Low interest rates lead to overbuilding leads to demolition
The chain of events whereby easy money leads to malinvestment that impoverishes a society is now fully manifest in the United States. You remember Victorville, CA where new homes were being demolished because it cost more to maintain them than to demolish them? (see post here) Well, that same phenomenon is going to be at work all across the USA because we have just witnessed one of the greatest episodes of malinvestment in the history of the world.
An article over at the Telegraph discussing this possibility has really grabbed people’s attention (137 diggs, 66 delicious bookmarks, 474 comments at last count) and seems to be everywhere. Here is a snippet.
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.
Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.
The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.
Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.
Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.
Most are former industrial cities in the “rust belt” of America’s Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.
In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.
Now, Mish has a post over on his blog which reminds us that the median home price in Detroit is now $6,000. Obviously what is happening in Flint right now is coming to Detroit very soon. But, I also want to remind you of the Victorville incident and exurb overbuilding – it is not just cities. No one wants that housing stock. According to Google Maps, it takes 2 hours and 40 minutes to commute 81 miles from Victorville to LA in traffic. That’s not something many people are willing to do. And if you look on a map, you will notice that Victorville, far inland, doesn’t have many other huge cities near by either (Barstow is 34 miles away and has great outlets for those of you who like shopping).
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Translation: Much of the building in Victorville was malinvestment. This is why houses are being demolished there. You should ask yourself how did we get to a place where entire cities are shrinking via demolition (Flint), where other cities have a median home price of $6,000 (Detroit), and where other previously sleepy towns are also shrinking via demolition (Victorville). Why is the U.S. so shattered financially that we must resort to demolition houses in order to move forward? The answer, of course, is easy money.
- Because of the rise of deregulation, a shadow banking system forms in the United States and globally. Long-Term Capital Management, famously leveraged 100-to-1, the most famous part of the shadow banking system fails spectacularly and is bailed out.
- The bust frightens the Fed under Alan Greenspan, which pumps liquidity into the market due to this event and the later Y2K scare.
- We get a massive bubble in shares, especially technology and telecom stocks.
- The bust frightens the Fed under Alan Greenspan, which, fearing deflation lowers interest rates to 1%.
- A massive housing bubble expands with huge overbuilding of the U.S. housing stock
- The bust frightens the Fed under Ben Bernanke, which, fearing deflation lowers interest rates to 0% and engages in both quantitative and qualitative easing.
Do you see something wrong with this picture?