Monday, 23 February 2009
A Credit Bubble That Can Only Deflate
Over the past two decades, the system has seen household and corporate debt grow to historical level.
It all started in the beginning of the 80's, had a parabolic growth in that same decade to only readjust in the beginning of the 90's but to only continue, even stronger, its madness course.
Nothing, nobody has managed or was willing to stop this historical debt creation.
-the Politicians kept being re elected, so this situation was seen as politically favourable.
-the bankers were amassing an astonishing amount of money, blinding them into thinking that this was solely due to their foresight and competence.
-the regulators, were supportive, pressurized to let the market regulate itself only to found out that they created the perfect ground for the development of this current crisis.
So the reality is different, the accumulation of greed, incompetence and blind liberalism imploded on its own weight: Today we are witnessing the most serious financial, economical and political readjustment over a a century.
Some statistics to understand the extent of the problem:
Over the past decade, Finland's population has increased by 153,135 persons, or three per cent.
In ten years, the number of passenger cars has increased by over 600,000, or 32 per cent.
Over the same time period the number of dwellings has gone up by 13 per cent.
Households in Finland are getting more and more indebted. Their rate of indebtedness, that is, credits relative to disposable income, went up to 103 per cent last year, which is higher than ever before. In 1997, households' debts amounted to 59 per cent of their disposable income
The consumption of alcohol has gone up by 1.8 litres, or 26 per cent, per capita in ten years.
An update on the housing market or the economy in general
The building permit for residential is on free fall since 2006. One could argue that the peak was reach in 2000, which could be significant in term of what kind of correction we could get.
History has clearly shown that a price downturn is highly correlated with a decrease of building permits (here on this chart, from 1992 until 1996).
Needless to say that until we see a pick up of these building permits, the housing market will continue its readjustment in term of price.
Consumption was allowed to be maintained at a high level up to mid-2008. Credit expansion by banks, competition between banks and a lack of regulation can partly explain that. Since then, consumers are cutting drastically their consumption. It will most probably push economists to review downward economical prospect: I still think Bank of Finland is highly unrealistic in his prediction.
Psychology and unemployment are the two factor that will speed up the housing market downturn. The latest consumer confidence supports that view. The report is pretty bleak, in fact it is the worse since the last "short" Finnish depression.
Finally governments and policy makers can only mitigate the effect triggered by the deflation of debt: household and corporates need to deleverage, see their saving rate increase and their risky credit appetite shrink. That will trigger a sharp reduction of capacities pushing higher unemployment, a unavoidable evil that will, at some point, converge toward a natural equilibrium (sustainable debt, lower prices, supply and demand match) ...we are still far from it.
In such environment, all assets price will readjust and such process has already started:
-the stock market, usually readjust the first and very fast and it did since late 2007
-the housing market, usually readjust with a lag and very slowly so it did since mid 2008 and will probably continue for the next four or more years.