Propping up property


I’ve recommended MoneyWeek to our readers before. It is one of the few economic / financial publications that actually seems to ‘get it’, offering hard-headed free market analysis rather than (a) just singing the financial sector’s praises, or (b) rolling out reams of Keynesian claptrap. A recent blog post by editor-in-chief Merryn Somerset Webb is a case in point:

What we are seeing in the UK economy at the moment is a sustained effort to engineer nominal property price stability. Why? Because sustained property price falls and their knock-on effects through consumption to the rest of the country are currently considered to be just too damaging to our still-fragile financial system. But while everyone is worrying about deflation, it is entirely possible that this price stability (or the effort to create it at least – there is no guarantee that it will work) will come at the cost of inflation in pretty much everything else.

She goes on to suggest that since high unemployment means that wage inflation is unlikely, this will result falling real wages and decreased living standards for most Britons. If people understood that this was the likely result of desperately trying to prop up property prices, she asks, would they be happy about it?

Well, I guess that’s an open question: after all, there are major interests vested in keeping house prices at a level that, by all historical standards, looks completely unsustainable. But there’s a broader, more interesting point to make here, about the way politicians and most economists approach economic downturns.

Almost no-one realizes, or is willing to admit, that recessions are actually a necessary, remedial part of the business cycle, in which bubbles burst, bad investments are liquidated, businesses and individuals deleverage, and the economy rebalances. They are, if you like, the purging forest fire that makes renewed growth possible. If you try to artificially prevent them, you do yourself no favours in the long run – just look at Japan and their two ‘lost decades’.

I’m increasingly worried that this may be the path that Britain is on, with near-zero interest rates and quantitative easing preventing the necessary, albeit painful, adjustments that would allow the economy to bounce back. Stagnation or, indeed, stagflation strike me as the likely result.