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Brexit: Property in the EU. Real estate and finance in a crumbling EU

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Brexit and The Changing Face of the EU - Part 3

Here is part three of this mini-series. And this is where things start to get messy. Iím sure youíve all been following the Shanghai Accord. Alright, you havenít. Not to worry. Iíll try to explain how it works. Itís all rather obvious really. China has been on a tear since the early eighties. They started selling stuff to the Americans, to Europeans, to anyone who would buy it. It got totally out of hand. The wages in China were on the floor. There were tens of millions of willing workers, and therefore the goods got made, usually very badly, at a very cheap rate, and exported round the world. China racked up huge reserves, and the country lurched into the twentieth century over the course of a decade, and into the twenty-first within a hiccup.

The problem was that this lurching forward didnít happen like it did everywhere else on the plant, in fits and starts, with plenty of crashes. China hasnít had a crash. China hasnít had a recession. This means mistakes werenít corrected, in fact, those mistakes were built upon, and the economy is now in a serious mess.

What usually happens in an economy is that people work hard and build up wealth. They then realise that economics can work in a different way. The work ethic is fine, but slow. When there is a store of wealth, that wealth can be used to leverage development. You use the cash to jump start a business. You can open a supermarket on day one if you have the cash, you no longer have to work your way up from barrow boy, to local shop, to more shops, to a supermarket chain like Mr Cohen did during the last century.

And when enough people have enough cash to put for safety in a bank, that bank can start to loan money as well, so the leverage to develop ramps up. This is all wonderful (itís capitalism) as long as the money is put to a productive use. Itís fine as long as loans can be repaid out of the profits of the developments.

Unfortunately, in China developments have been started using borrowed money, and they are not producing the funds required to pay back the loans. The country is now stuck with a serious problem. The banking system is in crisis. The big number everybody is watching at the moment is the percentage of Non Performing Loans (NPL).

If you look at the number of NPLs that are more than 90 days overdue the percentage is 5%. That doesnít sound too bad, but if you add in the revolving loans, those that are taken out to repay existing loans, the number jumps to 8.6%, which is getting a trifle scary, but probably containable, despite the fact that in cash that represents $3 trillion, or the size of the whole of the UK economy. However, if you then add in the loans made through Chinaís shadow banking system the total runs up to 21%. In actual cash, that equals $34.5 trillion. Thatís twice the size of the US economy. Put another way, it is roughly half of the whole planetís economy. In terms of non performing debt that is insane. That is not repayable, and not containable. It is a figure that is set to completely crash the Chinese economy. Enter the Shanghai Accord.

This was an IMF brokered meeting of the G20 nations back in February to try and do something about this mess. After all, the Chinese economy is the second largest on the planet and for the past 25 years it has been the worldís engine of growth. Thatís over. With the world economy on the ropes, and debt levels throughout the world at astronomical levels everyone is frightened of the coming crash.

The Shanghai Accord wonít stop that crash, but itís a vain attempt at doing something. The idea is to devalue the Yuan, which will help make Chinese goods cheaper, but by devaluing the currency, it will also make the debt levels shrink.

The idea is to let the Yen and the Euro strengthen while the US dollar and the yuan weaken. This is why at the last Fed meeting the US interest rate level did not increase as was widely expected. Itís why the Bank of Japan did not increase itís stimulus package a couple of weeks ago.

There is another layer within all this jiggery-pokery which relates to the issue of SDRs, but I dont propose to enter that particular mine field at the moment, although that is set to kick in next year according to my own time-line.

What I take away from all this is three main points. First, we are in a false economy where politicians are manipulating everything from the value of money to the way we all trade, and making a bloody awful mess of things.

Second, as part of the Shanghai Accord the euro is set to strengthen. That will impact adversely on EU trade. Look for the local economies to weaken, which in turn means worse borrowing conditions, higher interest rates on those borrowings and more fierce austerity. This will tip countries like Greece and Portugal further into the mire, and further under the control of Brussels and the European Central Bank.

Thirdly, it means that a squeeze on borrowing is going to get worse, and that bodes ill for real estate across the union. Now is not the time to be buying real estate anywhere in the EU.

SDRs? Yes, they are coming to a country near you probably sometime next year, or very soon thereafter. In fact, they will probably flood the world, and trash local currencies. Thatís when the real pain begins if you are unprepared. Iíll talk about that in another blog.


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