I’ve got a quirky and strange theory, but I reckon it’s a good one… Especially if you’re a property investor.
More and more places are experimenting with a basic wage. Have you got enough property?
Here’s a long run prediction for you. In the not too distant future, the government will give free money to everyone. In a generation, we’ll forget that free money wasn’t once one of the primary roles of government.
The idea I’m talking about is called a ‘basic wage’. The idea is that everyone, no matter what you’re earning, gets enough to live on, for nothing. No centrelink cues, no work for the dole, nothing.
Even the richest people in society will still get paid a wage. It won’t be enough for a lavish lifestyle, but probably enough to get by. Like the dole now.
Whether you want to earn more after that, that’s your call. If you don’t want to, you don’t have to.
This idea has been around for a while. And when I used to hear about it I would just roll my eyes. It seemed both practically and politically impossible.
But now, the more I think about it, it kind of seems inevitable.
Because the reality is that we’re still fighting deflation. For most of the twentieth century we were fighting inflation – rising prices. When prices rise too quickly, it causes havoc in the economy. When money is losing value overnight, you end up putting a lot of energy into managing your money (spending it as quickly as possible).
But so far this century, in the developed world, inflation hasn’t been a problem. In fact, most central bankers are now much more worried about deflation than inflation.
Deflation normally only happens in severe economic circumstances – depressions and so on. And it causes just as much trouble as inflation. Why spend today when things will be cheaper tomorrow? And how do you preserve profit margins when prices are falling?
And in recent years we’ve seen the Fed in the US, and the ECB in Europe come out all guns blazing to try and head off deflation.
Quantitative Easing – a massive experiment in money printing – was aimed at generating a bit of inflation. To pretty much everyone’s surprise, it didn’t work.
Every other time some country tried printing money, it led to inflation, even hyper-inflation. That was the historic precedent, and the logic driving one of the biggest gold bull-runs in years.
But it didn’t happen.
Why? Two reasons. First, stuff is just getting cheaper to make. Once you combine the masses of cheap labour coming on line in China, India and Asia, and combine it with exponential technological growth, you get really, really cheap stuff.
I’m mean look at your phone. Look at the technology embedded in that. Go back 15 years and what’s it worth. $5,000? Easily I reckon. In a world where most people didn’t have mobile phones yet, the I-phone 6 looks totally beam-me-up-Scotty.
But now you can get them for a tenth of the price. That’s deflation.
And the consumer is starting to get maxed out. In Australia, most of our spending goes on stuff we don’t really need. There’s a lot of fat that can be trimmed. And so we’re interested in new stuff, sure, but only if the price is good.
So the point is that our economy has matured to a point that stuff is just getting cheaper – at an exponential pace. Over the longer run it’s going to be incredibly hard to stop this from translating into deflation.
The second reason that Quantitative Easing didn’t work is that the government gave all the money to the banks.
Yep, I know this sounds strange. You had a global financial crisis caused by the banks being dodgy banks and the solution – give money to the banks. Who dreams this stuff up?
Anyway, the banks didn’t let the money swash around the economy. It never reached consumers. Mostly it went on share buy-backs and inflating the stock market.
It was a total con, and slowly, people are waking up to that.
So the question has to be, if we’re printing money to get the economy going again, why are we giving it to the banks? Why not just give it straight to consumers?
That logic is very hard to argue with. And the next time deflation rattles the house, it’s going to be very hard to argue with.
And any political party that adds it to their policy is going to be hard to argue with.
Who do you think will get more votes – the party that says we want to give money to voters, or the party that says we want to give money to the banks?
Starting to look inevitable right?
And the only reason that it hasn’t happened already, is that a basic wage would be massively inflationary. In any other era it would be totally irresponsible.
But right now, we need inflation. We need massive inflationary forces to offset these massive deflationary forces.
Not only is free money a vote winner, it’s sensible economic policy.
Very hard to argue with that.
There are all sorts of issues to work through. Tonnes of them. But ‘issues’ have never stopped a party with a popular policy.
And we’re already seeing cracks in the dam. Utrecht, the second largest city in the Netherlands, just announced that it would implement a state-funded basic wage. It could be the thin end of the wedge.
But just stop and think about what happens to housing in this scenario. Property is pretty much the only thing in the economy not subject to deflation. (Building houses is getting cheaper in some markets and there’s downward pressure on costs, but land is in fixed supply and always increasing).
So we’re effectively strapping an inflationary rocket to land values.
Maybe it will be ten years, maybe it will be twenty years, but it’s another reason to me to have a good share of my wealth in property.
Politicians with a popular idea, with a personal interest in property wealth?
I’m not arguing with that.
What do you think about my freaky theory? Does it have sound economic basis? Where do you thin prices will be in the next 5 -10 years?