Some random thoughts on economy : one cause of the crisis remains the recent refinancing of mortgage from annuitary to interest-only. We used to have annuitary mortgages, where you pay off the main sum as you go. Moneychimp has a simple annuity calculator online :
| main sum |
int. |
yearly |
monthly |
yrs |
| 200.000 |
4% |
14.500 |
1200 |
20 |
| 200.000 |
2% |
11.500 |
0900 |
20 |
At first you pay 98% interest and 2% debt, at the end you pay 2% and 98% debt. In the netherlands we have a specific regulation that allows for deduction of the interest payment from taxes, that benefits startup families and can lower the tax pressure from roughly 35% to 30%. After 20 years on average people make more money and can do without the deduct.
In the bubble one brand-new idea was the interest-only mortgage, where you pay the entire sum at the end when you sell the house.
There are arguments for it, and arguments to never go there.
| main sum |
int. |
yearly |
monthly |
yrs |
| 200.000 |
4% |
8.000 |
0700 |
- |
| 200.000 |
2% |
4.000 |
0350 |
- |
That would seem amazing, average joe can refinance his 200K house and pays only 70% compared to an annuity mortgage.
Problem remains that in a free market the price is what the market pays for it, and if 50% of the market is the average joe population the market has a 1000/mo budget, through competition the market price of houses goes up :
| main sum |
int. |
yearly |
monthly |
|
| 300.000 |
4% |
12.000 |
1000 |
|
| 600.000 |
2% |
12.000 |
1000 |
|
Without the payment on the main debt, the prices on the housing market becomemore volatile. If interest goes up the prices drop, part of the mortgages can become a risk to the houseowner and bank, who can even lose their triple-A and that drives the interest up even more.
If Joe bought the house at 2% 600K and the price drops to 450K with 3% interest, Joe has a 150K net debt that is not covered in the sale of the house. 20 Joe’s is a million dollar problem. 200.000 Joes is a 10 billion dollar problem. We have roughly 3 million Joe families so we would have a 150 billion dollar problem.
A strong argument not to go there.
The second problem is the release of funds in the refinance round, the old mortgages were annuitary and some were almost completely paid. Selling a 200K 4% for 300K 4% frees 300K and that will largely be spent in the overal economy. It could amount to 300 billion for the netherlands, 20.000 per capita that is not structural growth.
The basic spend on housing, gas water electricity, municipal and state taxes, health insurance didn’t change, and much of the extra funds is spent on luxury. The baby-boomers were 45-55 at the time so they benefitted most from the refinance round, and could suddenly buy a Bavaria yacht for daddy, a timeshare pensionada home in Spain or Portugal, adventures on the stock exchange, music, computers, extra dinners.
With as result the yachtbuilders booming, expanding, entire new factories for ships, and now the entire demand is gone and half the companies go bankrupt. Construction of pensionado village in Spain and Portugal is over, sadly it was mainly the pension funds that invested in these projects (another reason not to go there).
Building capacity to satisfy extra demand in a bubble is a waste, there is no structural long term demand. John Maynard Keynes hinted at that, it is wise for a community to save money when things go well to support spend when things go less well, and choose a long term stable balanced growth.
In keynesian thought the state is the complement or maybe superego of the population and in these phases increases taxes and cuts budget and spend on education, culture, health care to dampen excessive growth, once the economic growth slows down the state lowers taxes and spends more. The state spend is complement to the populations spend and together they spend in a stable growing pattern. That allows for stable turnover for companies and stable employment, and would prevent building up bubble luxury overcapacity.
That remains a critique on my part, part of the crisis is caused by the egotism of the baby-boom. The baby-boom demographic segment is 30% bigger than normal, we have 6% “extra” population in that segment mainly in countries involved in WW2. When voting, they can outvote other demographic segments related to life phase issues.
The baby boom itself causes an independant extra demand in lifecycle related products of 30% in the west, and also a 30% drop in demand for these products as they move towards the retirement home. They could simply be used to catering to their own needs, for them the growth in business would always seem related to their lifecycle products, as if society actually shapes itself to satisfy their needs.
All in all, that makes the main search engine marketing tip for the next ten years Granny Gift shops on the web, lots of photos of happy little toddlers that make Granny happy, with $20,- gifts for Granny’s own grandchildren. Home delivery so Granny does not have to go out on the streets.
There is a 30% extra demand in the segment throughout the west (unless the pension funds go belly up). In 2015 there is 50% more demand for “happy 70th birthday” cards in the Netherlands.
Just some random thoughts.
I am going to get some coffee, I have a very stable coffee demand pattern that I *must* stafisy, my demand is very stable and long term a-cyclic.
