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| Steep decline |
The world has learned the hard way that our political leaders lacked the judgement and resolve to identify and address the problems which led to the recession. Richard Douthwaite argues that a similarly flawed judgement is evident in the assumption that the economy will recover, and advises on how to prepare for a future of global economic contraction.
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Indeed, finding the energy and other resources to maintain buildings and the rest of our infrastructure will become increasingly difficult and a lot of our present stock will be abandoned after being stripped of anything of value. The sites will eventually return to forest, as there may not be the energy to clear the land for more intensive use. Suburbs in Flint, Michigan, are already being returned to nature, although there is still the energy to bulldoze the houses first.
Some property built during the Tiger years will never be used. Others, in bad locations, will be closed up quite soon. Estimates published by Ronan Lyons of Daft in February1 indicate that 200,000 too many houses were built between between 2002 and 2008. “We churned out over half a million properties, off an existing base of just 1.3 million households,” he writes. “An overview of economists’ figures suggests that we should have been building perhaps 300,000 households in that same period.” Many of these houses were in the wrong place. More houses were built in Connacht-Ulster than in Dublin, although the latter has almost twice the population, Lyons points out.
Standard and Poors puts the number of surplus houses even higher - at 250,000. Either figure has profound implications for the price that the National Asset Management Agency pays for the developments it is taking over from the banks. The properties and projects it will get are like ships blown ashore at the top of a high spring tide. The water is unlikely to rise high enough ever again to allow them to be floated off. The fact that the Swedish “bad bank” was able to sell off the properties it took over in the early 1990s is irrelevant as, back then, the global growth tide was still coming in.
The reason why the tide will never get high enough is that Ronan Lyons has calculated that the effective rate of interest on property loans was negative throughout the entire Celtic Tiger period. In other words, borrowers were being paid to invest. Now the effective rate is strongly positive because, although bank interest rates are low, property prices are falling and, if you add the percentage price fall to the interest cost, the “real” interest rate is around 14 per cent. If incomes are now on a long-run declining trend and take property prices down with them, as we must expect, the real interest rate on property purchases will continue to stay high and they will remain unattractive investments.
Vestas wind turbines at the Black Banks wind farm in Drumkeerin, County Leitrim
The scenario I've just sketched is only one of an infinite number of possible ways the future will unfold. We can, however, be fairly sure about the main features of the decline which has just begun. These are:
1. Less energy will be available than at present. The supply will decline year by year and its price will fluctuate widely according to the state of the global economy. This volatility will deter investment in developing new supplies.
2. Less energy means lower incomes, which will also fall year by year.
3. Inflation was a feature of the energy-fuelled upswing. Deflation or falling prices, will be a feature of the energy-scarce move down. Just as inflation lightened the interest rate burden on the way up, deflation will increase it on the way down.
4. Lower real incomes will make it more difficult to service debts. Massive defaults are inevitable and only the desperate will wish to borrow. No-one will wish to lend except at very high interest rates which compensate for the risk even though high rates make defaults more likely.
In fact, many of the positive feedbacks which made the upswing such an easy ride will go into reverse on the way down and aggravate the situation. Take economies of scale, for example. These lowered unit production costs while output was expanding, but the lack of scale will increase them on the way down.
So what should you do to respond to this new situation? Here are some suggestions.
1. If you have a large house, trade down to somewhere easier to maintain and heat, ideally with space for a vegetable garden. But don't rent a place to live because, although it might seem to make sense to let someone else carry the capital loss as property prices fall, at some time in the future you may not have the income to pay your landlord.
2. If there is a temporary recovery in the next month or so, take advantage of it to sell whatever assets you have apart from farm land. There will never be a better time to sell. If there's no recovery, sell anyway.
3. Use the asset-sale proceeds to get out of debt, as otherwise you or your company will have to pay loans off out of a smaller income.
4. Reduce business and personal overheads in every way you can. For example, stop paying for a pension – it won't deliver. If you have an endowment policy, cash it in.
If you have any money left after paying your debts, spend it so that, even if your purchases lose their money value slowly, you do at least get continuing benefits from owning them. If you put money into a bank or conventional investments, you may lose it all at once.
This lose-money-slowly approach was suggested by Dmitri Orlov when he spoke at Feasta's New Emergency conference in June. He based his remarks on observing the effects that the collapse of the USSR had in his native Russia. “We do have some control,” Orlov said. “Our financial assets may not be long for this world, but while we have them we can redeploy them to good long-term advantage.”
So how should they be redeployed? It would be nice to think that Ireland as a whole could mobilise its resources to provide a cushion in case hard landings lie ahead but that won't happen until opinion leaders stop claiming to have seen green shoots and imagine that life can go on as before. A majority of people needs to have recognised that an historic turning point has been passed and that contraction rather than growth is the order of the day before a national mobilisation will happen. Until then, anyone with money should concentrate on spending it in ways which provide their families and communities with the things that they will need if money and supply systems break down. Community-level food and energy production need to get top priority and, since they should no longer be funded by money debts, novel financing methods are needed.
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