From Socialist Voice, August 2006

Kamikaze capitalism

Ahern’s recent assessment that high ination is a sign of a “strengthening economy” is an economic forecast straight out of Cloud-Cuckoo Land. In fact with consumer prices rising at 3.9 per cent annually—the highest rate in about three years—we can only suspect that his comments were a vain but self-interested attempt at keeping the “feel good” vibes on the economy going—much like the recent Bank of Ireland report that suggested that Ireland is now the second-wealthiest country in the world.
    Of course it’s a jungle out there, and with a lot of the contradictory facts being thrown around it becomes difficult to comprehend how we can be so rich and reside in such a booming economy while simultaneously being faced with our property market and borrowings posing such a threat. (Recent figures from the Central Statistics Office point to the fact that the economy grew by 7 per cent in the first quarter of the year; the Central Bank worries about the property market; while politicians and some media analysts tell us that we’ve never had it so good.)
    Crucially, the Bank of Ireland report was based on calculating the value of property assets over the last decade. These, as everyone knows, have risen by about 500 per cent. Residential property assets account for €542 billion of our estimated total assets of €796 billion. Yet while the amount put into investment property has grown dramatically, most of us are simply living in our main asset, and not earning any income from it.
    On average, our incomes are above those of the rest of the European Union; but for most Irish workers this income finds its way back into feeding an increasingly mercenary life-style and repaying debts—debts that have been primarily incurred in buying our main “asset”: our home. Real wealth is where someone has their money invested, and it in turn creates an income; it is not when you live in a house that is worth 20 per cent more than it was the previous year. So this “wealth” is really only on paper. In fact if we exclude residential property, then real financial wealth—at least a third of it in Ireland—lies with only 1 per cent of the population.
    The irony of it all is that the very thing “creating our wealth” is in fact the economy’s Achilles heel. Twenty years ago the economy was in free fall, because the national debt grew to 120 per cent of GNP. While national debt is at present about 30 per cent of GNP, include the amount that households have borrowed from banks and the figure again climbs to 120 per cent of GNP. While the nature of Ireland’s debt is now very different, the scale of the exposure is there nonetheless. As interest rates climb steadily higher, the income of households that have borrowed heavily will in turn be squeezed.
    At some stage, new borrowers—and the financial institutions that are falling over themselves to lend as much to them as possible—will start to run out of road. More and more borrowers will start to be priced out of the market as they fail so-called “stress tests.” Investors, increasingly desperate buyers and bankers trying to grow their mortgage books are combining to keep the merry-go-round spinning ever faster. This has left our personal debt levels above the international average, at around 140 per cent of disposable income.
    This will probably climb to around 150 per cent by the end of this year. This is what is worrying the Central Bank, which recently pointed out that if borrowing keeps expanding at its present rate the amount of outstanding mortgage borrowing would double in three years. How will Irish workers pay for ever-rising house prices? More importantly, what employer will pay workers to keep up with the housing market? Quite simply, this won’t happen. The resulting impact could produce any of four potential results: widespread unemployment, as workers are priced out of the labour market; a fall in real wages; falling property prices; or some combination of these. Economically, there is no other option.
    The more we postpone by hyper-borrowing—a form reminiscent of the kamikaze capitalism that befell Japan in the 1990s and sent its economy into a ten-year recession—the worse the outcome is likely to be.

[NC]

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