Pointless property spending ruined the UK economy

Pointless property spending ruined the UK economy

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Pointless property spending ruined the UK economy

It’s not the money the government prints that triggers a resurgence in the economy, but the way everyone spends the cash, argues credit strategist Ben Bennett.

The point of no return for the economy was when property investment stopped improving living standards and became pointless spending on renovations and idle speculation, he argues.

The gravy train sped into the buffers in 2008 as a heady mix of easy borrowing, lax regulation and quick profits fueled by house price inflation encouraged speculators to jump aboard.

That’s when fear took hold, explains Bennett in an investment analysis for Legal & General – once everyone realised wealth was created by banks printing money and fueling an inefficient property bubble, the reaction was a rapid increase in regulation, tighter lending conditions and a fear of losing money.

How did this happen?

The magic starts when a borrower takes a £100 loan from a bank and spends the cash.

“Spending introduces new money in to the economy.The bank loses a deposit once the money is withdrawn, and goes out in the market and replaces the funding, but as £100 of new money is floating around somewhere, the bank can suck it back up by issuing a bond, using the loan as collateral to borrow money at the central bank, or simply by increasing its deposit base by £100 from whichever individual the cash ended up with,” explains Bennett.

“As the £100 is spent and sucked back up by the bank, it has generated economic growth by allowing a company to pay for a machine that makes them more productive, letting a worker buy a new washing machine that reduces the time spent cleaning clothes or facilitating government infrastructure investment that increases the number of people that can travel at any given moment.The £100 loan is good for the economy.”

When that £100 is spent on inefficient investment, the economy plunges in to a mess. The anomaly is bank deposits have increased while borrowing levels have slipped back since 2008.

The reason is quantitative easing, says Bennett.

“We have witnessed a nationalisation of money printing,” said Bennett. “The key question is if governments are any good at judging efficient and productive ways to use newly printed money. Economic orthodoxy argues that governments should back away and leave the market to determine the best ways to do things, but such a policy has resulted in a pretty useless property bubble.”
The investment lesson is not to follow the money, but to analyse the usefulness of what it is being spent on.

“Corporate bond investors make this analysis every day when it comes to choosing which companies to lend money to,” said Bennett.

“Choosing which banks to lend money to adds a layer of complexity as we have to decide if their lending choices have been to economically useful activities. Given that many bank balance sheets remain full of poor loans, it will be some time before banks are in a position to drive the money printing process once again.”

Comments

Michelle Dalby

5 years ago

But surly if I could borrow to buy a B2L property that needs word, I employ a builder/electrician/plumber who buys materials from a supplier, I then earn off the rented property now of a very high standard, so my tenants living standards have gone up, I repay the Bank so they earn there share, I then pay the govt in taxes, keeping Mr Cammeron to the standard he likes, and guess what may be if im lucky, theres some left for me too. Money has to work its way round, not just stay stagnant in a bank somewhere. What we need is banks to lend, and look at the person not take a dim view of the business there in.  I know everyone says Labour got us into this, but IF it wasnt for Labour I wouldnt be where Iam today. Conservatives have done nothing for me other than stop me in my tracks. Thanks.

Rich

5 years ago

a bank is just another business at the end of day

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