punch-ups. We shall learn little by studying numbers, but much by looking at process.
While swapping spurious estimates of specific proposals both parties choose to ignore the elephant in the room that portends an economic crisis within a few years, possibly within the term of the next government. As the Conservatives boast of their economic achievements, pointing to Britain’s GDP growth rate, they must know of the process in train that promises to create the country’s very own 2008 equivalent. I refer to the inflow of foreign funds seeking a safe haven in London: funds that have caused some commentators to see London as the money laundering capital of the world.
Money flowing in as a result of foreign direct investment in productive activity, particularly that which helps to raise Britain’s poor productivity levels or exports, is not the problem, although I do not share the view that foreign ownership of nominally British companies is of no consequence. My concern is with the enormous volume of funds that resulted from the collapse of 2008 and the subsequent rescue of the banks. These are footloose and of a size sufficient to destabilise most national economies.
Such funds, many of questionable origin, are pouring into the London property market in sufficient volume to distort it. Consequently, property prices in London continue to rise, making accommodation ever more unaffordable for people working there. Building activity is being diverted from creating new homes for ordinary Londoners into the construction of luxury apartments affordable only to the very wealthy. Ordinary homes and office buildings are being demolished or converted to apartments that sometimes stand idle, the investors profiting from rising property prices, rather than occupation by tenants. I understand that this phenomenon is now affecting property prices in English cities well away from London, either directly through foreign investment or by driving other people out of London to seek accommodation they can afford.
These direct effects on property prices are widely recognised and acknowledged, but the funds have a more insidious impact on our current account and the value of the pound. The poor export performance of Britain is partly disguised by them, and the pound stands at an exchange rate not merited by the state of our economy, so making British export prices less competitive than they would otherwise be. Incidentally, the inflow also enables our politicians to make quite misleading claims about our economic wellbeing.
Some might argue of course, that we are simply exporting property ownership of housing just as we have exported ownership of much of our industry. Superficially, that is plausible, but it ignores a crucially important difference between the two. The motives of the investors are entirely different. When an Indian company buys a British motor manufacturer, for instance, it is likely to be doing so as part of a long-term strategy that includes modernisation and development, and the creation of export markets. Although foreign ownership perhaps makes that motor manufacturer more vulnerable in the event of a downturn in the international market, the effects on our economy are positive and long-term.
That is not the case with the funds flowing into the London property market. These are much more speculative, and often arise from obscure sources directing the money through third-party, off-shore accounts. Even in cases where they are used to create new property with nominal long-term intentions, they carry the threat of instability as many of the investors are jumping onto a bandwagon they consider safe. It isn’t. These investments ride on a platform of optimism that the market will continue to expand and, should they wish to sell, a profit is assured.
This process of inflation in a large, but narrow, market is extremely dangerous for the British economy in that it is creating a property market bubble that will inevitably burst, with huge consequences that will not be confined to property prices. The confidence on which this market is based has no substance. Many will profit in the short term, indeed the smart money has probably been turned over already, but ultimately there will be massive losses, often hitting people who have not consciously speculated.
I don’t doubt that many will scoff at my use of the word ‘inevitably’ in this context. Some will do so from political motivation while others find the idea of seeing into the future as bizarre. However, no crystal ball is required, simply an observation of processes that are unsustainable, and have proved to be so historically. By such means the catastrophe of 2008 was predicted by many, myself included, despite subsequent claims that it could not be foreseen. The secret is to treat numbers as of secondary importance while being sensitive to what processes are in train, and asking if they are sustainable over the long run.
The government, and opposition parties, would benefit from following that advice, though they are unlikely to do so.
I find it ironic that the Conservative Government, which despite being thankful that 2008 didn’t happen on their watch, derides its Labour predecessor’s grasp of economics, while ignoring, even glorying in, the pending crisis on their doorstep. It is also comical to see the Labour Party keen to become the next government when such a situation exists. Should the property bubble burst under a Labour government that party’s economic credibility would be destroyed for at least a generation.
What are the precedents? Well, in the last twenty years financial crises have occurred in Mexico, Thailand, Indonesia, South Korea, Russia and Argentina. As Yanis Varoufakis tells us in his book ‘The Global Minotaur’ “All these crises began with a large inflow of cheap foreign capital that led to bubbles in the real-estate markets. However, once they burst, a violent outflow of capital, plus a friendly visit by the good people of the IMF, turned these economies into the financial equivalent of scorched earth”.
Later, when referring to crises in South East Asia, Varoufakis tells us “Towards the end of the 1990s, that bubble burst and foreign capital departed much faster than it had poured in, plunging these countries into a terrible nightmare. Building sites were abandoned, currencies were devalued precipitously, investment dried up, unemployment heightened social tensions, poverty began to rise again and, worst of all, the IMF was called in.”
The government could take action to prevent this happening in Britain, but it is unlikely to. Politicians naturally view life in the short-term, and even if they foresee problems, they tend to hope they occur when the other lot are in. So, when the bubble bursts in London property, our ‘leaders’ will parade before us, wringing their hands and claiming that the disaster was not predictable.
© Tom Kilcourse March 13th 2015
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