The foundations for a new kind of economy are being laid, but the “new normal” bears little resemblance to what is being discussed by the “authorised” opinion makers. Debate still rotates around the theories that were tested to destruction in the run-up to the 2008 débâcle. The black hole in public knowledge will lead to serious miscalculations about how to protect savings, and when to purchase the single most important personal asset – residential property.
Savers and investors, for example, are being encouraged to focus on the implications of looming changes to interest rates. Central bankers on both sides of the Atlantic are signalling the prospect of increases in the next few months. In the short term, interest rates are important to consumers and producers. But a far more serious issue is the adjustment that is taking place without discussion by the pundits who shape people’s expectations.
The most important structural change to occur in a century is marked by a huge shift in investor sentiment. Instead of investing in the formation of fixed capital assets (which add value to the wealth of nations), the Big Bucks are going into the purchase of assets that generate rents (to cannibalise the wealth produced by others).
This trend may be observed in the way foreign investors are buying top-end properties in European capitals. House and apartment prices in cities like London and Stockholm are escalating at rates which, through the ripple effect, and driving prices up in outlying areas. In Copenhagen, for example, near-zero interest rates are translated into higher property prices. Apartment prices are up by 25% over the last 12 months. The bonanza for existing property owners is now protracting the depressive effects of the Crash of 2008.
In London, the estate agents Savills forecasts that property in the central districts will increase by 24.4% in the four years to 2018. According to my calculations, that is a modest forecast. I reckon prices of top-end properties will rise much faster in the run-up to the mid-cycle recession in 2019.
But the struggle with unaffordable house prices is the least of the problems now facing European economies. Analysts have not yet cottoned on to the medium- to long-term implications of the new economy. Investment markets have been compromised by the preferences of rent-rich foreign investors like the sovereign wealth funds of the Middle East which need to park their oil rents. They are buying rent-generating assets, or investing in infrastructure projects that will generate a flow of rental income over the next 30 years. Why does this matter? Governments ought to be alarmed, for at least two reasons:
- As the infrastructure comes on stream, dividends will flow abroad, creating a crisis for balance of payments.
- Rents are the economy’s net – or taxable – income. As the pool of available rents shrinks, governments will find it increasingly difficult to fund public services.
The change in the character of the economy will surface as increasing turbulence in the markets. Austerity policies, far from being temporary strategies to rebalance the economy, will become permanent devices for trying to balance the books. The amplitudes of the swings in market activity will become increasingly violent. Social distress will intensify as housing becomes increasingly unaffordable even to middle-class professionals.
Spain’s labour market is already displaying the characteristics of the new economy. According to official data, one in eight workers (2.28m people) earns the minimum salary or less. The share of workers employed on temporary contracts is alarming: in July, only 6.9% of newly hired workers were hired in permanent positions. The rest were on short-term contracts which paid barely enough to cover living costs.
The Spanish labour profile is replicated across Europe. Greece is too well known a case of accelerated implosion to need documentation. But even Germany is registering a marked increase in poverty among people in employment. The consequence of these trends will be a permanent decline in productivity, which will render Europe ever more vulnerable to Asian and South American competitors in the global markets.
The cultural underpinnings of these trends are analysed in my latest book, As Evil Does. I trace the organising principle of the new economy back to a “killing cult”. On that, more anon.