By David Whitehead
The market is clearly leveling off, but the feared bursting of “the real estate bubble” widely reported in the mainstream press has yet to occur. Given the fact economic fundamentals were largely ignored paralleling the remarkable performance of the U.S. real estate market during the past decade, everyone from international economists to conspiracy theorists have sounded the alarm that a major economic collapse is on the horizon—a seemingly elusive horizon that continues to get pushed back.
In my publisher’s perspective column entitled “South Bay Real Estate, Global Economic Meltdowns and Pretty Houses on the Strand,” I was bold enough to proclaim the real estate market had reached the point where it “could” collapse but stopped short of metaphysical certainty. Why? Primarily because even though there is no logical reason why the real estate market should do anything else, there is one factor that holds the system together that circumvents all other principles of market economics: “American hegemony.”
According to Wikipedia, hegemony is “the dominance of one group over other groups, with or without the threat of force, to the extent that, for instance, the dominant party can dictate the terms of trade to its advantage; more broadly, cultural perspectives become skewed to favor the dominant group.”
Following the Second World War, the United States inherited the status of global political and economic hegemon to the world. In other words, we became the new global empire for the 20th Century and beyond. An empire fitting a new paradigm that shuns sending it’s legions to rule it’s vassal states, but one that holds the reigns of economic power and the tributes are paid via calculated trade deficits and convoluted currency devaluation formulas.
What’s interesting is, the infrastructure of the empire is largely invisible and Americans themselves shy away from acknowledging their attainment. America’s hegemonic status attracts massive foreign investment from many directions that distorts our economy into a debt-driven Nirvana most of our citizens take for granted and stubbornly refuse to analyze from a global perspective.
And the real estate market is one of the best indicators of this distortion. Although challenged in recent decades by Asian manufacturing powerhouses and the emerging European Union, the U.S. Dollar still remains the world’s reserve currency while our nation has dominant influence over the International Monetary Fund and the World Bank.
Nearly 70 percent of the world’s oil is traded in dollars on the New York and London exchanges, requiring most nations that import oil to retain large dollar reserves. This is referred to as the “petrodollar” factor and is a key component to the dollar’s valuation on the world market.
And most recently, the very Asian powerhouses that have challenged us also have invested billions of dollars in U.S. Treasury Bills to keep American consumers in a position to buy their products. The recent $15 Billion-a-month surge in China’s U.S. investment has largely fueled our more recent prosperity and gave the Federal Reserve a powerful tool to expand the money supply to unprecedented levels. In fact, former Federal Reserve Chairman Alan Greenspan doubled the money supply over a ten-year period prior to his retirement.
To put this in perspective, when the Fed doubled the money supply to fund the First World War, just a few years after its creation in 1913, a not-so-funny thing happened. The dollar lost half it’s value. Not even Jimmy Carter screwed things up that much, but Woodrow Wilson is still considered an esteemed president. But in our time the same policies don’t have nearly the same impact. Why? In 1919, America burst onto the world’s stage as a major player, but had yet to establish it’s hegemony. That would come later and allow us to throw the economic rule book out the window and still come out prosperous. Or at least with a remarkable illusion of prosperity until the bills come due.
Collectively, this broad-reaching foreign investment created the largest trade imbalance in our nation’s history. It also flooded our central banks with capital the Federal Reserve has used to expand the money supply to levels never before seen without creating hyperinflation. That alone has allowed housing prices to rise to heights that would not have been attainable if the flow of cash wasn’t there to initiate creative financing strategies that qualify buyers to purchase homes at prices grossly out of line with their incomes. The hegemonic system allows this and nothing is going to crash until it ends. And end it surely could if the United States loses control of its vital economic interests. At this point, these interests are the American way of life as we know it.
The real estate market was destined to level off since even a hegemon can only push the limit so far. But solid cash reserves backed by the wealth of other nations has padded our fall. It would take an abrupt turn in the global economy to precipitate the “bursting of the bubble” the mainstream press is foretelling. I don’t fault them for the foretelling, but for the lack of nuance and explanation. This kind of research doesn’t mix will with daily deadlines.
What Could Precipitate the Fall?
Nothing comes on the Federal Reserve's radar screen faster than anything that could cause a run on the dollar. When the late former Iraqi president Saddam Hussein decided to bypass OPEC and sell his country’s oil in Euros back in 2000, the year George W. Bush was elected president, it certainly raised eyebrows in financial circles and ruffled the stirrups of a few Texas oil executives to say the least. When China ended it’s policy of pegging the Yuan directly against the U.S. Dollar and expanding its investment portfolio, it sent disconcerting messages through Wall Street, but certainly not panic.
There are many arguments that assuage concerns that any one of these things could precipitate a run on the dollar, however, as the debt load gets more precarious, the fear becomes greater. And like the big earthquake Californians know must happen sooner or later, no one can say with certainty when the shake out will occur. These events are like the tremors that get people talking about the big one. And of late, we’ve certainly had many tremors in startling places.
The real estate market as we know it is dependant on an ongoing expansion of the money supply. And American hegemony gives us a mandate to push the limits beyond what many would say is prudent or responsible. As long as we are the world’s superpower, as long as other nations feel compelled to invest in our nation to pursue their own interests and as long as the Federal Reserve can continue to expand the money supply at the current rate without unintended financial consequences, there will not be a crash. The moment this ends, there is no logical reason for gravity to reverse course.
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