G20: Hail to the Location Louts

The G20 leaders meeting in Washington this weekend want us to believe that they are setting a new course for the global economy. They are in fact setting up the next classic boom / bust cycle.   The two planks of their “never again” package of proposals are tighter regulation of the banks, and massive expenditure funding of infrastructure.   The regulatory ruse – some calling it Bretton Woods II – is an irrelevance. Over the past 200 years we had bank-funded crises under all supervisory regimes: no regulation, tight regulation and (latterly) light-touch regulation. Count on banks being at the forefront of events at the end of the next cycle.

More interesting is the revival of John Maynard Keynes’ recommendation that governments should fund public spending to rescue the economy from a downturn. The Chinese have developed a £373bn package to head-off its recession, the money going into roads, railways, health care, education and low-cost housing.   The US plans a $200bn expenditure on infrastructure. With bridges collapsing and highways turning into chasms, the renewal of that infrastructure is imperative. The UK’s Gordon Brown is also preparing to announce a similar spending programme. Already the speculators are jockeying to cash-in on the huge increases in land values that will flow from this social investment.   This social spending is necessary, but why has it taken a financial crisis to induce the investment? By itself this spending is a key element in creating the conditions for lopsided growth (to say nothing of social injustice) over the next cycle.

In China, for example, the developers who made themselves billionaires out of real estate have cashed in their urban chips and are opening pig farms. Pig rearing is subsidised by the state. And: the choice of the location of these new “farms” just happens to be close to proposed railway stations. In other words, these shrewd operators are continuing to farm the public purse. In due course, their pig yards will be sold for fortunes to commuters using the new railways.   The massive debts being created by states around the world to fund these investments will have to be paid back. Who pays? The leaders hosted by George W. Bush this weekend haven’t got a clue. So, as usual, the cost will fall on the taxpayer.   This is the final ingredient in the matrix of policies that will deliver yet another “bog standard” boom/bust. As the net gains from all those billions spill over into the land market, the location-louts will return to our TV screens to proclaim a new era of eternally rising house prices. Hail the return of the glory days!