[Pops]

Reading Piketty a couple things stuck in my brain:

The first chart is population growth:



Economic growth begins and ends with population growth. The party line around here is overpopulation/overshoot etc will kill us all — probably by Tuesday at the latest, but just pretend to think outside that box for a moment — the population curve is heading downward, especially in the most "developed" countries. Corps are banking on middle class growth forecast in today's "developing" countries but the writing's on the wall— even discounting PO, limits, etc.


This is Piketty's main argument in one chart:



This is a picture of the fall in relative importance of agricultural land (especially since FFs) and the rise in housing value, relative to GDP, in postwar France. The US looks the same, just not as dramatic because France suffered much more from the wars. Piketty's purpose with this chart is to tie capital accumulation to growth by illustrating how capital value relative to GDP was destroyed during the negative growth and high tax period around the wars, but then how accumulation returned with postwar growth and the Reagan/Thatcher Trickle Up implementation.

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My take on the chart is different although it's not that I disagree with Piketty's claim. Since about forever here (and in R/L) I've said that paying off the mortgage is the number one goal everyone should be working toward in preparation for the economic decline that is sure to happen as the energy slaves die off and limits kick in. That is what is known as a typical knee-jerk, gut reacted, emotion-based opinion – the very thing I always rail about! Thinking I am a realist, I connected owning shelter outright as the best investment of a typical 99%-er.

To explain myself... my family legacy, such as it is, revolves around that very loss of agricultural value. Not that my ancestors were Lords of the Manor but they did lose their once somewhat substantial farms in the depression. I equated their loss of shelter with not being an outright owner but that wasn't their problem, they did own. The problem was their asset just was not productive enough to provide a living during the great ag crash.

My solution has been to invest my net worth in housing - but it now dawns on me that in the next cycle the value of housing will evaporate as the economy slows and value will return to productive land. I'm repeating my ancestor's mistake — in reverse.

My new realization (or at least my current conceit) is that on the downside of the population and economic and energy availability growth curve, when capital begins to evaporate, the biggest loser will be the homeowner. Since everyone else is putting all their scant capital in the 3/2 detached-manse as well as me; the great 21st Century RE Bubble should be thought of as the equivalent of the cabbie handing out stock tips. Kunstlers said, suburbs are the greatest misallocations of capital ever, but that doesn't really bring home the problem does it? That still leaves the problem with the "them" when we should be thinking of the problem as "ours."

Part of the problem in the oft quoted factoid that the rich own everything, is the grain of truth that the definition of "everything" includes only "financial assets" which a house is not. Once upon a time both the greatest productive asset and the greatest store of value was agricultural land but now the greatest asset is nonproductive... tract houses ... and they are the thing most of us are vested in. They are neither productive asset nor a store of value beyond their short life and that only in a growing market. Houses in Detroit (just to pull out the obvious example) are not only not productive and not an asset, they are a liability and abandoned to the city to demolish.

So the dramatic prediction here is that in the next cycle, the Great PO Rinse, not only will the digital 1s & 0s be erased but all the work invested in your house payment will disappear as well.


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I forgot to explain about Ricardo. One of his ideas was increasing population drives rents to the point of strife. He is to land rents, as Malthus is to food and Marx is to capital accumulation. Interestingly his current "fame" is in regards to his theory of comparative advantage, pretty well the cornerstone of globalisation and my eternal hobbyhorse of the evils of regional ag specialization. My thought is they may all be somewhat correct but Ricardo will be correctest.

[Ibon]

My solution has been to invest my net worth in housing - but it now dawns on me that in the next cycle the value of housing will evaporate as the economy slows and value will return to productive land. I'm repeating my ancestor's mistake — in reverse.

How can productive land replace housing as a valuable asset if industrial agriculture continues to make gains in feeding a growing global population whose fertility rate continues to decline?

[Pops]

Ag land didn't lose value, food is still pretty important I think. Land in fact is more important than ever if, as you mention, one considers the increase in how many people are fed per acre.

Rather, the investment value of land was overshadowed by the froth and opportunity for return on investment in the extractive and leveraged economy based on housing.

For more than 100 years now, banks have lent fiat money into existence by making RE loans based on the premise that a growing population and innovation and fossil fueled increases in productivity will be able to come up with the interest payment. More than anything else, those loans are the froth that the modern economy is built upon. They may be liabilities to you and me but they are primary assets to the economy.

Stagnating populations and falling opportunity for investment in themselves are enough to put the kibosh on growth. But add in declining FFs, gluts of money and credit and lately even commodities in general and the great post-war growth bubble looks to be nearing...
need I say it? LOL

[dolanbaker]

In the UK & Ireland, there appears to be an ever increasing cost for housing, this is despite a house price drop of 50% in much of Ireland during the downturn. House prices are rising despite tightening lending rules that make it even harder for families on average incomes to buy average houses. what is actually happening is that more and more investors are buying property instead of other investments for their pensions. If this trend continues, owner occupiers will soon be in the minority.

The return of the landed gentry may well be on the cards.

[Pops]

dolan, Buffett said that he would buy a few billion of RE if it were feasible. Instead he bought a few thousand real estate offices.

I think the big problem is going to be the aging population and growing inequality. In the US the average house price is rising as well, but it is the upper end of the market pulling up the average rather than an increase in the median price.

[ralfy]

I would look at population momentum (discussed in another thread), global demand rather than demand from developed economies, resource and energy demand needed for basic needs of the global population, the state of arable land and how that may be affected by environmental damage, etc.

[Tanada]

I wonder if someday the USA will adopt more of a Greenland approach to property? I watched a documentary yesterday about how the mining interests are butting up against the government of Greenland, it turns out that all property is held in common. If you want to farm or mine in Greenland you have to rent the property from the government and they have all sorts of regulation to prevent permanent changes that will make the land less valuable for following generations. It reminded me of the First People of North America and all the conflicts it caused between them and the European immigrants with their completely different belief in land as private property.

[Pops]

I think one of the biggest cultural differences between the US and most everywhere is our history of individual property ownership by the lower classes. When Europeans first arrived they killed the natives and brought over indentured servants. Not Africans, but poor Europeans initially who signed on for a term of work and at the end of their contract were paid in land, because land was what there was in abundance. Private property was established British common law way before the American colonies. But that isn't to say it was some conscious force for egalitarianism. I'm guessing it was probably established by feudal lords to protect their property from squatters and who never expected the serfs to actually hold title to anything.

In South America and probably other colonies, instead of bringing over large numbers of their countrymen, the colonizers instead forced the natives into labor while the state keep the title to the land and doled out holdings as political favors to the existing plutocracy. There was no competition so there was little development.

As Manifest Destiny played out in America, the incentive was to continue giving away land to anyone who would take it in order to prevent other countries from gaining a foothold. Free land was the incentive to go West and a line of wagons hauling families was a much more powerful weapon than any army.

This seems like a really big thing to me. I think it's the basis of our inventiveness and drive as well our pigheaded selfishness, née individualism. I think at one point we were admired for the former but we are becoming more and more reviled for the later. I also think we suffer here at this point of "economic maturity" because as opposed to other country's cooperative nature we still have that selfish streak that helped us survive and thrive in what was, to European standards, a wilderness. It is at once the origin of our sense of freedom and the rapid development of our economy (and exploitation of our resources) but perhaps also the setup for de facto corporate plutocracy if not Balkanisation.

[onlooker]

I also think that throughout the 20th century US was both admired but also beneath that admiration was a sort of envy. We have had for quite long a standard of living far superior to almost all countries. Even more so we were prone to flaunt it and also waste it. This has amazed and to some degree disgusted people around the world who have throughout their lives needed to be frugal and penny-wise. Our golf courses, our swimming pools, our amusement parks etc. all attesting to this surplus of wealth. As well as discarding good food. So to try and stay on topic landed capital is just one of many assets Americans enjoyed as opposed to so many around the world. What will be most valuable from this point forward will be natural resources.

[Pops]

Here is the last post I made to my blog, about 5 years ago now, sounds awfully Pikitty-ish though it predated Capital by a couple of years:
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There is Only So Much West

We in the "New World" have a handicap in that our entire history has been one of exploiting natural resources. "Go west young man..." is embroidered on our society's genes in orange thread.

The reason one could (and was expected to) "lift themselves up by the bootstraps" was the existence of vast tracts of virgin territory containing timber and mineral ores and ancient fertile soils and of course coal and oil and gas - all there for the taking, just a short ride off toward the sunset.

Of course we're currently burning through those gifts like the lottery winnings they are, but we've convinced ourselves it is us that is special, when in reality it was only blind luck that put us in the right place at the right time and the right color and (usually) the right sex. In other words, we were 'Born on third base and thought we'd hit a triple' – to mix metaphors.

As we subdivided and privatized and populated and mined the commons, "growth" was inevitable and so a "growth economy" made sense. The role of government was small since there was a huge surplus to go around and that always makes governing easier. Until, that is, the early period of industrialization when the production of "capital" wealth outran the ability (and will) of government to protect the populace from the rapidly concentrating power wielded by monopolists.

Teddy Roosevelt and the "Trust Busters" interrupted the march of the industrialists for a time but by the "Roaring Twenties" the wealthy overclass once again had money to burn - and gamble. They inflated another speculative bubble in commodities and the stock market that even the little guy eventually tried to ride. Of course when the little guy gets on board you better know it's time to get off - think real estate in 2005.

During the depression, income taxes on the rich were raised and the ensuing fifty years saw the most uniformly prosperous time in US history. Everyone prospered, the owners made money and the workers shared in the success. Unfortunately the political tides of the last 40 years have shifted and the citizenry duped into believing if you let wealth concentrate, eventually some will "trickle down" - contrary to past experience. As a result, wealth is concentrated more than at any time since the great crash of '29, the "rights" of corporations are judged to be protected by the Constitution and more and more, control of the very essentials of survival; food, shelter, heat and even water are being privatized, purchased and controlled by corporations simply because that's all that's the only place left for them to spend their vast cash reserves.

Our whole system is based on the government loaning money into the economy at interest. That interest has to come from somewhere and the somewhere is "growth". The problem of course is there can be no growth without the availability of cheap raw materials, the gold-nuggets-as-big-as-your-fist-just-waiting-to-be-picked-up and of course most other minerals, the big stands of timber, tall-grass prairies, endless fisheries, easy fossil fuels... are all gone or going fast.

So here we are at the end of another speculative bubble blown because too much money was in the hands of too few people with no adult around to keep them from betting it instead of investing. Except this time IS different: all the "A better life for our grandkids" is gone - leveraged/strip mined/clear-cut/sub-soiled/off-shored/free-traded/trash-compacted and land filled.


There is no "west" left... it's all private property now...

[onlooker]

terrific overview of 20th into 21st century US Pops! thanks

[rdberg1957]

I think the usual reply to this line of reasoning about natural resources has been that it doesn't take into account innovation and technology. The idea is that innovation and technology are the sources of growth, not natural resources. But all the innovation and technology have revolved around leveraging natural resources for more growth. Ways to extract more oil from the same resource, electronic ways to become more efficient and require less labor. But if the fisheries are depleted, and the oceans have many dead zones and the oil fields require more and more technology just to keep steady much less grow, then where does the growth come from?

[onlooker]

Really good point berg, all our technology and economic prowess will make not an iota of difference on a planet that is no longer producing for us. In the end all our vital good and services depend on a functioning and giving Earth. We cannot create or replace what Earth gives us.

[Graeme]

Pops, I saw the following article a few months ago. It's appropriate to post it here:

The global economy could be on the verge of a once-in-a-generation transformation

Few things illustrate the 35-year boom in Western asset prices better than the cost of a London house. In 1980, according to Nationwide data, you could have bought the average home for little more than £30,000. Today, the same property would set you back £407,000, or more than 13 times as much.
Even adjusting for inflation, the gains are spectacular. Relative to average earnings – which are themselves up by a lot more than ordinary inflation – house prices have doubled.

But it is not just residential property. Equities, bonds, agricultural land, even personalised number plates – virtually all asset prices have sky-rocketed. There have been ups and downs, admittedly, but the direction of travel has been clear. It is as if all the inflation that used to go into consumer prices has been diverted into financial assets and real estate instead.

All this, however, may be about to change – for we could be on the cusp of one of those seminal, once-in-a-generation shifts that completely alters the way we experience, and respond to, the world around us. For the past three and a half decades, the balance of advantage has resided unambiguously with capital. Now, it may be turning back to labour.

telegraph

[Pops]

I second onlooker, modern economists consider natural capital — and increasingly "human capital" as too cheap to meter. I suppose they are even growing tired of modeling consumer behavior, after all, the fancy algorithms of quants and scams of high speed frontrunners need neither, they truly make money for nothing.

It is like a capitalist economists wet dream.

But just because you can go through life ignoring oxygen doesn't mean you won't die in about 3 minutes without it.

[onlooker]

But just because you can go through life ignoring oxygen doesn't mean you won't die in about 3 minutes without it.

Or as the Indian proverb says "When the Last Tree Is Cut Down, the Last Fish Eaten, and the Last Stream Poisoned, You Will Realize That You Cannot Eat Money"

[Ibon]

Here is the last post I made to my blog.

I greatly enjoyed your last two posts. You know, I was born in rural Pennsylvania where I spent my childhood, and my life's path took me to live 10 years in Europe, 5 years in South East Asia, and spent over 18 years in Latin America running my business while based out of Europe and South Florida. Not to mention my extended adolescence backpacking through Africa and Latin America into my late 20's. I mention this only because I have spent a lot of time studying the cultural differences of the places I have lived, with a lot of focus on the place of my birth, the USA. In my 20's I rejected many aspects of the American way of life and romanticized Europe and Latin America but through my 30's and 40's I saw some of the shortcomings of my foreign residencies and recognized and appreciated many of the aspects of my American youth and upbringing. A few things you mentioned in your post resonate, particularly that strong streak of frontier individualism that is both an asset and deficit in American culture, particularly in how families and communities are not valued or able to hold one. My wife, from the Philippines, is wise in community and consensus and humble deference to family and community but the flip side there is that there is a kind of "tyranny of the group" that stifles individualism. So every place has its baggage.

But, the one deep deep irony or paradox in the American way of life here in the 21st century is how this legacy of individualism has led in the end to a far greater degree of dependency on the resiliency of a cheap oil economy and a huge anxiety and sense of helplessness if the economy goes into decline. The cult of individualism leaves one isolated and fearful over losing ones job, ones home, ones car. With no extended family and feeling no real sense of community folks often do not have the anchor that this provides for most of the worlds population living far more humbly who don't even know what a 401k is or health insurance or retirement or a steady job. And yet most folks in the world are not anxious not having this. Why? Because they are held in their families and communities. Not to mention that most folks are a lot better in accepting the transient nature of life without a sense of deserving happiness. Where the hell did that come from anyway?

I don't worry to much though, this can all change quite quickly as emerging generations actually adapt to economical and resource constraints by abandoning the toxic side of isolating individualism and move toward a more collectivist society. Americans just have to get over this idea that this is somehow socialism or communism or whatever. It really is more in line with human nature. Go Bernie Sanders!!!

Forget the cartoon version of the American frontier, there still is the hum of the original resourcefulness and pioneer integrity in the culture. it has just gone stupid and dormant, but it is not dead.

[Ibon]

Folks in the burbs will repurpose their homes for multi-generational dwellings.

Multi-generational dwellings are the norm in the world. Furthermore, in most of the world people do not see their home as a monetary liquid asset. It is their home, their roots. It isn't flipped. It may be used as a guarantee on a loan to start a business but it does not serve the purpose of equity like in the USA.

[onlooker]

yes what is uplifting about this traditional way of living is that people ultimately rely on each other. That is their greatest asset. I think their is something to be said about this in so much as it reinforces a sense of kindness and caring between folks rather then being atomized and individualized the way we are now in the Western world. The home is an extension of the family not to be sold or discarded.