The Good:
Plan B: Food, Cash, Fuel & Self Sustainability
I’ve just finished reading two very good books: Howard Ruff’s How to Prosper During the Coming Bad Years, and Garth Turner’s Greater Fool. Both books fall along the same line of logic: tough times are ahead, and it’s time to prepare.
In some respects, these two books conflict with one another, but in others, they mesh nicely.
On the subject of investing in gold as a hedge against economic catastrophe, there is conflict bewteen Ruff and Turner. Ruff argues in favor of holding physical gold and silver, which probably stems from his Austrian-esque economics. Ruff believes the future will be hyperinflationary; the US government and the Fed will churn up the money-mills to Zimbabwean proportions in an effort to escape the throes of depression. Thus, the only safe store of value will be in physical gold. But how practical is it? If I take physical possession of gold, will it be widely accepted as money in the event of a crisis, or will other commodities become the basis of money? I’m thinking a few pot plants would definitely suffice the average Canadian. In some places in Canada, this is the real green that forms the economic lifeblood of communities. I suppose it depends on your community, because I can’t see Ruff, a Mormon, advocating illicit substance production as a means of subsistence.
Turner, on the other hand, sees gold as just another bubble, akin to the dot-com and subprime balloons. In my mind, it will semingly play out thusly: as the little guys flood their capital into gold, those at the top who have the real leverage will flood the market and short their contracts, cause panic among the uninitiated, and will buy up gold for pennies on the dollar. I think Turner might see this, too; he seems to be parking his cash with a trusted money manager and hoping for the best.
Both Turner and Ruff agree on one fundamental thing: the essentials one must have during a crisis are food, cash and fuel. Ruff, a Mormon, is compelled by his Church to keep a storehold of food as a hedge against crises. He points out that, during a crisis, the first thing to inflate is food, and having a store of goods purchased when times were good will always help one hedge against the riots at Wal-Mart. He personally lived through such a minor crisis during the assasination of Kennedy, when store shelves went bare in some parts of the US as people panicked.
Turner, like many Ontarians, has lived through the 2003 brownout in Toronto. While the duration of the crisis was short, the effects highlighted the vulnerability of our modern society to energy shocks.
With no electricity, it was impossible to use the phone, get cash, check the internet, fuel up the car, etc. Traffic was snarled because traffic lights did not work. For Turner, this crisis highlighted the importance of energy self-sufficiency; he returned home that day to find his generator running and providing power for his home. If anything, he claims it shows the importance of the Boy Scout’s motto: Always be prepared (but hope for the best).
In a deeper crisis, everything goes Katrina. Without the basics, humans regress as a species. Electricity and power, like cement, coal and oil, are the fundamental building blocks of modern society, and without them, humans quickly retreat to the Olduvai Gorge. We lose a part of hour humanity as our reptilian brains kick into survival mode. People riot. Others loot.
Are we headed for a Mad Max future? It’s hard to tell. But here are some indicators:
Reuters: Impending Global Food Crisis
World’s Biggest Food Storage Company Empty Through All 2009
Alternet: Catastrophe Seems Inevitable: Will Survivalists Get The Last laugh?
Bloomberg: Former Morgan Stanley Guy: Buy Guns, Head for the Hills
Tehran times: 29 Food-Hoarding nations driving food prices even higher
A Wall Street Journal columnist has advised people to “start stockpiling food†and an ABC News Report says “there are worrying signs appearing in the United States where some … locals are beginning to hoard supplies.†Now there’s concern that the U.S. government may be competing with consumers for stocks of storable food.
Who knows what the future holds? It’s hard to imagine here in Alberta. But it could happen here. If there are lunatics who will decapitate fellow bus passengers here in this province, then surely there are cold-hearted freaks who would try to sabotage the Glenmore Reservoir. If Greenpeace can smuggle a sixty-foot banner past Syncrude security, then it’s possible for people with more sinister intentions do even worse damage, especially with the slew of company-owned airports used for shuttling oil sands workers to and from work.
Turner and Ruff might not agree on everything, but they have some foresight to recognize that the economy and its dependent social structures are in for a rough ride. Mr. Turner might not advocate going out and buying six month’s worth of storable food, but at least he has the wits about him to know the importance of having food cash and fuel on-hand in the event of a crisis.
In my mind, both these authors point to a new form of sustainability – Self Sustainability. This concept differs from self-sufficiency, and has a lower threshold of requirements. Self-sufficiency implies being totally off-grid in a geo-thermal solar bunker, growing your veggies and hunting for your food on some crown land, deep in the bowels of northern B.C., whereas Self-Sustainability points to the ability to sustain one’s self through a crisis until times are better.
From an economic angle, one can view their house as an economy. In fact, that’s where the root words of economics come from – ‘oikos’, which shares meaning with ‘house’ and ‘nomos’, which shares meaning with ‘laws or rules governing thereof’. The concepts of ‘weak’ and ’strong’ sustainability are two such rules that have been applied to national economies, and measure the ability of a capital stock to be maintained (strong), or for increases in one capital stock to offset declines in others (weak).
I suppose the best way to examine self-sustainability would be to examine your economic picture in the event of major shocks.
What would happen if you lost your job tomorrow? Will that six month’s salary you had saved up still be accessible if your bank shuts down due to a run on it? Do you have debts you’ll need to service? You can see how this can quickly descend into a worry-wart’s orgy of despair; we should not live in fear of the future. Nevertheless, a Plan B always helps, and you can’t make an effective Plan B until you’ve looked into this abyss. Turner and Ruff have helped me do that.
The original review is here.
The Ugly:
Just saw this “news†on CBC Newsworld, the story lasting a full SIX MINUTES, and I have questions:
1. What the hell is a sitting MP (Garth Turner, LIBERAL) doing writing a tendentious, negative, alarmist, freak-out-and fear-inducing book called “Greater Fool: The Troubled Future of Real Estate†which calls for a real estate market CRASH, and touting it on the liberals’ state-owned CBC? On its “Newsworld†channel no less.
2. What the hell is the liberals’ state-owned CBC doing touting a book—particularly one portending a financial CRASH as a result of policy decisions among other things—written by a sitting MP? Is this in the national interest? Is doing it over the helpful CBC banner “REAL ESTATE CRASHING?†in the national interest? Or just in the do-anything-to-bring-down-the-Conservatives interest?
3. How did a sitting MP have time to write a book? On our dime? He gets paid at least $150,000 taxpayer dollars per year plus we give him a $22,000 yearly expense allowance. The CBC gets over a BILLION taxpayer dollars per year.
4. Can I get on there and talk nonstop about the ProudToBeCanadian website for endless minutes, and get asked nothing but fluffy leading questions by the suckup CBC Newsworld anchor? (And by the way, even if invited, I wouldn’t, citing a ridiculous waste of taxpayer dollars, its inherent and total lack of it being newsworthy, insane unfairness, the fact that state-owned and state-run media should be banned in this country and therefore the CBC shouldn’t even exist…)
6. Did Turner pay taxpayers for this free ad? Is this what the CBC is doing now?
7. Does Liberal leader Dion support this use for our state-owned CBC? Did he know about this book-promoting segment in advance? Did Dion sign off on this?
Outrageous. This is an abomination. I demand answers.
EXTRA QUESTION:
8. Doesn’t Garth Turner have an demonstrated interest in the real estate market (and by extension possibly the entire economy) tanking and crashing now, if only to prove how awesome he thinks he is in prognosticating, and to possibly sell more books? And how will that affect his policy decisions and votes in the House and his demands of government?
The original review is here.
43 comments ↓
Funny negative review. It’s as if people think that folks on TV can cause a Real Estate crash, and if we all just had “happy thoughts” prices would rise forever (faster than incomes)
Bottom line is… prices are too high for the average buyer without suicide financing. This is why the prices have to come down. It’s economics 101, nothing to do with interviews on the CBC.
In the US, since the market peaked in 2006, the TV was filled with people saying the “market is sound” and “high prices are based on fundamentals”, including people like Ben Bernanke, Henry Paulson, and other influential figures. It did not prevent economic reality for causing the market to collapse.
Stay tuned Canada!
[…] Garth Turner was nice enough to post my favorable review of his book, I’ll expand on it a bit for readers who make their way back here looking for more to read. […]
Garth: Would it be fair to say that the credit crunch and the housing bubble and inflation and economic woes were caused by interest rates being too low for too long?
For once we have a politian that speaks what most of see as the truth and tries to warn people of the impending bad times ahead and all of the sudden it’s “Outrageous”and an “abomination”. Give your head a shake fella…
The negative review moron; like all conservatives, he not only believes that the government lies to the public all the time, he believes it’s their DUTY to do so “in the public interest” and is ENRAGED when they do NOT.
Now if that isn’t the single most ridiculous head-in-the-sand argument begging for totalitarianism, nothing is.
“Only tell me the good news, Uncle Adolf; we sheep can’t handle the truth.”
On the contrary, what he’s really saying between the lines is “As an Elite, you should have kept this information amongst ourselves so only ‘our own’ can benefit from the situation.”
Many thanks Garth,
Thank you for having the balls to publish Greater Fool and maintaining this great site. Bravo, well done……..
Interest rates should be 8% but after this teez on inflation with absurd low rates expect rates to clime 10-12% conservatively speaking.
Of course Garth is going to have negative press, he displays what is happening as a consequence of greed.
People are truly amazing. If they live in Calgary and their mortgage is paid off, they still cant make enough money….and yet they want their houses to be worth at least double what they paid….it reminds me of aging men who want super potency, but dont have it, so what do they do? They go buy houses in Calgary and then try to flip them to naive buyers…
Hmm. Methinks that Mr. Negative Reviewer hasn’t unloaded all his TO spec condos yet…
Garth,
I agree with #6 above. You are a man of great courage.
The negative review was extremely distasteful and offensive. It also spoke volumes about the person who wrote it.
Keep up the informative site – it is excellent!!!
Have a look at youtube for a preview of a new documentary called I.O.U.S.A
The real estate industry spin….
http://njrereport.com/index.php/2008/04/09/tracking-realtor-spin/
Doesn’t matter what country, they all talk the same language. LOL
2 comments. I’m not a Liberal (I DO live in Alberta after all) but I sure appreciate your message. Thanks for what you do Garth!
I have heard recently that TD Canada Trust is introducing a Canadian version of subprime to circumvent the intent of the new anti zero down, 40 year mortgage laws. No doubt they will be first in line to Ottawa for a bailout when it inevitable goes bust. The executive of that bank should do time for this. Short of that they should be clubbed like rented, red head, baby seals.
“Outrageous. This is an abomination. I demand answers.”
We are slowly entering the anger phase in our real estate bubble.
Stay tuned as the anger heats up in coming months as the pigs start getting slaugtered.
I think Garth is bang on the money except when it comes to gold.
Sadly, I believe the U.S. Dollar (and the Canadian Loonie going along with it kicking and screaming) will not be able to get out of this nosedive.
I wish I shared Garth’s faith in the abilities of the chaps at the Fed and BoC. He must know that since deciding to no longer publish how much new money Uncle Ben is injecting into system that independent analysts estimate he’s secretly increased it to around 18% last year. How can reducing the purchasing power of every dollar bill out there by 20% in one year alone not be inflationary?
Like Mr. Ruff I prefer to plan using the historical track record: that being the percentage of fiat currencies that have survived more than 100 years: zero.
FYI: We all know what happened to gold during the stagflation of the 1970s (from $35 to $650 by 1980, or almost a 2000% ROI), but not many people know how gold fared during the Dirty Thirties. During the Depression the average annual per-ounce gold prices in US Dollars were as follows:
1931: $17.06
1932: $20.69
1933: $26.33
1934: $34.69
Newsflash in Calgary:
All real estate snake agents will have lobotomy installed soon. Mario T. at the Herald no longer pimped out.
Bacon soon in your local market for hungry renters denied too long.
Newly released Calgary Real Estate Board Stats (http://www.creb.com/media/stats_pdfs-graphs/res-stats-pdfs/2008/Public%20Stats%20July%202008.pdf) shows a 9.8% DECREASE in average price for a single family Calgary metro home in July 2008 from July 2007. ($505,920 -> $456,380)
Nothing like taking a 10% / $50,000 (average) equity hit in one year! If someone got a 25 yr mortgage @ 5% last year, it would only take 4.5 years of mortgage payments to recover that 10% loss… (10 yrs if they got a 40 yr mortgage @ 5%)
The Victoria Real Estate Board has just released the stats for July:
GV – Greater Victoria
July 2007 shown in ()
MLS Sales – 723 (922) – Down 22%
MLS listings – 4557 (3402) – Up 34%
GV SFH Average – 578,177 (574,753) – Up 0.6%
GV SFH Median – 529,900 (515,000) – Up 2.9%
GV SFH Sales – 335 (453) – Down 26%
GV Condo Avg. – 302,635 (306,537) – Down 1.3%
GV Condo Median – 285,000 (267,750) – Up 6.4%
GV Condo Sales – 166 (240) – Down 31%
Average and median house prices have been falling for three months in Victoria.
Here is a Victoria Real Estate Board graph:
http://photoshare.shaw.ca/image/a/0/7/128719/savg.jpg?rev=0
This graph shows median and average prices:
http://photoshare.shaw.ca/image/a/0/7/128719/tanking.jpg?rev=0
Correction to Victoria Stats :
MLS Sales – 616 (922) – Down 33%
Roger,
That is a carbon copy of Calgary’s market a few months ago. (Now down 10% ($50k ))
I noticed in the CREB newsletter for July they are not talking price increase as an incentive, but referring to “selection”.
Prices in Victoria of Single family Homes (SFH) has been dropping for three months:
Graph of Victoria SFH average prices (prepared by real estate board):
http://tinyurl.com/vreb-graph
Graph of Victoria SFH average and median prices:
http://tinyurl.com/victoria-prices
There has been a lot of denial by the local agents and real estate developers but the media is now starting to report the facts.
That review was very lousy. Who wants to be compared to some wingnut Mormon religious fanatic? Howard Ruff is like the broken clock that manages to be right twice a day. He has been on this nutball survivalist gig for decades and he should spend his time preaching to the converted in that great USA anal orifice known as Utah.
Dmitri Orlov wrote some incredibly intelligent and lucid essays on the coming collapse of the USA political and economic system that actually makes some semblance of sense. His essays are full of insight.
http://www.energybulletin.net/node/40919
The Ugly review is a totally execrable piece of hack work. This guy never hear heard about the marketplace of ideas.
Mitchell, it isn’t really a $50K equity hit if the value wasn’t really there to begin with. I think that’s the point of Garth’s book and blog – real estate was and continues to be generally overvalued. I bought my home in Calgary 13 years ago for $320K. Last year they told me it was worth $900. I never believed them. Am I crying over the fact that I may have lost $90K in value since last year – NO, because psychologically I still believe I have a $320K house. Even if my suburban home is someday worth less than $320K, I won’t lose sleep because I paid off my mortgage three years ago and have no other debt.
The realtors, banks and mortgage fraud artists really did a number of people here in Calgary and people are starting to feel the pain here.
With all of the negative economic news hitting us lately, I am sure most people are feeling rather uneasy about their economic futures.
I think most people know (deep down inside) that the “boom times” we have been experiencing these last few decades have been solely as a result of our collective society piling on more and more debt.
A saying by the economist Ludwig von Mises comes to mind. “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”
According to Statistics Canada, the M3 money supply in Canada expanded by 14.0% over the last year. I think it is hard to argue against Ludwig von Mises point of view.
I would like to strongly recommend to those people who are considering going in debt to purchase something they do not absolutely have to have, that they should postpone their decision to do so for one year, to see how the bursting of our current historic credit/debt bubble is playing out.
My guess is that the (debt fueled) party
we have been experiencing over the last few decades is over, and that the hangover(the deleveraging process) is about to begin.
I would also strongly recommend to those people who are considering going into debt to purchase something they do not absolutely have to have, to speak to someone who is really old (like in their 80’s) and ask them what their opinion of piling on debt is, and also what their recollection is of the “great depression of the 1930’s”.
With all of the negative economic news hitting us lately, I am sure most people are feeling rather uneasy about their economic futures.
I think most people know (deep down inside) that the “boom times” we have been experiencing these last few decades have been solely as a result of our collective society piling on more and more debt.
A saying by the economist Ludwig von Mises comes to mind. “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”
According to Statistics Canada, the M3 money supply in Canada expanded by 14.0% over the last year. I think it is hard to argue against Ludwig von Mises point of view.
I would like to strongly recommend to those people who are considering going in debt to purchase something they do not absolutely have to have, that they should postpone their decsion to do so for one year, to see how the bursting of our current historic credit/debt bubble is playing out.
My guess is that the (debt fueled) party
we have been experiencing over the last few decades is over, and that the hangover(the deleveraging process) is about to begin.
I would also strongly recommend to those people who are considering going into debt to purchase something they do not absolutely have to have, to speak to someone who is really old (like in their 80’s) and ask them what their opinion of piling on debt is, and also what their recollection is of the “great depression of the 1930’s”.
http://money.canoe.ca/News/SmallBusiness/2008/07/31/6319796-cp.html
“It’s a bit of a shocker,” Douglas Porter, deputy chief economist with BMO Capital Markets, said of the Canadian results.
“It’s disconcerting given that almost every early indicator we had was pointing to modest growth and to basically have every missing piece of the puzzle wind up on the down side is unnerving. It does suggest there is some very real underlying weakness here in the economy.”
Worldwide economic problems abound and they’re just *starting* to see weakness at the doorstep? Is the windshield covered with grime, or are they just lying to the passengers about what lies ahead? We need more lighthouses and warning buoys in these turbulent waters, and fewer captains sailing with their eyes closed.
At least Garth posted a negative review and not only positive reviews..the negative review made soem innacurate comments but hey he might be stuck with a condo or two he can’t unload. Comment 15 – I am no gold bug per se, but agree with most of your comments. Forecasting anything is fraught with risk but even more so for gold ! Anyhow, I have read through many financial crisis and bullion itself (rarely gold shares as these usually perform poorly in a time of risk aversion) does hold up well. Unfortunately, the primary government/central bank policy in dealing with these type of issues is currency devaluation / credit inflation. However, it appears that the credit game is coming to an end so be prepared for some sort of intense deflation (late 09/early 2010) in my opinion before the actual serious inflation which might happen in the eleventh hour(2012??). So if we do have any sort of deflation over the next 2-3 years (signs include emerging psychology of saving, many borrowers and growing numbers of lenders not willing or able to extend credit / falling base money in US and trends in velocity of money / dramatic initial decline in total credit outstanding in US / serious underperformance of gold shares to actual gold / and underperformance of silver to gold – signs of deflation mentality in my view), gold might drop significantly (low 700/maybe 600s?) but the point is most people should consider owning a decent amount of actual gold/bullion as a hedge against extremely agressive central bankers/goverments acting in any deflationary situation. Stay away from US ETF..there are other options out there even for those who do not want to own coins. Once the housing correction gets truly difficult, look out for all kinds of unusual and outright bizarre ideas coming from governments / central bankers. And of course, the minority that is diligent in managing their money and who have done what they have been told (save money, pay off home or save a large DP for a home, invest in RRSP) are going to suffer even more than the many who were reckless and want to be bailed out at the expense of the prudent ones. At least one who owns some gold can have modest insurance against the impoverishment that often accompanies these type of once/twice in a century crisis we are in. After this period though, the opportunities will be amazing.
I understand Garth’s view on gold, that it’s a bubble. But not yet, he’s too early, however it will be a bubble. The view that when everyone runs to a specific asset class, the price inflates and then the ‘smart’ money or the ones in first gets out with the gains is correct. This happens again and again ie. dotcom, real estate, commodities? etc.
But bubbles don’t end until everyone (the public) is in because only then do you run out of buyers, ie. the greater fool in RE.
The question then is, Is the public in Gold? How many people do you know own Gold or even talk about it? When you go to dinner parties, Are people talking about Gold? Most of them are still talking about RE.
So Garth’s analysis is correct but his conclusion is wrong, for now. That’s why you want to own Gold now, so that when it becomes a bubble, you sell. And you’ll know when to sell because everyone will be talking about it!
Study the history of Gold and you’ll see what I mean. Gold is basically a vote of confidence on the economic/financial system you’re in. If you have very little or no confidence in a specific fiat system(s) then you run to Gold (and Silver of course) because it’s the ONLY true store of value throughout history.
Greet the Fear. Fear the Greed. – Warren Buffett
The inflation vs deflation debate is a endless subjective issue.
My own conclusion and 2 cents is this. It all depends from which perspective you’re looking at it from and you can have both. There is deflation in RE in the U.S (soon coming to Canada), there’s deflation in car values, electronics, furniture and everything that people don’t need or that has been over-produced.
However, there’s inflation in everything that has been under-produced or valuable. Things like energy, food, metals, commodities and of course precious metals like gold & silver.
I read this somewhere and the new term was Uflation. Everything U need goes up (inflation) ie. food, energy etc. Everything U don’t need goes down (deflation). ie. if you’re selling your car, flat screen tv, computers, toys etc. you’re going to get less for it.
One of the main reasons why I don’t believe there’s a commodities bubble or a gold bubble right now is this. Countries like China, Japan, the European countries and the Middle East, well basically everyone holds US debt, Do you really think that they’re happy holding trillions of $$$ worth of depreciating US paper? If you personally held $1 million US cash right now, would you keep it? I believe that they will convert that cash into things they need to build their own infrastructure and economies.
The idea that the world needs the US is a lie & a delusion. That’s like saying a family needs their crackhead junkie son so the family can drain its savings on his addiction.
The US is addicted to debt and the world is waking up to that fact and trying to figure out what to do. They are already starting to cut him off.
Independent in Calgary – post # 23. You made some excellent points. Several years ago coffee time conversations at work would enevitably turn to how much houses were now “worth”. People would puff up with pride as if their private parts appreciated at a 20% a year clip along with their house. I tried to explain that house appreciation was a huge red herring that only resulted in increased property taxes for no additional services. Houses are a shelter, not an investment and that is their real worth.
It was only when I mentioned that it was very difficult to realize these so called gains in a meaningfull way because if you sold, you still had to buy. The only way was to sell and then rent, for which the very suggestion was a kick to their pride. The other way was to sell, leave Calgary, and go back home to Newfoundland or Winnipeg, or wherever the cost of housing was lower, and live mortgage free. Over the past few years, 1/3 of our office actually did exactly that. Count them NOT among the greater fools!
CREB’s Ed Jensen said:
AUGUST 1, 2008 — “The (Calgary) market is presenting a good selection for home buyers, but waiting too long may present less opportunity in the future, as we continue to move into a normal market,†Ed Jensen
continued.
“Buyers who wish to take advantage of the zero down mortgage program will need to hurry as this
program, and the 40 year amortization
program, are discontinuing shortly.”
There’s nothing quite like a ‘normal’ market to get people buying houses, right Ed? At the rate this is going, a lot of careers in the Calgary real estate industry could be “discontinuing shortly.”
Are there many fools left in Calgary? If so, they’d better do as Ed says and hurry on in…
Patiently watching events unfold in Ottawa.
I just finished reading an article in the LA Times about would be sellers/first time landlords. These accidental landlords are hoping to rent their unsold homes out at high rental fees. One woman to date has not been able to rent her second home out and expressed concern over the difficulty in paying two mortgages.
What will happen when the economy stalls further and rent increases also stall? What then happens to the accidental landlords when their mortgages are due for renewal and inflation has increased interest rates?
Newsflash: Calgary Herald 8/2/08:
The “Silver” lining should occur in 2009 as prices stabilize and real estate values climb back up.
What a bunch of crap!!! Its truly amazing the propaganda the Herald is spewing out, infecting the minds of the naive. Where are these people going to come from that will sustain this boom? If its hard for the normal dude making $35 bucks an hour to buy a $350K shack in Calgary, how is the walmart person or anyone else going to afford it? The dishonourable Ed Jensen, the chief of chafe, is surely the culprit lesion in this abnormality.
I do notice that Mario T. wasnt the one writing this article. Perhaps he became a eunuch or the lobotomy was successfully performed at Rockyview Hospital in the neurosurgery ward.
Does this sound familiar and where we are heading???
The Japanese asset price bubble (“bubble economy”) was a time of skyrocketing land and stock prices in the Japanese economy, that peaked from 1986 to 1990 and hit bottom in its valuation of the Nikkei index in 2003. It is one of the more famous speculative bubbles in economic history.
In the decades following World War II, Japan implemented stringent tariffs and policies to encourage the people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.
With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. The rates for housing, stocks, and bonds rose so much that at one point the government issued 100-year bonds. Additionally, banks granted increasingly risky loans.
At the height of the bubble, a commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California. Japan regained a sense of national pride and assertiveness as a result of its new power, which manifested itself in works such as The Japan That Can Say No by Shintaro Ishihara and SONY founder Akio Morita. Many outside Japan were alarmed by this resurgence, leading to criticism from foreign observers. Michael Crichton, for example, wrote Rising Sun at this time, which highlighted US concerns with the growing Japanese economic power.
Prices were highest in Tokyo’s Ginza district in 1989, with choice properties fetching over US$1.5 million per square meter ($139,000 per square foot). Prices were only slightly less in other areas of Tokyo. By 2004, prime “A” property in Tokyo’s financial districts had slumped and Tokyo’s residential homes were a fraction of their peak, but still managed to be listed as the most expensive real estate in the world. Trillions were wiped out with the combined collapse of the Tokyo stock and real estate markets.
With Japan’s economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and Japanese manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral. The Japanese Central Bank set interest rates at approximately absolute zero. When that failed to stop deflation some economists, such as Paul Krugman, and some Japanese politicians, spoke of deliberately causing hyperinflation[1]. To this day, 2008, the Japanese Central Bank has the lowest interest rates in the developed world.
The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. They would sometimes resort to depositing their block of investment cash, as ordinary deposits, in a competing bank, which would bring howls of complaint from that bank’s Loan Officers and Investment staff. Meanwhile, the extremely low interest rate offered for deposits, such as 0.1%, meant that ordinary Japanese savers were just as inclined to put their money under their beds as they were to put it in savings accounts.[2] Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called “zombie businesses”. Eventually a carry trade developed in which money was borrowed from Japan, invested for returns elsewhere and then the Japanese were paid back, with a nice profit for the trader.
The time after the bubble’s collapse (崩壊 hÅkai?), which occurred gradually rather than catastrophically, is known as the “lost decade or end of the century” (失ã‚ã‚ŒãŸ10å¹´ ushinawareta jÅ«nen?) in Japan. The Nikkei 225 stock index eventually bottomed out at 7603.76 in April 2003 before resuming an upward climb.
“I have heard recently that TD Canada Trust is introducing a Canadian version of subprime to circumvent the intent of the new anti zero down, 40 year mortgage laws. No doubt they will be first in line to Ottawa for a bailout when it inevitable goes bust.”
If TD loans the borrower 5%, they’ll then qualify for mortgage insurance.
= bank is off the hook
Not a bad deal for TD as they collect mortgage interest without the risk, which is passed onto to CMHC and back-stopped by taxpayers.
I think Vlad Poutine has hit the nail on the head.
I think this form of longterm credit deflation, as experienced by Japan in the nineties, is just about to wallop the USA.
An interesting decade ahead.
Of course, please note that Japan is STILL the world industrial centre. Honda, Toyota, Mitsubishi, Fuji Heavy Industries, etc, etc, etc…
The USA’s problem, and ours, is much worse because our capital has fled, leaving us with junk, second rate industries. GM, Ford, etc, etc, etc…
A VERY interesting decade ahead.
I think the worse inflation happening right now is in the medias. No so surprising, in this new world of abundant and quick communications medias tend outbid each other and focus on a few things in a massive way which make events appear bigger than they really are. The result is a distorted reality. If you see the worls as the raw reality presented by the medias you will be in a constant state of panic. Given actual facts this is ridiculous.
You need to adapt to distorted information caused by hyper ventilating medias, and the only way to do this is to to refect and put things in perspective.
Would you believe for example that the world has never been so peaceful? Certainely not if you listen to the medias but it is never the less absolutely true. It’s not even hard to figure out, you just have to think a bit.
If you listen to the media these days would you believe that unemployment is still at historical lows almost everywhere? That the vast majority of businesses are still profitable? That the world economy is still growing rapidly? That the worse forseeable problem is manpower shortage?
To those who fear the next great depression pleeeeease get a grip. Sure there is a slowdown in the US and world economies (which involves a RE crisis) but this this is by no means extraordinary nor fatal.
Of course some long term problems are complex and real, such as the demographic shifts (decline) in Europe, Canada and others places, these issues require careful analysis. But the medias are not big on that kind reflection, they prefer cataclismic headlines.
Beware of media inflation (and Garth that goes for you too).
Kris its really the fact that Canada just exports raw materials to be later manufactured and sold back to us.
Kinda stupid for Canada to let it get this out of hand.
Canada should be concentrating on building its own manufacturing technologies.
Try and convert all those shipping costs to homeland wages in manufacturing quality products
pbrasseur, in the U.S.
– over 1M homeowners have already lost their houses
– 1M are 90 days past due on mortgages = foreclosure coming
– over 2M are 30 days past due on mortgages
that’s another 3M likely that will lose homes shortly, and couple that to another few million that will fall through the cracks in the next few years and you may be looking at 5M+ total homeowners (roughly 10% of all U.S. mortgages).
this is hardly going to be a walk in the park, and one needn’t be an alarmist for pointing this out.
Calgary:
Median July 2008 home prices $406,000
Median 2008 combine home income = $90,000
Home price / income = 4.5x
Banks lend at = 3.75x
Price will not go up anytime soon unless wages go up a lot. Prices might have to decrease (4.5 – 3.75)x$90,000 = $68,000 to come more into line.
#40 Brazer … where are you getting your info from?
How fortunate Canadians are to have someone like Garth who is willing to speak the truth.
I currently live and sell real estate in FL, I wish I could have been introduced to Garth’s books and blogs sooner.
We are currently dealing with the aftermath both in the industry and our local economies.
The silver lining has been that all of the quick-money Realtors and mortgage brokers are gone; strong and HONEST have survived and are here to help homeowners in need.
I enjoyed Garth’s most recent book and look forward to meeting him at our corporate convention in October!