The ideology stikes back

"May you live in exciting times" goes the old Chinese curse. For decades since the fall of the Iron Curtain, most of us in Europe and the west have lived under a stable regime oscillating between centre-left and centre-right parties. If not in a two-party system like here in Malta, then in a system of political alliances dominated by centrist blocks.

This edifice that has been steadily eroding now shows signs of accelerating collapse. In Italy, France, Spain, Portugal and Greece parties that once dominated the political scene now share the opposition benches with their former rivals or share power with upstart new parties. In the United States and the United Kingdom old parties have been taken over from the inside or split down the middle and in Germany the establishment hangs by a thread.

The trend is clear; the dichotomy of centre-left and centre-right politics is at an end and voters are binning old parties for radical agendas and a return to ideology.

Ideology has always been a part of politics, but in the post cold war west it had become something of an after-thought. You could vote for a moderate that promised to increase the size of government through borrowing or for another moderate with the same plan and slightly different priorities.

This lack of differentiation must have bored many voters. However, until recently they mostly shied away from ideologically consistent parties like communists, anti-immigration parties and independence movements. These parties were always there and always had radical agendas, so why is it only now that the centre is being dumped for the fringes? Why is this happening in so many different countries at the same time?

Of course, sometimes the zeitgeist just happens to blow the winds of change in a particular direction, and future historians can only speculate and argue among themselves as to why a particular thing happened when and where it did. But to me it is quite clear what is going on, and understanding the cause of this transition does not fill me with hope for the future.

A similar thing happened before, not too long ago. After the Great Depression, many of Euorpe's moderate parties were defeated or taken over by radical agendas. The high unemployment and financial uncertainty angered voters who blamed their sitting governments for the malaise.

Voters punish the government and bring in the opposition. The opposition, also unable to magically improve the condition of the voters are also booted out. Voters start to cast their hopes further out as their frustration grows. Indeed it was common, as the Fascists and Communists knew, for the same voters to switch their vote from the far-left to the far-right and vice-versa. Such ideological inconsistency is actually consistent with the driver of their actions; frustration and desperation.

Hang on, you might say. Great depression era unemployment was massive and the world was gripped by a deflationary downward spiral. The economy in the west today might be a little flat, but we're not even in a recession, let alone a depression.

That's all true, however if you look beneath the surface of seemingly good ecnonomic data, a stealth depression lurks below and is entering its second decade.

Unemployment is nowhere as bad as it was in the depression, it is 8% in the Eurozone and below 5% in the US. However, that figure is misleading as it hides those who have dropped out of the labour force entirely and those who are underemployed. Shadowstats' more believable number puts unemployment in the US north of 20%.

Much worse are the governemnt's inflation figures. Hedonic substitutions, qualitative and seasonal adjustments allow governemnts to understate inflation. Their calculations ignore significant qualitative changes and shrinkflation. Here are some anecdotes: paying the same amount as you did last year for a new laptop counts as a massive saving as the CPU is faster. Your flight is €100 cheaper but the cost to add your seat, buy a meal and check in a bag are not captured in the goods basket. You pay 10% more for that bag of crisps, which now contain 20% fewer crisps.

This understating of inflation directly boosts GDP and gives the central banks cover to keep monetary conditions artifically easy. This easy money boosts asset prices which give an impression of prosperity and allows those who own assets to continue to live beyond their means. But what about those of us with no assets? Young people, loaded with student debt, look at house prices in dismay. They go to their part-time job and realise that at this rate, they will never move out of their parent's house. The parties of their parents created this mess, only the parties on the fringe are even willing to acknowlegde their plight.

So until we return to normal monetary conditions and suffer through the asset deflation we so desperately need, voters will continue to increasingly support radical agendas. There is no easy way out and it might already be too late, in some countries at least. The horses have already bolted and the best we can hope for is a rough landing and no wars.

Christchurch, UK, 2nd May 2019

 

TLDR: The transition to new political parties is a symptom of economic hardship

Dude, where's my crisis?

Predicting the future is hard. If it wasn't, I'd be a lot richer. I have dared to make some predictions in this blog which haven't come to pass. Or at least, not yet. Specifically, I predicted that the brief interlude between the 2008 crisis and its continuation was coming to an end last year. But it didn't. I don't feel too bad about this. I just think I was a little early. I still feel good about my previous predictions about the 2008 financial crisis and Trump's campaign success.

In a way predicting the next crisis is easy. There's always going to be a next crisis. The hard part is getting the specifics and the timing correct. The crisis itself however, is guaranteed. Central banks have created an artificial boom by keeping interest rates too low, monetising government debt and printing up money to buy other assets. Booms always bust. The bigger the boom, the bigger the bust.

And boy, have we had a boom. The dow is up over 350% since its 2009 low. Government, corporate and individual debt is at record levels in the western world. Loss-making companies with unproven business models are getting sky-high valuations. The crypto asset bubble, real estate prices in some markets and record prices at auctions are yet more anecdotal evidence of the boom.

But this boom is tired. It is old and it is looking for pins. Air is starting to come out and the central banks know it. In fact, the Fed has already started to ease and has already spent a lot of its ammunition. Hang on, interest rates haven’t been cut yet and quantitive tightening is still happening, how is the fed easing? The easing already began last year, when they changed their guidance about future interest rate moves. From four interest rate hikes in 2019, the guidance is for no increases. QT is no longer on "auto-pilot" and the verbal groundwork for QE4 is already being expressed.

This massive turnaround is a lot of bullets already unloaded from the feds magazine. This volley did manage to stop the slaughter in the stock market, but it hasn't been able to bring on a new bull. If the market resumes its downward trend as corporate earnings disappoint, the fed will be quick to go from 2.5% back to zero. That's not a lot of stimulus, so QE4 will also be needed. Asset purchases will likely have to be north of $100Bn a month as early as this year to try and hold back the tide of recession.

Ok, so the longest expansion in history will come to an end soon. That’s an easy prediction. The central banks will do what they said they will do, cut rates and print money, that’s an easy one too. Now on to the difficult prediction, the one actually worth making: Failure by central banks to normalise interest rates or balance sheets will finally unleash market pressures on inflation. The currencies of these markets, particularly the USD will decline markedly which will in turn create massive price increases in commodity prices and eventually consumer goods.

Asset prices simply have to return to normal, in real or nominal terms. The central banks only get to choose which: either a deflationary recession where asset prices come down or an inflationary recession where the price of everything goes up to bring asset prices back into line. This prediction is ultimately assured because of the simple fact that you cannot print prosperity. One cannot suspend a ball in mid air. However, if one throws it high enough, for a while, it can appear to be done.

So, this early phase of the next crisis didn’t happen in 2018. We've had a good quarter for financial assets. Will we have another one? Another three? Time is running out, and I hazard another prediction. ZIRP and QE are going to be back with a vengeance before 2019 is gone. The 2008 financial crisis will be remembered as a prelude to a bigger problem. The "Great Recession" will be like the "Great War": it will have to be renamed and it won't be great.

Columbus, OH April 9th 2019

TLDR: The crisis hasn't come, the crisis is coming.

Trivial Pursuit

Does life have a purpose? A lofty question, to be sure. While I cannot know for sure, I am convinced that life's purpose is not what it is believed to be by the vast majority of humans. Life is not a staging area; it is all we have.

For most people, death is not the end. An immortal part of one's essence transcends to another plane. Belief in an afterlife is very widespread, and is central to the Abrahamic religions. Indeed, the early Christians had a complete disdain for anything to do with concern of this world: possessions, the keeping track of time and the bearing of children. They yearned for the end times which they believed to be right around the corner.

Another very frequent early Christian belief, one shared with Buddhists and a surprising number of people in the west today, is reincarnation. Although the early Christian factions that won out ruled the belief in reincarnation heretical, it is still a belief held by millions, including many Christians, non-affiliated spiritualists and agnostics. The belief in reincarnation is only slightly different to the belief in a permanent afterlife in another plane. The difference is that you return to this self same plane. This still requires an immortal life essence. It is complicated by the fact that this essence needs to enter another host at birth. Indeed, for some there is a fixed number of living souls in the universe, queuing up in the ether for empty bodies.

These beliefs and beliefs that the world or the universe itself is somehow permanent or rotating and eternal all have a common thread: they are irrational. That might sound harsh and even mean, but that is a word I picked deliberately. Following a reasonable and rational argument, one cannot find any evidence or purpose for an immortal living essence, a soul. If the universe did contain such extravagant complexities it would require a much more complex explanation of the physical universe around us. Latching on to a more complex and elaborate explanation to fit the same observations is irrational. Reason and truth are not compatible with such sentimental fancies.

Fine then, one might say, I don’t have reason on my side, I have faith. Faith is by definition an unexamined and therefore an irrational belief system. I don’t personally have a problem with people having irrational beliefs. This, believe it or not, is not an attempt to turn anyone atheist, but the foundation for my main argument: the importance of the pursuit of happiness. If indeed this life is all we have, then limiting someone’s life can be understood to be a terrible, even eternal, crime.

The ultimate limitation on life, is death. Death is a limitation that is built into life, hence its finite nature. Ending someone’s life and thus limiting even further the what is already so short, is the worst thing you can do. Short of that, limiting the parameters of someone’s life, by locking them in a cage or amputating one or more of their limbs would be runner-up in this sordid hierarchy. Indeed every limitation in the duration or quality imposed on someone’s life should be, and often is, regarded as a crime.

In this way, we can understand the basic immorality of preventing people from having the widest range of freedom possible when it comes to pursuing their own happiness. Happiness as they see it, not how it is seen by anyone else. And to pursue that happiness, not to have it given to them. Of course we must limit that pursuit of happiness in some important ways. To prevent us from impeding the short, precious lives of others is the most obvious. Other details and complications arise around minors, animals and the mentally challenged. There is a lot to work out on the margins. What is clearly outside the margins in my opinion, is the interference and perversion of the pursuit for the aims and perceived benefits of third parties. Taxes, wealth redistribution, licensing, censorship, subsidies and many other government actions change our behaviour, limit our options and confiscate the fruits of our labour.

This is the fundamental problem with using government force, rather than market exchange to solve our problems. Our free decisions are limited by government policy, our choices perverted by government incentives and a large percentage of our property is confiscated for uses other than those that are of our choosing. You might think that this is necessary, even essential. If essential, it is still tainted by our robbing people of their hours and their options. Understanding this, we can appreciate the wisdom and the kindness of using this crude force as little as possible, apologise for doing it and continually seek ways to reduce the impediments imposed on people enjoying the only rational purpose of life: to make of it what we can and what we want.

Mellieħa, March 25th 2019






TLDR: Incentive schemes and taxation are crimes against our limited lives

Green Hell

I'm not an environmentalist. That to many must sound awful. It is like being in favour of cancer. Who could be against the environment? Of course, I'm not against the environment. I like clean air and water, forests, lakes, mountains and wildlife. What I am against is scaremongering. I am against unattainable utopian goals and policies that are counterproductive and fascist. I am not an environmentalist because I do not want to be associated with this growing strain of fascist and sometimes marxist movements that want to destroy either our liberty, our prosperity or even our lives.

First let us tackle the scaremongering. When I was growing up, my mandatory classes in environmental "science" tought me that by 2020 (next year!) we will have run out of oil and other fossil fuels by 2050. I was too young to know then that this was a rehash of flawed thinking that had been going on for a long time. The US Bureau of Mines predicted that we would be out of oil in 10 years in 1914. The dept of the Interior made similar predictions in 1939 and 1950. William Stanley Jevons in The Coal Question points out, in the 1860s, that unless Great Britain rationed its consumption of coal, the resource will run out in a few decades and the economy ruined. Indeed such totally wrong predictions about the environment and sustainability go back a long time. Malthus in the 18th century is usually the archetype for this sort of Chicken Little warning with his thesis that the world was going to starve due to overpopulation not quite panning out.

The green warriors were quick to pivot though. The problem shifted over the years from fossil fuel depletion to ozone layer depletion and catastrophic ocean rise. When Waterworld came out in the 90s people really believed that we were all going to be underwater. The film itself puts the impossible event of all land on earth being submerged to some time in this century. Now that ozone layer depletion and global warming seems to be reversing, the eco warriors have pivoted again to climate change, extreme weather events and plastic.

This is a moving target which is getting increasingly taken seriously. At this point, eco warriors like to deploy the label "climate change denier" to anyone who strays from the choir sheet. It's a catchy derision (sounds like holocaust denier), but I am not denying climate change. The climate has always changed. Nobody ever said it was mean to be stable. The real debate points, which the eco warriors tend to avoid are: what is causing it? is is dangerous? and what can we do about it? In the past, periods of warming have been good for humans, as they have coincided with better harvests. We know more about the past climate changes from sedimentary records than we can accurately predict about the future. The Medieval Warm Period was 300 years of relative bounty, followed by 100 harder years during The Little Ice Age (1450 to 1550). Now current warming might be more pronounced than back then, but the extent and harmfulness of these changes is hardly settled science. Now that the temperature is leveling off, the eco warriors are quickly changing the subject to extreme weather and plastic pollution.

The truth it is not about carbon. It is about values. The eco warriors, or the “anti-human league” as Alex Epstein calls them, tell us that we have to reduce our CO2 emissions before we all die. However these same people but will not endorse nuclear energy, which is the only source that can actually replace fossil fuels for electric power generation without drastically curtailing our consumption. The reason they will not endorse nuclear is that their main value is Gaia, an unspoiled mother earth utopia that never existed were all species are in balance living in natural habitats. In this Gaia, humans, to the extent that they exist at all live like primitive hunter-gatherers. I don't like pollution either, but I value human life over the Garden of Eden. The goal cannot be and should not be zero pollution. It is immoral to get rid of diesel tractors which will result in the death of millions to starvation. It would be a disaster to human life to get rid of our factories and yes it would be a disaster to get rid of plastic. Now sure, we can try and balance the cost versus benefit, but the current debate seems to be between ultra green monks who admonish guilt-stricken sinners who like warm clothes or want to read at night.

The environmentalist movement is actually a cover for fascist and marxist ideologies. This is exemplified by the asinine Green New Deal put forward by AOC. You can see the fascism when the anti-human league calls for more and more controls on industry, condemnation of capitalist material excesses and zero-tolerance for debate. The environmental marxists, on the other hand, want to destroy all industry and progress and live in regimented communes that supposedly live in harmony with nature. Both strands of collectivism ultimately turn totalitarian and if ever given a chance would result in predictable tyranny and misery, and ironically enough, a much worse environment.

That is the last reason why I am not an environmentalist. It is because I care for the environment. Environmental policies, like biofuel subsidies often backfire. But apart from this, the truth is that the environment has improved tremendously over the years as we have become more prosperous. The truth is that prosperity allows us to spend less time and energy on worrying about basic necessities and more on things like art, entertainment and the environment. This is why the worst man-made environmental disasters always happen in socialist countries. There are real environmental problems to be solved, and there good non-perfect solutions like privatisation, economic and technological progress. However, if being an environmentalist means I have to support asinine and counter-productive government solutions, count me out.


Catania, February 25th, 2019

TLDR: Beware of reds in green coats

The Trump Card

To many, the world has stopped making sense. People "out there" have lost their minds. Brand new political parties are winning big elections, Britain voted leave and of course, Donald J. Trump.

To me, this all makes perfect sense. While I did not think Trump was going to win, I did believe he had a much better chance than many were expecting. What did I know that so many missed?

Indeed, why did trump win? What will happen in 2020? It wasn't the Russians. Yes, I'm sure they try and influence elections where they can and I'm sure they try and sow instability in their rivals' turf. But to say they were able to swing the whole election with some social media bots is asinine. Advertisement is not hypnotism and we don't need such an outlandish explanation to explain why Hillary's campaign and candidature were so lacklustre and why Trump's message had legs when there is a much better explanation staring us in the face.

The real reason Trump won is the same reason Bernie almost got the Democratic nomination. It's the same reason why Jeb and the rest of the establishment tanked. Of all people, Hillary really should have known: it's the economy, stupid.

Living in Obama's recovery USA, I could see a lot of anecdotal evidence of people struggling. College grads working multiple bar jobs and moving back in with their parents and Uber drivers explaining how they used to be retired. Work trips to Ohio and Michigan really opened my eyes to a recovery that wasn't

There are lies, damned lies, and then there are statistics. Government economic data is thoroughly biased as evidenced by the changes to the formulae for inflation, GPD and unemployment that always coax out better numbers than the older formulae. Hedonic substitutions then really allow the bureaucrats to cheer-lead the economy. Shadowstats, economists or the Austrian school and contrarian thinkers had it right: the Fed's unprecedented inflationary policy had brought the good times back to Wall street, but on Main street, unemployment was still north of 10% and and inflation was a lot hotter than 2% (making real GDP negative).

One other person saw all of this: Donald. He called the stock market a "big fat ugly bubble". He said unemployment was more than 20%. He said America was no longer great. Hillary, on the other hand, stood on Obama's shoulders, who said that Trump was "pedaling fiction". But the rust belt knew what reality they were living. They voted against four more years and for something different. Anything different.

Almost as soon as he had won, Trump changed his tune and declared victory. The big fat ugly bubble was now a bull market. The worst economy in history was now the best economy in history. Excitement about tax cuts and deregulation changed sentiment and the stock market reached record highs while unemployment reached new lows. However, the underlying economy was still the same. Nothing of substance has changed. The deficits are bigger, people are still struggling, waiting for Trump's America to arrive. It's not coming. Trump's irrational cheer-leading leads me to my next prediction: Trump is toast.

Trump will be a one-term president. Trump's 2020 slogan of "Keep America great" will be another four more years the electorate won't want. As the recession worsens and the data becomes undeniable, the voters will be ready to bring in anyone, as long as they are everything that Trump is not. America is going to lurch hard to the left in 2020. Of course, that won't work either.

Similarly, and for similar reasons, the rest of the west will lurch left and right, sliding ever farther from the centre and down the slope towards totalitarianism. In some places it will be universal socialism and in others, nationalist socialism.

Our only hope is to recognise and refute this trajectory. The only answer that works is real free market capitalism. Not the crony, over-regulated special interest system we have today, but the true free markets that made us rich in the first place. Getting there will not be easy. After all, we need a recession. We might even need a depression. The real economy has been so screwed up for so long by so much bad macro policy and regulation that the transition must now be long and arduous. So much debt now has to be written down. So many people expecting a social safety net will have to be let down. So many malinvestments have to be liquidated and re-allocated. If that sounds grim, I assure you it could and might be worse. After all, 2035 might start to look a lot like 1935.

San Jose, January 24th 2019

TLDR: Economic issues are the root cause of the west's political instability

The Dismal Science?

The march of progress in my lifetime has been astonishing. The fact that I and almost everyone else can walk around with an incredibly fast and compact computer that can access most of human knowledge in my pocket was beyond our imagination even as late as the 80s when I was born.

We have seen incredible advancements in all the hard sciences. I can appreciate this mostly in my own field, computer science, with which I am most familiar. But there is one field where we have not advanced. Worse still, we have regressed and have all but lost many important advancements of the 19th and 20th centuries and gone back into erroneous pseudo-science. This is the sorry state of economics today.

A bold statement from a non-economist to be sure. Although my field is computer science, I have more than a passing interest in economics. Having consumed dozens of books and other content on the subject over a decade, my confidence was buoyed when a Harvard economics professor admitted that my grasp of the subject went far beyond the layman's. But I am not here to commit the logical fallacy of arguing from (non) authority. Let my arguments stand on their own merits. I look forward to their refutation.

So I am not an economist, nor do I desire to become one. Yes, I could become a "proper" economist and apply to some revered institution. But it is those institutions that are the problem I am writing about here. Economics as a science has regressed, and the professors are to blame. What good would it do to get their recognition, when they are in error?

If this sounds crazy, then good. The suggestion that the established academic consensus on an entire subject is largely mistaken is a wild one that should be taken in with wild skepticism. But this would hardly be the first time that the academic consensus was wrong, and thinkers and commentators on the fringe were proven right in the end. There are today, two main schools of thought in the subject: the Keynesian school and the Austrian school. The former dominates academia, government and the mainstream profession. The latter is a small minority who have been able to further the subject.

Indeed, the Austrian school, through proper understanding of the business cycle, malinvestments caused by cheap credit and the damage done by forgetting to consider both the seen and the unseen effects of government intervention, was able to predict the 2008 crisis, and is predicting the next crisis which has started to unfold now. The Keynesian school, championed by professional morons like Paul Krugman and Ben Bernanke, was blindsided in 2008 and actually think that the problems were solved and no repeat crisis is on the horizon. But track record aside, the Keynesian school can be shown to be wrong by logical praxeological (human action) analysis.

Obsessed with complex mathematical models that prove results that are not reproducible in the real world, the academic mainstream have been unable to condemn, and worse, have often championed economic ignorance and nonsense that had been settled by the science in the 19th and 20th centuries. It is no wonder then that today economic ignorance is rife and worsening. People obsess about income distribution and imagine wealth a fixed pie. People think that inflation comes from employment. They think that the minimum wage raises living standards. They think that tariffs are paid by foreigners or that they help domestic industry. Mercantilist views are widespread and Malthus' thesis is alive and well. Krugman himself shows off his ignorance when he writes that a catastrophic alien invasion would be a boon to the economy as do the central bankers and politicians who think that consumption is key and demand somehow drives everything.

And this ignorance, trickling down from the professors and policymakers has a real impact. We are witnessing an increase in barriers to trade, protectionism, nationalisation of industry as well as never-normalised interest rates.

Economics has been derided as the dismal science, but it is only in a dismal state. When truly understood, economics is not heartless. It isn't about money. It is about humans and how they behave. Unfortunately, the coming crisis will not be one of conviction on behalf of the professors. Capitalism looks likely to get the blame again, and we look likely to double-down on the terrible ideas of these clueless socialists. Maybe when that fails even worse, we will finally be ready to listen to the Austrians.



Harrogate, December 23rd 2018

Swinsty resevoir

TLDR: Economics professors give economics a bad name

Bubble Bath

Looking at the Maltese skyline, one was hard pressed to find a view devoid of a crane. The construction industry has been the biggest industry in the country since the end of the socialist era. Indeed this made sense, a lot of pent-up demand was unleashed as the economy started to prosper and people stopped fleeing the malaise and started returning in larger and larger numbers.

But looking around today, one sees not a crane in every direction, but ten. Property construction, redevelopment, urban expansion and encroachment on ODZ areas are now happening everywhere. If you ask around, people are starting to sense that we have reached bubble proportions. But why? Why now and not ten years ago? What has changed? What’s going on? Is this normal?

To the inquisitor, a number of answers are ready supplied by eager opinionators. They are all wrong, and the real culprit escapes the blame. One popular explanation is greed. Greedy people, greedy developers, short-sighted profit-seeking, greedy politicians accepting bribes from greedy developers who only want to get rich quick. This is only half right. Yes developers are greedy, yes politicians are greedy. We are all greedy. We all want to get rich. The quicker the better. But why are we suddenly all so much greedier than before? We are not.

The other even more popular wrong answer points the accusing finger at the foreigner. I have been repeatedly told that the passport scheme specifically has resulted in an additional 10,000 rich new citizens who are buying up everything in the country. This is plain wrong as only a couple of hundred passports have been issued under citizen-for-investment scheme, besides which almost all of the newly minted citizens have availed themselves of their EU rights and moved on to where they really wanted to go in the first place.

If it’s not the passport scheme, it is other foreigners, Italians, Brexiteers, Germans, eastern Europeans and asylum seekers all moving here by the tens of thousands to grab a piece of Birkirkara while the going is good. This notion ridiculously overstates the demographic trends, which although the growth rate has increased significantly, the population has yet to breach the half million mark.

So if it isn’t speculators or foreigners or foreign speculators who is it that is to blame? The answer is to be found between the ears of a Italian man in Frankfurt. The reason for the extremely rapid rise in asset prices in Malta is the European Central Bank.

Turn the way-back machine back to 2008. The financial crisis was turning into the European debt crisis and Malta officially joined the Eurozone on January 1st. The debt crisis had been caused by earlier action by the ECB and the Fed to ‘save’ the economy from the dot-com bubble bursting almost a decade earlier. The far-too-low rate of interest in the Eurozone created massive construction booms in the PIGS countries and massive overborrowing by their governments and municipalities.

Malta was saved all this turmoil. Having the Maltese Lira, governed out of Valletta we played no part in the mania. The currency was pegged to the Euro to be sure, but interest rates kept pace with inflation reasonably well. But when we joined the Euro and suddenly interest rates collapsed at Frankfurt’s direction, trouble started brewing. And this is crucial - bubbles take time to form. Our property bubble didn’t materialise on joining the Euro on January 1st 2008. Ten years of negative real interest rates later, and now Malta resembles the 2008 Costa Brava.

The ECB would scoff at this. They would point out, rightly, that I do not have an economics degree, and that they, the experts, know best and have everything in hand. This would continue their remarkable streak of getting everything wrong all the time. The current ECB interest rate is at 0%, which makes the official real interest rate in Malta somewhere close to -2%. This insane interest rate alone is enough to fuel a speculative mania. However, the real interest rate is much much higher.

The official inflation rate of less than 2% is bullshit. The ECB is constantly reworking the formula, adding hedonic adjustments and substitutions to arrive at this absurdly low number. Indeed, at 2% inflation, Malta has seen rent prices increase at a rate of 47% in the years 2013 to 2016. That alone would blow the 2% number out of the water. So with real inflation running somewhere in the double-digits, the 0% interest rate becomes a dangerously irresponsible policy prescription.

Ah, but you say. Malta is not the only country in the Eurozone. What about the other 18 members? Well, of course you cannot compare Malta to Spain, which had a property boom go bust in 2008. Nor could you compare it to Germany, which has had much lower inflation. You could compare it very easily to the other country that joined the Euro on January 1st 2008, our sister in the sea, Cyprus. And wouldn’t know it, many Cypriots are starting to wonder if their unprecedented property boom is now a bubble. Two other countries Slovenia (joined the Euro in 2007) and Slovakia (joined 2009) are also experiencing bubble-like tendencies in their markets.

I haven’t seen this movie, so I cannot tell you how it ends. Well, not exactly, I have seen pretty much every bit of crap this director has put out and I know how it ends. The boom will bust and property prices will attempt to return to their inflation-adjusted trendline with a healthly pendulum overswing to the downside on the way. Until the ECB saves us again from a disaster of their own creation by going even easier for even longer.

At some point however, one straw is one too many and the camel’s knees buckle and collapse. Asset prices collapse and bankruptcies usher in a period of depression or the Euro is finally printed into oblivion.


Edinburgh, November 7th 2018


 

 TLDR: The ECB is the reason why Maltese property has gone ballistic