Maybe this austerity stuff works after all

There is only so long you can avoid reality, although Keynesians can go on for a very very long time. This is about the latest observations on the UK economy by Christine Lagarde, the head of the IMF.

The head of the world’s economic watchdog delivered a stunning endorsement of the coalition’s record last night – saying Britain was setting an example to the rest of the world.

Christine Lagarde, director of the International Monetary Fund, said in much of the world growth was ‘too low, too fragile’.

But completing an extraordinary volte face on the Government’s austerity measures – which as recently as 2013 were being attacked by the IMP as ‘playing with fire’ – she called on other countries to look to the UK’s example.

Look all you like, but how would you explain it? Of course, with the modern textbook version of economic theory, this is all in the realm of impossible, just as they forecast in 2013. The story continues:

‘Certainly from a global perspective this is exactly the sort of result that we would like to see: more growth, less unemployment, a growth that is more inclusive, that is better shared, and a growth that is also sustainable and more balanced.’

Miss Lagarde’s endorsement will be greeted with delight by senior Conservatives and Liberal Democrats, who were angered by previous IMF criticism of their policies.

In 2013, the organisation warned that persevering with strict austerity policies risked denting Britain’s economic prospects.

Olivier Blanchard, chief economist at the IMF, said George Osborne was ‘playing with fire’ by pressing ahead with austerity, insisting: ‘In the face of weak demand it is really time to reconsider an adjustment to the fiscal consolidation plans.’

What would Blanchard know, anyway? Meanwhile, for the rest of the world’s economies, here is Ms Lagarde once again:

Strong headwinds from weak investment, substantial debt burdens and high unemployment are preventing a pickup in global economic growth despite a strengthening U.S. recovery and tumbling oil prices, International Monetary Fund Managing Director Christine Lagarde said.

A healthier U.S. and cheaper energy “won’t suffice to actually accelerate the growth or the potential for growth in the rest of the world,” the head of the emergency lender to nations said in a speech Thursday at the Council on Foreign Relations in Washington.

“If the global economy is weak, on its knees, it’s not going to help,” said Ms. Lagarde in remarks previewing the IMF’s latest forecasts for the global economy due out on Monday.

The eurozone, at risk of a third recession in six years, continues to struggle with the fallout from the 2008 financial crisis. Japan is also mired in low inflation, high debt and anemic growth. And output in many major emerging markets—economies that have provided most of the gas for global growth over the last decade—is slowing faster than expected.

However, there is the US, which has been suffering under sequestration and restrained public spending since 2013:

Nonetheless, the IMF is upgrading its forecast for economic output in the U.S., one of the few advanced economies bucking the weak global-growth trend. But the world’s biggest economy and a shot in the arm from cheaper gasoline aren’t cures for deep-seated weakness elsewhere, Ms. Lagarde said.

If you think in terms of aggregate demand, my only message to you is that you will never understand how an economy works. You certainly could not explain the relative success of the UK and US.

Who would have expected that stagnation would continue so long?

I will, along with the rest of us, see what happens, but I am not, to say the least, encouraged. From The Australian:

THE global economy faces another five years of stagnation, the International Monetary Fund warned overnight as it cut its growth forecasts for the third year in a row and urged nations to ­reinvigorate economic reforms.

Releasing the fund’s updated economic outlook, IMF chief economist Olivier Blanchard ­described global growth as ­“mediocre” and, in a reference to the agenda Australia has set for the G20 members ahead of next month’s summit in Brisbane, said the difficult outlook underlined the importance of identifying economic reforms that could lift output.

Who could have expected such an outcome? The people who run our economies do not have a clue. This is all so unexpected for them, and they will therefore persist in running budget deficits and keep interest rates low until our economies finally tick up which means, of course, that is of course if you are a classically trained economist, that their very policies will continue to be the reason our economies refuse to grow. And if they still attribute the problems to the Global Financial Crisis of six years ago, they are seriously seriously out to lunch.

Understanding the high dollar and rising house prices

The Australian ran an above-the-fold front page story today on Pitch to foreigners locks out locals before ‘for sale’ sign goes up. It is a pretty disturbing story, specially when it goes with this one on Our housing costs are out of whack, says IMF and this one, IMF warns over Australian house prices. Let me start with the last one:

HOUSING is less affordable in Australia than in any other country except Belgium, the International Monetary Fund says, warning that rising prices might point to an unsustainable boom.

The IMF is stepping up its analysis of housing markets around the world, having concluded that property booms and busts were implicated in two-thirds of the past 50 banking crises. “The era of benign neglect of housing booms is over,” deputy managing director Min Zhu said.

House prices, rents and incomes should, in theory, all move in tandem.

On this basis, the Australian real estate market is one of the most exposed in the world.

Let’s see if we can work out what’s happening in the property market. Back to that first story about locking out locals:

AUSTRALIAN real estate is being marketed and sold exclusively to foreign investors — including Chinese millionaires — with local buyers not even aware the properties in question are up for sale.

More than 100 real estate firms have sprung up in mainland China, exclusively selling Australian real estate — both fixed and off-the-plan — directly to wealthy Chinese investors, bypassing Australian buyers.

At the upper end of the fixed-home market, prestige Sydney property agency Simeon Manners — which says it has sold more than $100 million of Sydney property to “China’s most astute buyers and investors” — operates a sales site that cannot be accessed from within Australia.

Director Mark Manners said many of the listings on the site — — could only be accessed from a foreign IP address and were private or off-market listings placed on behalf of owners who wanted a discreet sale to a foreign purchaser.

Even those geniuses at the IMF should be able to work out from this why Australian property prices are so high and perhaps also why the dollar is so high. Our locals are being driven out by money that is flowing into Australian property from overseas. I had a student in my class this year – it’s a graduate class so he was not young young but in his early twenties. And he was telling us about his experience in trying to arrange a loan for more than a million to buy a house. If you are trying to compete for houses with Chinese millionaires trying to park their American dollars, you will have your problems.

This is a genuine issue and it genuinely needs attention. Especially when you combine it with this from The Age a couple of days ago, Melbourne’s tiny flats would be illegal in other cities:

Melbourne is becoming a city of “super-dense” towers, packed with tiny apartments that would be banned in Hong Kong, New York and London.

A scathing report from Melbourne City Council shows some of the city’s newest developments are up to 10 times as dense as permitted by law in some of the world’s most urbanised centres.

Sydney, London and Adelaide all have rules that ban new one-bedroom apartments smaller than 50 square metres. But in Melbourne, 40 per cent of the city’s newest apartments are smaller than this.
The boom in shrinking homes is being driven by a market that satisfies the needs of overseas investors at the expense of residents, according to the Melbourne City Council’s draft housing strategy.

The report warns Victoria’s capital “is in danger of leaving a lasting legacy of poor-quality housing”, because of a lack of enforceable density or height controls.

Bang ’em up and put ’em out, specially since no one cares. They are buying off the plan, sight unseen. This lasting legacy of such poor quality housing is a catastrophe. The trouble with so many in politics is they think all investment is to the good. Their ignorance of what makes a great city great is going to leave this country with a legacy of very poor quality but high priced housing that will remain a blight for decades to come.