The collapse of the Chinese stock market, the Greek economic collapse and forced continuation of a failed austerity regime, together with the speculative surges in property prices in Auckland and many other cities of the Pacific Rim – all have a common source.
These events are rooted in the the earlier loosening and then the subsequent tightening phase of the US Federal Reserve’s management of the US dollar – the de facto world currency.
The extraordinary process of “quantitative easing” of the US dollar indulged in by “the Fed” to prevent a complete collapse of the US banking system during the crisis of 2008 was historically unprecedented. Interest rates were cut to virtually zero and trillions of dollars printed and made available to troubled banks, financial institutions and enterprises.
The crisis itself was the first stage of the Great Recession, the deepest and longest international capitalist crisis of overproduction since the Great Depression of the 1930s.
Other countries like China also undertook their own versions of loose money by expanding credit and running huge budget deficits for a few years. That fed into a property and share market boom in China that is threatening to collapse at the first signs of a slowing economy there.
New Zealand also undertook some significant bailouts of some financial institutions as well as large scale budget deficit spending to try and ride through the world wide recession and pay for the Chistchurch earthquakes.
Cheap and easy money internationally meant banks in NZ were able to continue to borrow funds to push onto customers keen to get into housing. This helped drive a rise in Auckland’s median house price of 60 per cent on its already historically high level in 2008. Many dairy farmers also pushed themselves into debt while trying to ride the dairy commodity price boom before its recent collapse.
Most house purchases in Auckland are now classified as being by “investors” and appear to be driven by largely speculative purposes. A dangerous assumption has emerged that there is no possibility of a decline in prices or a rise in interest rates. The latter especially will make servicing debts problematical for many.
There is no doubt that a lot of money from overseas – especially China – is part of that speculative flow. There are literally millions of Chinese in China who have accumulated substantial personal wealth (legally or illegally) and want to store some of it overseas. Simply ignoring that reality doesn’t help and simply feeds the bubble. It makes no economic sense not to even have any data on what is happening.
But the solution is not to target only “Chinese” investors, or even necessarily only “non-resident” investors. Controls being proposed to limit non-resident purchases of existing houses, or restricting banks from loaning money to non residents for existing housing are probably a common sense step to limit the speculation. But it won’t eliminate it. The problem is rooted in a capitalist housing market and a credit-fuelled speculation that is being participated in and profited from by tens of thousands of resident New Zealanders as well. There are several hundred thousand New Zealanders who are “landlords”. Many are large capitalist businesses, but many are also owned by professionals or workers with above average incomes who want to “put something aside for retirement or for the kids.” Because there is little or no tax on this form of investment property it has a privileged place in savings and this has resulted in a dangerous over reliance on one form of private saving for many.
Waiting for the bubble to collapse and many peoples life savings to be eliminated is no solution to housing affordability. But nor is it a solution to ignore the problem and keep feeding the bubble.
A solution to the housing crisis must begin with those most in need. Publicly owned state or local authorities must build (or buy) quality housing in the tens of thousands each year and let to tenants at no more than 25% of their income with secure lifetime tenancies. Tenants should be part of the governing bodies that manage this housing. We must keep building or buying these homes until everyone who wants an affordable, quality publicly owned and provided home has one.
The Accommodation Supplement – a private housing rent subsidy – should be abolished as it is simply goes into the landlords pocket through higher rent and capitalised into house prices. There needs to be a big increase in the minimum wage and a universal basic income to compensate those who lose access to the accommodation supplement. The homes of private landlords who can’t make any money any more can be bought out and added to the public stock. Maybe the house could simply be swapped for a guaranteed retirement benefit.
Total private sector debt in New Zealand (housing, agriculture and business) remains high at $360 billion or 150% of GDP. There is a real risk that any shock to the system will see prices in property and farms decline significantly and make servicing that debt a problem.
This is where the Fed steps in again. The Fed now fears that unless they curtail the monetary easing process they have carried out they will risk unleashing an inflationary devaluation of the dollar against gold and soaring interest rates. That in turn would lead to a collapse of the dollar system worldwide and almost certainly result in a renewed world wide crisis of even greater magnitude than seen so far in the history of capitalism – including the super crisis of the 1930s.
The Fed’s modest tightening so far is reflected in a rise in the value of the US dollar against gold and the Euro and a rise in long-term US bond rates from under 2 to 2.5% in recent weeks. The Fed has signalled it intends to raise short term rates as well before the end of the year.
In contrast the European Central Bank after initially using the crisis to impose austerity across Europe is trying to combat stagnation by monetary easing – creating more euro-denominated paper money and bank reserves. By the two central banks moving in opposite directions there are risks for the many European capitalists who have assets in Euros but debts in dollars. A significant change in value will make some unable to pay off their debts.
For US capitalism a declining Euro value means more imports and a growing trade deficit. A further decline in the Euro/rise in the dollar could provoke a US recession. The stalling of the US economy in recent months seems to have postponed the interest rate rise for the moment.
But it is the recovery that the Fed actually fears. The trillions of dollars printed by the Fed has largely been accumulated in hoards by big business and the capitalists more generally. If a recovery process seems likely to continue the capitalists will be wanting to pour that money into new factories and warehouses and beat their competitors to the new opportunities opening up. That is when a broader inflationary threat becomes most likely.
In may ways a full recovery is well overdue. A business cycle is usually around 10 years and it is now 7 since the crisis began. The weak recovery signals what appears to be a long-term stagnation in the system of world capitalism. This is provoking a significant discussion among bourgeois economists as to the cause. This is discussed more fully in the Critique of Crisis Theory blog in a three part series Capitalist Economists Debate ‘Secular Stagnation’
But every time the Fed takes any action to reduce the hoards of accumulated money their system threatens to seize up again. That in essence is what is behind the Chinese stock market crash and the crisis in Greece. The chain of payments that is the international credit system breaks at its weakest points. As Sam Williams writes at Critique of Crisis Theory:
It is a basic law of competition that periods of reduced economic growth cause increased competition—among individual capitalist corporations, capitalist nations and capitalist industries, and above all, between the buyers and sellers of the commodity labor power. When the pie is growing rapidly, everybody can get a bigger slice in absolute terms, even if their slice is shrinking in relative terms. But when the pie grows slowly, if at all, the weakest competitors end up with slices that are shrinking in absolute terms. This in a nutshell is the essence of the Greek crisis.
NZ capitalism is in troubled territory. Property prices have risen above any historical precedent in terms of rents or incomes. A “correction” appears inevitable. China is slowing. Australia is slowing. Europe is stagnant. Commodity prices are at a low point – especially dairy. The US dollar system could see a prolonged steady rise in interest rates and a neutralisation of the dollar hordes or an inflationary collapse and surge in interest rates. Either prognosis signals the end of recovery and a new recession. It is just timing and maybe severity of the next crash that may be different.
There is no Keynesian solution that involves permanent zero interest rates and printing any amount of money you want to keep the system ticking over. That just makes the inflationary collapse that much sooner.
Our problem, like for the Greeks, is capitalism.
Our solution must be to link hands with those in Greece and elsewhere who are saying we will not accept capitalist solutions to a capitalist crisis. We need socialist solutions for the working class that involve taking over the banks and monopolies and introducing democratic planning in the economy so that everyone has a job, a decent home, health care, education and access to all the best that human science and culture can offer.