Buying Property in Turkey — Part 2

I recently warned that buying real estate in Turkey was a big mistake. I gave several reasons, only to be told that one of my readers was going ahead with a purchase because he had been advised by a “reputable” London firm.

All I can say is that I hope he had second thoughts. But let me underline that previous recommendation to steer clear of a junk market.

Several things have been coming together recently to add to the standard disasters in Turkey. We all know that the country has serious internal strife: not the place one should move to or invest in. There are wars on both sides of the country, and religious intolerance is on the rise. But never mind all that, let us look at more general aspects that affect the country.

Turkey is regarded as an emerging market. That type of economy is in deep trouble because of a convergence of financial changes that are taking place in the international markets. I refer to low interest rates that have led governments to borrow heavily in the international markets, which usually means, getting US dollars.

The other problem is that the bond markets are turning round, and interest rates are on the rise.

When you are borrowing in dollars you are borrowing money denominated in a reserve currency. If you are the Turkey government, you are paying back in a weak currency. One small change in the market rates and you will get crucified. Let’s put some figures on this.

The Turkish lira has fallen about 20% against the US dollar so far this year. The chart is frightening. Four years ago you would get only 2.5 lira to the US$. Now you get 4.5. That is a hell of a currency crash.

Inflation there is running at 11%, which is pretty steep, and heading higher. Now look at the interest rate. It has just jumped from 13.5% to 16.5%. What is that going to do for mortgages? And what is that going to do for the property market which is dependent on borrowed money? Property prices are crashing.

Are things about to get better? On the contrary, they are about to get worse. The government plan is to borrow even more. And as the currency collapses those loans rise in value against the collapsing lira.

Interest rates have started to rise. It looks as though they will rise further. As the dollar rises and interest rates follow, so weaker currencies will fall. Already Argentina is collapsing. The Turkish currency is following. That will wipe out value in real estate.

Turkey is heading for a full blown economic crisis. THIS IS NOT THE PLACE TO INVEST. It is the place where you are guaranteed to lose money.

As I did warn earlier, if you buy real estate in a country then you are investing in that country. Would you invest in a risky company? Of course not, so why invest in a weak country? It will take your money with you as it tanks.

If some so-called reputable company tries to convince you that buying in these dumps is a good idea, take that advice for what it is: the company is talking its book. They need to sell you something to keep their business functioning so they will talk it up.

Don’t invest in Turkey or any of these marginal countries. You will regret it.

Buying Real Estate in Turkey

Buying Real Estate in Turkey

This excerpt is part of a longer article on buying property in Turkey, originally published at the end of 2012. I have been advising people to steer clear of this country for the past thirty years.

I am re-publishing this here for the simple reason that I do seem to have a continuing clientele visiting this site, but the main articles are now available from this website:

http://www.property.org.uk/unique/blogs/unique-property-blog.html

 

Two of you have asked about interesting properties for sale in Turkey. Unfortunately I cant find much. There obviously are interesting properties around but I suspect they are all in places none of you would be keen to move to.

One of the big problems with Turkey is that it’s borders are rather problematical.  If you look at a map you will note that although one of Turkey’s borders, it’s smallest, abuts the EU (or at least it does at the moment, maybe next year half that border will be with Greece). The rest, however, are dodgy areas.

The western half of the country abuts the Mediterranean, Greece, and the Black Sea, with a small border with Bulgaria. However, have a look at the borders to the eastern part of the country. Georgia (nasty trouble spot), Armenia (nasty trouble spot), Iran (potential third world war country), Iraq (already in civil war), Syria (already in civil war). I mean, guys, hold on, is this really a place you seriously want to invest in?

This is not for me, however, you’re asking the questions, so here we go.

First, I cant find many unusual properties in Turkey, which is odd because there are some very interesting cave homes in Cappadocia. They are well inland, to the eastern side of Turkey, so may not be of interest to those who dont speak Turkish. We are looking at an area well away from tourist spots, in a rural mountainous zone, not that far from the border with Iran, with a Kurdish hot-spot not far to the south. Are you still interested? ………

If you wish to read on, go here

White Sands & Green Planet

A few years back Green Planet Plc starting selling plots of land in the Province of Natal in North East Brazil. They operated out of expensive premises in The Gherkin in the City of London.

The main area for sale was at The White Sands Country Club, and White Sands Towers, just a few miles to the north of the city of Natal.

Admittedly this is a great area for development, but was it a great deal?

Purchasers of land at White Sands are mostly still waiting for certificates to show they own anything. Some have been offered planning certificates, but these relate to what we would normally call outline consent rather than detailed consent. My understanding is that the planning certificates relate to what the Brazilians called the loteamento, or the area classification. This is stage one of a rather lengthy process that can take four years or more to come to fruition.

To the best of my knowledge there have been no updates.

A trust certificate was issued to some purchasers claiming that a company called Title and Trust was acting as trustee for the operation. That company ceased trading at least two years ago.

Green Planet’s website, though still online, has not been updated for nearly two years. The company moved from The Gherkin into smaller offices in Soho Square. They then moved again into even smaller officers in Covent Garden, and my understanding is that there is one room, a desk, and a telephone, that is never answered.

It also appears that most of the directors have resigned, and the company is a skeleton. Not only is the UK version of the company no longer functioning, but neither are the two related companies in Gibraltar.

In short, the situation would appear to be that the company no longer exists, and the money that has been paid over for plots of land has gone god knows where, and there is in all probability no ownership of land in Brazil at all.

Someone claiming to be called Brian Hubbard appears to be acting as some kind of watchdog for the company. What his purpose is, is not clear at the moment, and although he has offered to speak to me, he has not returned my calls, neither has he sent any meaningful email of explanation to me. For the record, Brian’s email address is brian.hubbard@greenplanetinvestment.com

Whether there is anything tangible that could be called Green Planet Investment is another matter.

A copy of this post will be emailed to him, and I will post any reply he chooses to make. However, at the moment it would appear that Green Planet was yet another fraudulent operation, and those of you who have been defrauded are invited to join a group to see what, if anything, can be salvaged from this mess.

Start a Business in Lisbon?

I’ve been asked a question. It’s an old one. Those of you who have been reading my material for some time will know my views on buying homes abroad, and especially holiday homes. But what about businesses?

I’ve been asked whether it’s a good idea to buy a property (or two properties) in the Lisbon area. The problem with this is that every deal is unique, but let me throw out a few questions, and make a few observations.

First, I would be very wary of starting any business in the eurozone at this time. You may be successful, but it is a time to be wary. You would need to check out how similar businesses are going, and what the competition is. Is there room for more? In my experience there is very little room for many traditional businesses. The way to find out is to rent somewhere for three months and wander round the businesses and see for yourself how they are doing.

The second thing to look at is the business climate. Some countries are pleased to see you. Panama is one, Singapore is another. There are good places to work in. You dont even have to work in Singapore. How about KL? Dont want to go so far? Then why come to Portugal? There is an anti-business climate here.

You should go where the tax structure favours business ventures, especially start-ups, which is why I mentioned Panama. Check it out. Portugal has a tax structure that seeks to close down businesses.

Let me show you something very simple which will show you what I mean. Tax structures are put in place to do one of two things. The first is to bring in enough money to fund government expenses. The second is used to discourage some activity. Tobacco is taxed highly, ostensibly to discourage users. Certain activities are taxed heavily because they pollute, and so on.

However, let’s have a look at how Portugal’s tax system works. A small business is heavily taxed, and the level of purchase tax (IVA) is punishingly high at 23%. At that rate it is set to discourage the purchase of goods and services. This will tend to depress the manufacture of goods and the provision of services, and so the economy will contract. That is apparently what Portugal’s government wants. Is that the kind of business environment you want to enter?

Let me explain how revenues are usually collected. All taxation is primarily based upon the maximising of revenues. This is done by using a bell curve model and test taxing. A bell curve is a mathematical structure which looks like a pregnant woman, or a guy with a beer gut, viewed sideways. In other words we have a straight line to the right, and a curve to the left. The curve starts at 0 at the top and ends at 0 at the bottom. Each of these points represents the collection of zero tax.

What any government seeks to find is what is called the sweet spot, the band where most tax is collected, the fattest part of the curve, or the furthest extent of that beer belly. When you find that region you keep your tax levels close to that point. If you move away from that band you will automatically get less tax. So, if you raise taxes it means either of two things. It either means you haven’t found the sweet spot yet, or that you want to decrease the tax take for some reason, or, alternatively, seek to depress that particular market.

Portugal has decided to make its tax system punitive instead of productive. It has moved away from the sweet spot. There will therefore be a lower tax take, and people will be discouraged from making money. That’s not a good environment in which to start a business.

It doesn’t mean you wont be successful, but it does mean there are head winds to cope with.

There are other points to make on this subject, but I’ll come to them next week.
john

Greece: After the Euro

I have been saying for some time that it is impossible to second guess the way the eurozone mess is going to go because of the continued idiotic interference of politicians. I have also said that the euro is a currency that survives purely on confidence. Well, I think we have just had a serious change in perceptions.

Confidence in Greece using the euro is evaporating fast. Once that mood gets enough traction it will be impossible to stop, and the country will be forced out of the eurozone simply because it will become a monetary wasteland.

Those of you who read the New York Times (probably not a lot) will have noticed some interesting articles recently about Greece, Italy and Spain.

The news is that large corporations in the US and other countries are preparing for a Greek exit from the euro. Several companies, including Visa, say they can cope with a Greek exit within 24 hours, and they have contingency plans for a new currency. It looks as though politicians are going to be side-lined on this issue at last.

The problem is one of confidence. All fiat currencies rely solely on confidence. Hard currencies are backed by something else, usually gold, maybe oil. Fiat currencies are backed by consensus. If you look at a euro note you would be hard put to work out what it really is, who printed it, who guarantees it, and what it’s supposed to be worth. It might have a 20 written on it, but what that 20 is worth is another matter.

The fact that more and more international companies are questioning Greece’s ability to survive within the eurozone (which is really so obvious only a politician cant see it) means that confidence is going. With that gone, the currency is effectively gone too. It’s no good a politician saying we can paper it over. If no-one believes the politician, that statement is worthless. International businesses have simply stopped believing the politicians.

The question is, who is going to pay workers, and with what. Greek companies will have to do what they have to do, but what about international businesses? What about trade? Most firms dealing with Greece are already demanding money up front. Banks are already organising transport mechanisms to get bags of cash over the border to pay workers. Obviously with a currency change all banking will come to a halt.

This also means that companies have emptied their Greek bank accounts. All this worsens the situation, and it is clear the euro in Greece already has no international value. There could still be a proper rescue but the effectiveness of that rescue would have to be believed. Unfortunately no-one believes there can be any effective rescue. One of the major political problems is the stark reality that Greece has not put in place a single reform demanded as part of the previous bailouts.

If you look at the fundamentals, Greece is in a far worse position now than it was three years ago. It long ago went beyond the point of no return. Businessmen are realists. I would say it’s over.

The real question then is, what happens about Spain and Italy? I note the airlines are making contingency plans for a Spanish exit. I think that might well be good for Spain, but it will put enormous pressure on Portugal if Spain does decamp. I’m not convinced at this stage, but I think it’s all over for Greece. If the politicians hang it out much longer they will do enormous damage to the whole european economy.

There are interesting times ahead. Let’s just hope we can get the Greek thing over and concentrate on the next problem.

A massive devaluation is on the cards for the new currency. That will make property cheap. But it wont solve the dead-beat state of the economy or the various restrictive practises which are still in place, and look likely to remain, or the massive government subsidy situation, which presumably is about to recoil from a serious shock after the bailouts stop.

One other interesting fact. Forgers have stopped bothering to forge euro notes. That is significant. If the forgers dont think the currency is worth forging what the heck are the rest of us to think?

Now might be the time to start looking at nice tourist spots with a view to buying after the crash. But do wait for that crash, it’s coming.

john

Unique Property Bulletins

The latest members’ bulletin on the Unique Property site lists some interesting items, but what really interests me is the way prices have come down for certain types of property.

I have over the years been featuring barns for conversion in Wales. I dont know why it is, but there seem to be more barns west of Oxford than there are to the east. For a while Devon was riddled with barns for conversion, and the number turned into an avalanche after the last foot-and-mouth scare. There are still barns available in Wales. The trouble is I think they are going to be available for a long time as they are priced well over the odds.

Some of the barns available in Wales cost £200,000 in their unconverted state. That is a ridiculous price. Compare that with a barn in Kent with a massive roof that looks to be in pretty good condition which is on the market with a guide price between £50,000 – £70,000.

There used to be a shortage of woodlands for sale, but that has also changed. There are woods for sale in the south all the time, and once again, prices are keen. A small site of approximately one hectare, again in Kent, is up for auction with a guide price of around £10,000.

There is even a double available. Half an acre of woodland with a barn shelter which might be developable.

Churches are on the market in ever growing numbers. When I first started the Unique property site there weren’t that many churches for sale. In fact, back then, everyone wanted a church they could convert into a home. Now the churches for sale are those that have already been converted. However, there is a rather nice Methodist chapel in Kent that is for sale at a very reasonable price. It looks rather nice, with some nice timbered beams, and would make a lovely home.

I am constantly being told that prices are still rising in London and the South-East but I cant see the evidence. In fact the latest Unique bulletin shows just the opposite. I think it is time I dusted off the old Auction Index to see how things are going. I suspect we may find that prices are at last sagging their way to a more affordable level. I’ll keep you posted.

john

Property Markets-2

Property Markets

Let’s start part two of this Property Market update with some figures.

In the first place I keep saying that rental costs and mortgage costs are roughly in equilibrium in the UK which means house prices are not about to collapse. That means, in the short term, house prices will remain roughly where they are. By short term I mean less than eighteen months.

On the other hand, if wages relative to inflation keep falling, then less money will be available for housing costs, and rents will come under pressure. That pressure may well start to show itself next year.

If rents come down, mortgage costs will start to look expensive. That will put pressure on house prices. If interest rates rise that will put more pressure on house prices. The medium term outlook therefore for house prices is for them to fall. By medium term I mean anything from 1-3 years.

The long term? Oh come on. Dont ask silly questions. Armageddon; the fairy Tinkabel arrives; take your pick.

Long term is a bit dubious owing to the fact that there are about 4,000,000 interest-only mortgages out there in the UK, As it happens, I have one myself. When the term is up (admittedly some considerable number of years away) what am I and my fellow unit holders planning to do? Redeem the darn thing? I should coco. We will all have to roll it over. And what terms will we be offered? At least my interest only mortgage represents less than 30% of the value of the house. In fifteen years time I hope it will represent quite a bit less. On the other hand, how many out there will be hovering close to the actual fire sale value of the house? Nasty!

According to figures published by various organisations the average buy to let (B2L) investor is getting between 4.5% and 7% gross return. Let’s say the general average is therefore 5.5%. If that’s gross then you have to take off insurance, maintenance, breakages, etc. The Inland Revenue, not noted for its generosity, allows 10% to cover all this. Hold on, if you are only getting a 5.5% return on the investment before taking off 10% for expenses………

Yikes, these guys are running on empty. Now what happens when the Bank of England raises interest rates by 1%? Suddenly you have several million mortgage holders going bust at a rather nippy rate of knots. What’s that going to do to the housing market?

Anyone looking to start a business in buy to let needs to take a course in therapy first.

But interest rates aren’t going to rise any time soon, are they? In fact, there is talk of lowering them still further.

Hmmm. Let’s move forward to 2014. Isn’t that when the Bank of England next needs to do some serious refinancing? If the UK is still limping pretty badly this time next year there is a serious risk that the UK will lose its AAA credit rating. That will put a nasty dent in the low interest rate scenario. It could very well lead to the UK having to raise interest rates to at least 1%. That’s enough to do damage to property businesses that are already running at next to no profit. That would lead to at least the worst B2L businesses selling up, which will naturally lead to more downward pressure on house prices.

We already have few first time buyers in the market. If the B2L buyers dry up, and instead become net sellers, then we have nothing driving the bottom end of the market.

With prices continuing to fall the whole scenario of 90% mortgages will also dry up. What sensible business is going to offer 90% finance on a commodity that is losing value by even 5% a year? In twenty-five months the deal will have gone negative.

90% mortgages are likely to disappear if things continue the way they are. The industry is looking at mortgages ranging between 50%-80%. That’s going to seriously impact on the number of buyers.

If the situation develops along those lines you are looking at a serious house price collapse.

Those of us who bought back in the early nineties dont care. We bought cheap. Our mortgages cost us peanuts, and the rent is still coming in. Even if rents drop 20% and mortgage costs double I still have a comfortable business model. But how many people bought property when I first put out my book on buy to let in 1993?

Nobody asks me to join any think tanks on this problem, but here is a thought.

The banks are going to have to set up some kind of arms-length businesses which will buy repossessed properties, and rent them out bringing in an income to service the debt that has built up on the under-water mortgages. I dont know how this would be affected by the regulations they are bound by, but I’m sure a very simple business situation could be legitimately set up to deal with the huge load of non-performing mortgages. I’ve even got a snappy little name for the new scheme: Rent to Redeem. Is that going to be the next property fad?

As you can see things are set to get much worse. After all, you simply cant have a situation where no-one’s making any money out of the real estate on which the country depends for its wealth. The UK no longer exports to the world. We have to rely on some sort of intrinsic wealth. If that is leaking away, we are all in big trouble.

Next week I’ll cast a gloomy eye on some other countries.

john

Real Estate Update-1

Real Estate Update-1

We are halfway through the year. How are things turning out?

I said at the end of last year that I expected house prices in the UK to stay much the same, or drop about 5%. So far, that’s how things are going. I dont envisage any change over the next six months.

I said that prices in Spain would drop between 10% and 15%. Once again that is what has happened. It’s happened slightly quicker than I expected, but that pattern will continue. Those of you who read all my stuff will know that I expect the price of an average 2/3 bed flat on the Spanish coasts or the Algarve to stabilise at prices in the €60-70k zone. Anyone paying more than that is throwing money away. I have noted that prices have already dropped to €75k for two bed flats in some of the tourist destinations. We still have a way to go.

I have also suggested that there has been a change in buying habits and I expect a severe contraction in the holiday home market in Europe. I dont think the retirement home market will change, but holiday homes have become a liability rather than an asset. It’s a market that is over.

I said I had no idea how the euro situation would pan out, and I still dont know, except that I did foresee politicians hanging it out (kicking the can down the road — extend and pretend — or whatever terms you prefer). That is how things are going. How long this mucking about can go on I still dont know, maybe another year, maybe more, who knows.

One thing is clear, things are not getting better, they are getting worse.

At the end of last year there were rumblings that Italy’s largest bank was on the verge of collapse. It’s been propped up, sort of. There have been worries that France is bankrupt, and Spain is too. However you look at it the whole thing is a total mess. That is not a good basis on which to do business across frontiers, or to get involved in property dealings.

The UK is no better off. The country’s debt equals its entire annual output. That’s suicidal. The traditional view is that once the figure goes above 90% you are on the road of no return. Maybe the country can work its way out of the mess. Unfortunately, the trading partners on whom we depend are broke. You cant increase sales to people who have no money. That spells a long period of languishing economic patterns. We are dependent upon the people using that pesky currency the euro, and the euro is losing value on a daily basis. As it loses value so the UK loses export cash, and so the £ looks more and more frail. In this situation we all go down together.

Let me go back a bit. The average boom period for the UK property market is about seven years. The average hiccup period is about 2/3 years. The average full-on property crash lasts 7-10 years. This situation is worse than that, thus we are looking at more than ten years to get things back on track. At one stage I suggested 2015-2020 as a likely period for the return of a positive housing market in the UK. That’s a guess and so isn’t worth much, but if asked to guess now I would say that is looking increasingly optimistic. A return to the good times much before the end of this decade is unlikely.

Let’s have a look at some simple maths. You all know I love trying to make figures stack up.

Because of the abnormally low interest rates set by central banks across the world, savers are having a hard time. That means money is being taken out of banks and put into other areas to get better returns. That is causing bank assets to drop drastically at the same time that their securities (mainly real estate) are losing value. That means the whole banking system is on skid row.

Remember we live in a capitalist society which rests upon a solid banking system. That means our whole economic way of life is threatened. That is not an academic matter, it’s serious.

The entire developed world’s banking system and currencies are flying by the seat of their pants. Put another way, we have no security of value anywhere in the western monetary system. We are all betting blind. It’s fun late at night playing contract whist and bidding blind, but it isn’t much of a way to win tricks.

I cant possibly deal with this whole question in one short blog, so next week I shall bombard you with a whole list of frightful figures. I dont want to frighten you, but as I never tire of saying, the bad news is more important than the good news. If you have the bad news you can at least prepare yourself.

john

France Part 3

France

The question is: Is France living on imaginary money?

The answer is in part “yes”. The running costs of France S.A. are greater than the government’s income. They cant print money to pay the difference so they have to cheat. They have already raided various pension funds. Excuse me, but I remember a certain Robert Maxwell raiding the Daily Mirror pension fund. You just dont do that. The French government has done it. What happens when so many hapless French folk retire? They are going to be in trouble.

I’m sorry to say that the French have just voted in a socialist president. That’s the last thing they need. Way back in Part 1 of this saga I noted that capitalism is the system that pays socialism’s bills. We are in a bit of a spot because so much socialism across the western world has made a good attempt at muzzling capitalism. The trouble is, there is no longer enough money to pay the bills. Socialism’s days, in its present form, are numbered. The socialists have run out of capitalists’ money. The trouble is, capitalism isn’t looking too healthy in many parts of the world either. It’s a disaster in America, total chaos in China, and looking dodgy just about everywhere else.

The current way round this problem I noted in Part 2. Think War Bonds in 1940’s Britain. Do any of you remember what your parents or grandparents had to say about them? Does anybody know of anyone who got their money back? Of course not. That’s not how these things work. It’s fraud. It’s theft. It’s crooked accounting. It’s sleight of hand. It’s survival. And that is how France is surviving.
The banking system is bankrupt. Loans outstanding cannot be repaid. Everything hinges on the skyhooks provided by the ECB.

This brings us to one very simple question which no-one dares ask. How much is a euro worth?
Look at a sterling currency note, then look at a euro note. The sterling note is backed by a guarantee. Dont ask too closely what that guarantee is worth, but what’s on a euro note? Nothing, absolutely nothing. Who even issues it? It’s a joke. No-one guarantees anything. It’s just a bit of paper. It is worth what anyone says it’s worth. While people think it’s worth something, then so it is. When people lose faith in it, it becomes worthless. It’s a fib which people in believe because it is convenient to believe it. I would not like to put too much store by it. I think it is dangerous to have one’s wealth denominated in euros.

In this respect France is not much different from any other euro-zone country. On the other hand, France does have a world class economy. It will survive, euro or no. However, I would not buy into France any time soon. You would be buying into a lottery. Buy in Norway, buy in Singapore, but dont buy in France.

I dont know whether we are entering the end game of this particular mess, and I dont know how it will turn out, but I dont like uncertainty, and neither do financial markets. If you are thinking of putting more money into France, then change your mind. You can wait. France wont go away. Wait till the disaster happens, then buy.

There was a second question in that original email that started me off on this rant: why is everything so expensive in France? I dont know. Is it? I was last there about nine months ago and I didn’t notice. If things are expensive it is because the place is falling apart. That’s one of the things that happen. It means no-one can survive at the normal level, so the level is ramped up, and so many people are sucking value out all along the food chain. More evidence that all is not well.

The third question is: Is France falling apart economically speaking?

I dont think so. But it is not a healthy economy. Two points need to be made here. The first is; it’s the government that’s broke not the country itself. Secondly, it’s all very well to claim that France is a socialist country. That is simply not true. It is a capitalist country that spends all the profits of capitalism on socialism. That’s not the same thing at all. Being a capitalist country it runs on capital. That means it can only function properly with a clean efficient banking system. That it doesn’t have. If the banks are broke then the oil that keeps the wheels of industry turning is not available, and industry starts to creak.

France is not that much different from any European state. The tentacles of government have encroached so far into every aspect of life that it is, like ivy up a tree, slowly killing the source of its lifeblood. Things have to change, but I dont see that people are ready for change. After all, what is happening across Europe? Folks are voting for more ivy to suck more lifeblood from a stricken tree.
This thing has to get worse, and it is going to take time. There is a long way to go yet, and most of that journey is, I am sorry to say, down.

One other point. Countries are trying to pay down debt. Make it simple. Think of someone trying to pay off an underwater mortgage. The more money you throw at it the more money you are throwing down a hole. The money vanishes. Why? Because the value of the asset is decreasing, sometimes faster than you can throw money at the debt secured on that asset.

If you print money to pay off government debts what’s the difference? The money goes down a hole It isn’t spent, it was already spent before. You are trying to pay back a debt, not increasing the money supply.

Hold on, that means all this money printing wont bring on inflation. That means inflation wont eat away the debt. Deflation will continue making the debt bigger. Oh shit!

That’s what’s currently happening in Europe. The central banks are hastily printing money to fill a hole that gets bigger with each day. In short, this mess gets worse month by month, and will continue to get worse until someone stops playing silly buggers, and looks out the window and finally sees the massive train-wreck.

The cost of living may be going up, that’s because of taxation — money sucked out of the economy — and some commodities like corn, wheat, sugar, oil, and so on gaining in price, but how much are large items like houses going down? Balance one against the other and we have deflation not inflation.

My survival bill for the year is about £6,000. A 3% rise in that equals £180. My home was worth about £400,000. That’s decreased in value by 5% over the past year. That means I’m poorer by £20,000. Take off the £180: hey guys, that’s some deflation.

Back to France. One final small point. You should also remember that France’s financial system has a nasty habit of crashing. It’s done it four times in my lifetime. The £ sterling has been a reliable store of wealth at least since the thirteenth century. France has had four different currencies in my lifetime. Do you need me to spell it out?

Maybe one day in the not too distant future I will retire to southern France and live a disgustingly self-indulgent lifestyle drinking fine wine and eating far too much rich food. In the meantime I’ll wait until things get much worse. Then I’ll buy. But I wont rely on the French economy to provide me with a pension.
john

Invest in France -2

Invest in France

In part 1 of this discussion about whether to invest in France I said that money used to be made from gold and silver, and the amount of precious metal in each coin gave that coin its value. Further, the amount of money in circulation stayed roughly the same relative to the goods that could be bought and sold within the community. If the community produced more goods then that store of money was worth more. The money supply could reasonably be expanded to keep goods and money in equilibrium.
Once the money supply is extended beyond the increase in goods then you have inflation: money begins to be worth less. That is what has happened throughout the twentieth century. However, there is a period when you have more money in your pocket and the value of that money hasn’t yet dropped. There is a delayed effect to inflation. The usual theory is that inflation is generally 2/3 years behind the increase in the money supply. That means that the money gets into your pocket before prices go up, and you always feel more wealthy despite the fact that the value of the money is decreasing.
There are problems with this. The first is that in order for the wealthy feeling to persist inflation has to be continuous. Once the vicious circle stops, people start to feel poor. This is why we are always told that a little inflation is a good thing. We are continually feeling more wealthy, and in order not to allow inflation to have it’s real effect on us we spend our increased money supply buying things before they rise in price. They then rise in price, but we’ve already bought them so we feel even more wealthy.
Obviously there are times when the whole system comes adrift, and there is a crash. That usually happens about once a decade as no-one has worked out how to really manage this form of economy. Often the crashes are minor adjustments. Occasionally those adjustments are of a more serious nature. We’ve hit one of those right now.
All of this is down to one very simple problem. Prior to the twentieth century most countries either had no plan to cope with the poor, or they had one based on a redistribution of a certain amount of the wealth of the community. That was in Europe mainly derived from tithes, or the appropriation of a tenth of the wealth created. This was distinct from taxes which were in the old days basically a device for collecting money to pay for wars.
In the twentieth century our whole way of doing things changed drastically. Socialism became a political force. Capitalism was seen as a way of making lots of money. Governments began to see that socialism could be harnessed and used to extend government, and socialism could be paid for from the profits of capitalism.
Unfortunately, that system creates an ever expanding bureaucracy which eventually becomes top heavy and strangles the wealth creating side of the community. It has been the downfall of every state since records began. Once the payouts become too large to be supported by the payers the system implodes. That’s happened in Europe, Japan, and the United States.
There is scarcely a European state that lives within its means. That means deficits just increase and increase. Central banks have found a way to deal with this. They print money. That causes inflation, and inflates away the debt. Let’s go back to my example of the US$. If you had bought US government bonds in 1912 and they matured 100 years later, when you went to the government to get your money back you’d only get 3 cents. The American government would have had 100 years’ use of your money, and returned you only pennies.
That’s why governments like inflation. It’s a form of taxation. It has been rampant throughout the western world for the past 100 years.
Now let’s answer that question I left you with last week. Will the French banks get their money back?
No. They’ve lent it, and it has been spent. It’s evaporated, and wont be coming back.
On the other hand the central bank, the ECB, will issue bonds which will cover that debt with more debt. The bonds will be equal to some of the debt, and those bonds will be negotiable. That means the banks who receive these bonds in return for the debt that wont be repaid can borrow against those bonds at an interest rate below the level of inflation (the ECB loan rate is currently 1%), and invest in something else for a much higher return, and thus re-build their finances.
By the wonders of capitalism money is created out of nothing, borrowed against, and lent out to make more money which can then pay back the original loan, and everybody is happy. I devote a whole section to this method of making money in my book on buying and selling property. I am currently revising this book. If you want a copy, let me know and I will reserve one for you. I hope the revised version will be ready by the end of this month. It is essential reading for anyone interested in real estate and money.
Back to the plot. Let’s now answer question number one. Is France living on imaginary money? It’s taken us a while to get there, but you can now see that the answer is “Yes”.
But so is almost everyone else. Next week I’ll show you what this means, and why it is almost impossible to work out what happens next. And maybe you will find that it doesn’t really matter. What an intriguing possibility.