derryl

The King Canute Economy: Governments' Futile Attempt to Stem the Tide

Great article. I especially like the idea of the Nano economy vs the SUV economy; widely distributed miniwealth vs overconcentrated megawealth.

In addition to the SUVs, millions of Americans bought houses that were way bigger and more luxurious than they could afford. Housing wealth was overconcentrated in these too-big-to-afford houses. Now the buyers are defaulting and the houses are empty. If instead of building 2400 square foot luxury houses America had built 1200 square foot affordable housing, there wouldn't have been such a catastrophic wave of defaults as we are seeing now. America built SUV houses. Americans, really, can only afford Nano houses.

When you buy something you are "commanding the resources of the economy". If some banker gives you a $600k mortgage then you can command the economy to build you a 2400 square foot luxury house. But most people lack the means to command that much of the economy. They cannot personally generate $600k of surplus value (i.e. income beyond what it costs them to eat and live) in order to repay the economy for that house. By making those unpayable mortgages available to too many people who lack the personal resources to repay, the US financial system allowed the gross overconcentration of housing wealth to be built and purchased.

This is a very serious misallocation of economic resources. There are now millions of big expensive houses in the US that nobody can afford to own. After the 1930s Depression many mansions were converted to apartments and other multifamily uses because there weren't enough rich people left who could afford that much house. If 2 families shared a 2400 square foot house they could probably afford to own it. If the problem is overconcentration of house, the obvious solution is dilution of house ownership by making duplexes or apartments out of houses that are too big for one family to afford.

I think cynicus economicus is right that world wealth is in a process of levelling. Asians can now afford a Nano house where previously they could only afford a shack. Americans can now afford a Nano house where previously they thought they could afford a McMansion. There are millions of US McMansions just waiting to be converted to affordable Nanos. King Canute should not expect to stand in the way of this evolution by maintaining the illusion that these are viable "single family" homes.

Special Drawing Rights: A Fantasy Built upon Foundations of Sand

Whether or not China wants its yuan to replace the dollar as the world's primary reserve currency is an open question that I will not speculate on here. But I think SDRs are a seminal attempt at introducing a non-national world currency. A new fiat currency backed up by nothing, by no economy, by no government's ability to tax its people in "full faith and credit". It will be the monetary unit of the BIS which, though it resides in Switzerland, has the rights of a sovereign state. From that impenetrable stronghold the BIS could rule the world if it owned the world's new money, SDRs.