Two days ago I linked to an article by Larry Doyle on the growing problem in the USA of people, with good credit records and in employment, walking away from their houses and defaulting on their mortgage repayments. I did so as such an event is exactly what this blog predicted would occur one year ago to the day!
I have had some internet exchanges with the author of this original article over the past couple of days and quote the latest exchanges below:
Larry,
Thanks for your reply, a welcome change as my suggestions this side of the pond are inevitably met with a wall of silence.
I agree the retroactive element of my proposal is a drawback, also within the US environment the impact on interest rates a potentially crippling disadvantage.
Let me discuss these factors from a UK standpoint, however, and you might then be better able to determine whether there is later applicability for the US which has the major advantage, when compared with ailing sterling, of the dollar’s reserve currency status.
Even a year ago it was obvious that the pound sterling was assuming junk status, hence my tagging of some posts on my blog with “funny money”.
Here is the key “The loss of a good credit rating earned with “funny money” is of small immediate significance and zero long-term effect” – hence the walkaways.
On the retroactivity consider a UK employee, retiring this year, who has saved a reasonable sum in a pension fund throughout his career. OK some decline would always have been a risk, but post credit-crunch he has been double zapped with both the fall in the funds value and the reduced annuity value which he can now purchase. This has been of such severity that a huge and retroactive pension fund reduction is effectively what has occurred in the private sector.
His peer who has historically ridden the inflated UK property market to the maximum and therefore done nothing to promote the true free-market system with his savings, is presently sitting on a huge untaxed and unearned apparent asset gain.
The UK Government, with the collapse of tax revenues from the City and escalating welfare bills has resorted to printing even funnier money with so-called Quantitative Easing. This is retroactive impoverishment par excellance.
When foreign lenders no longer consider sterling interest rates sufficient to cover the risks of further devaluation where can extra sterling revenue then be found? The presumed wealth of the country, wasted during the apparent high-growth years, now rests in an over-valued private property pool. No surprise then that this week the third largest political party in the country has been the first to suggest property taxes.
In the USA restoring faith in the national currency remains a viable possibility, thus a damaged credit rating might remain a deterrent to strategic mortgage defaults.
In the UK outside of the casino style banking industry, the government and the civil service, people in the country at large have noted the stark reality and will likely start to cut their own losses in far greater numbers, possibly involving agreed cross-squatting (also covered on my blog last year).
Walkaways, mutually agreed cross-squats and property taxes will dish the property market for certain …. and potentially the rule of law in the process.
Things for the UK look sombre, hence my proposal for sharing property equity losses for the period during which Gordon Brown and Mervyn King deliberately distorted inflation indexes.
I would welcome your further thoughts and will link this exchange from my blog.
Martin,
I find your comments to be very interesting. Your perspective from your ’side of the pond’ is on one hand understandable to anybody following economics but on the other hand very difficult to fathom for those of us on ‘this side of the pond.’
What is hard to fathom? The effective ‘taking’ of private property. I think that may create civil unrest of unprecedented proportions. Not that we may not have civil unrest for other reasons.
Suffice it to say, both the UK and US economies have real issues all of which center on excessive debt. No surprise that the sterling and greenback are each having issues.
Are we living through a multi-generational shift in the primacy of what once were two world leaders. I believe we are. To what extent? Time will tell.
Living beyond one’s means is a recipe for underperformance.
In summary, from an American perspective, I have a hard time grasping the government unilaterally assuming a degree of ownership in what was private property.
I thank you for sharing your thoughts and perspectives. I welcome continuing the dialogue on this topic as well as others.
Best.
The earlier exchanges and original article may be read from this link.
Labels: Bankrupt Britain, Funny money, UK House price crash
Larry,
Thanks for your reply, a welcome change as my suggestions this side of the pond are inevitably met with a wall of silence.
I agree the retroactive element of my proposal is a drawback, also within the US environment the impact on interest rates a potentially crippling disadvantage.
Let me discuss these factors from a UK standpoint, however, and you might then be better able to determine whether there is later applicability for the US which has the major advantage, when compared with ailing sterling, of the dollar’s reserve currency status.
Even a year ago it was obvious that the pound sterling was assuming junk status, hence my tagging of some posts on my blog with “funny money”.
Here is the key “The loss of a good credit rating earned with “funny money” is of small immediate significance and zero long-term effect” – hence the walkaways.
On the retroactivity consider a UK employee, retiring this year, who has saved a reasonable sum in a pension fund throughout his career. OK some decline would always have been a risk, but post credit-crunch he has been double zapped with both the fall in the funds value and the reduced annuity value which he can now purchase. This has been of such severity that a huge and retroactive pension fund reduction is effectively what has occurred in the private sector.
His peer who has historically ridden the inflated UK property market to the maximum and therefore done nothing to promote the true free-market system with his savings, is presently sitting on a huge untaxed and unearned apparent asset gain.
The UK Government, with the collapse of tax revenues from the City and escalating welfare bills has resorted to printing even funnier money with so-called Quantitative Easing. This is retroactive impoverishment par excellance.
When foreign lenders no longer consider sterling interest rates sufficient to cover the risks of further devaluation where can extra sterling revenue then be found? The presumed wealth of the country, wasted during the apparent high-growth years, now rests in an over-valued private property pool. No surprise then that this week the third largest political party in the country has been the first to suggest property taxes.
In the USA restoring faith in the national currency remains a viable possibility, thus a damaged credit rating might remain a deterrent to strategic mortgage defaults.
In the UK outside of the casino style banking industry, the government and the civil service, people in the country at large have noted the stark reality and will likely start to cut their own losses in far greater numbers, possibly involving agreed cross-squatting (also covered on my blog last year).
Walkaways, mutually agreed cross-squats and property taxes will dish the property market for certain …. and potentially the rule of law in the process.
Things for the UK look sombre, hence my proposal for sharing property equity losses for the period during which Gordon Brown and Mervyn King deliberately distorted inflation indexes.
I would welcome your further thoughts and will link this exchange from my blog.